AI Keeps VC Dealmaking Afloat While Biotech, Consumer Goods Falter
Plus, Meta faces off against the FTC
AI dealmaking remains steady while other sectors are suffering, per comments from 20 VCs we checked in with this week. Early stage investors like Precursor’s Charles Hudson have kept chasing the best startups, but retail and biotech companies face a harsher reality. Mark Zuckerberg takes the stand at Meta’s antitrust trial, and Parker Conrad raises even more funding for Rippling.
Reminder, don’t forget to apply for Breaking the Bank if you’re a fintech founder, investor, or insider. We’re almost a month away. The summit is May 20 in San Francisco. We’ll have the CEOs of Plaid, Lead Bank, Gusto, Kraken, and more on stage.
The Main Item
AI Apps Show Their Value Amid Market Turmoil
The stock market’s volatile descent over the past two weeks is widening the startup economy’s divide between AI and everything else.
Overall deal volume for VCs is holding up surprisingly well in the face of public market uncertainty, according to about 20 investors I spoke to this week, thanks almost entirely to the AI frenzy. Outside of that the picture is gloomy, especially for biotech and consumer packaged goods.
“The tailwind is so strong that it’s pushing through the headwind,” said Charles Hudson, the managing director of Precursor Ventures.
AI applications that have already proven their worth, notably coding assistants, are a big part of the current buzz. OpenAI is in talks to purchase Windsurf (formerly Codeium) for $3 billion, per Bloomberg, which if completed would be the largest acquisition ever for the foundation model provider. It also suggests the big LLM companies could move quickly to roll up successful AI applications, antitrust regulators permitting.
We found OpenAI’s o3 release to be genuinely mind-blowing, whether or not it qualifies as AGI, and the fast-and-furious progress is likely to keep the investment momentum going. As my colleague Tom Dotan wrote Wednesday, there’s tons of customer enthusiasm for the offerings of OpenAI, Anthropic, and Perplexity, and their sharp revenue growth is a strong signal.
“There’s still an acceleration of deals in AI and a deceleration of deals around everything else,” a GP told me.
There’s been a modest slowdown in overall VC funding deals since Trump’s “liberation day” announcement. CB Insights reported that there was a 24% decrease in venture deals and a 17% decrease in M&A last week versus the weekly average for the first 13 weeks of the year.
Early stage AI investors believe they are mostly insulated from the tariffs, and software companies in general are thought to be less exposed. On the flip side, cuts to federal research funding and the FDA, along with the prospect of steep tariffs on imported drugs and the anti-science views of HHS Secretary Robert Kennedy, have combined to crush the biotech sector, which had already been struggling.
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Bullish on Precision Manufacturing, Bearish on Fast Fashion
Public biotech stocks, as measured by the S&P Biotech ETF Index, are down 20% this year and hit an 18-month low last week. Early-stage biotechs are suffering too — seed stage Port Therapeutics laid off nearly all of its staff after a prolonged funding drought at the end of last year, according to Endpoints News.
VC-backed retail and consumer packaged goods companies are also hurting. Direct-to-consumer companies like Jolie, which manufactures shower heads, and Havenly, a furniture-maker, have already slapped significant price hikes on their products to cover costs.
None of the investors I spoke with said they were fully pausing deals, but two multistage GPs told me their firms were slowing down the pace of new deals and focusing more on supporting portfolio companies. Multiple investors told me the bar was much higher now for new investments, and four mentioned that they’re seeing founders approach with lower valuations than what they would have asked for just a few weeks ago.
LPs are getting anxious, too, one investor who just hosted their annual general meeting told me. Many went into 2025 thinking that this would be the beginning of the boom times for IPOs and that deregulation would bring GDP growth, but tariff uncertainty and Trump’s sweeping and legally dubious attacks on critical institutions have upended those expectations.
Still, most of the investors I polled told me that they expected to keep their deal volume steady for the year, and that the tariffs and market turmoil wasn’t factoring into their decision making. One partner at a large multistage firm told me that it’s been “their most active year since 2021.”
While coding assistants are gaining the most traction, other AI apps have raised sizable funding rounds. Creative tool hub Krea locked up $83 million in total funding from BCV, a16z, and Abstract Ventures last week, while Agentic AI startup Touchcast is selling for $500 million in cash and stock to spatial computing startup Infinite Reality.
Hard-tech startups that were already focused on building in America could potentially benefit from Trump’s protectionism. One such venture, Amca, plans to design and manufacture complex components for the aerospace and defense industries by rolling up existing American legacy manufacturers. The company launched out of stealth last week with $75 million in seed funding from Caffeinated Capital, a16z, Lux Capital, and Founders Fund.
Cheap consumer goods, on the other hand, are in for a rough ride.
Chinese ultra-fast fashion and goods retailer Shein, which is backed by American VCs Tiger Global and General Atlantic, announced along with its competitor Temu that it will raise prices on goods coming into America. The end of the de minimus rules that exempted cheap goods from tariffs when they were shipped directly to US households will almost certainly strain their business models.
Other startups in the direct-to-consumer category are adding “liberation fees” to cover rising import costs. This will directly hurt marketplace companies like VC darling Quince, which relies on importing directly from warehouses in China for many of its goods. Quince closed $120 million in Series C funding in January from Notable Capital and Wellington Management.
Ocean freight traffic from China to the US is already down 50% since last week, Flexport’s Ryan Petersen tweeted Thursday. We’re just beginning to learn what the longer-term impact of the China trade war might be—and hoping it doesn’t surprise to the downside.
Newcomer Podcast
AGI, Seriously + Foundation Model Polyamory (With Kyle Harrison)
Tom Dotan gives us the scoop on how the foundation model companies are really doing, and — spoiler alert — they’re showing pretty strong revenue figures.
But aside from the money, have we finally hit AGI with OpenAI’s o3? Tyler Cowen seems to think so. The Newcomer debate rages on.
Plus, Eric talks with Contrary’s Kyle Harrison about his map of VC investments in foundation model companies.
One Big Chart
Startups Are Getting Acquired Earlier and Earlier
M&A is picking up a little among startups, but mostly with smaller deals for companies at the earliest stages.
PitchBook’s Q1 Venture Monitor shows a plurality of M&A happening among companies that have only raised a seed round—and it’s been especially common thus far in 2025. Series D or later acquisitions as a percentage of the total remain well below their 2015 peak.
With long-term exit prospects looking gloomy, founders looking to cash out could see a nice payout from an acquisition where they still own most of the company. With seed valuations far higher than they used to be, that can be a good exit for founders who might otherwise have been tempted to soldier on.
Newcomer Event Calendar
Newcomer’s Event Schedule in 2025
We host invite-only summits for founders and investors. Apply to attend below.
Breaking the Bank | May 20 in San Francisco on financial technology.
Cerebral Valley London | June 25 in London on artificial intelligence | Hosted with Volley.
Deus Ex Medicina | Sept. 9 in San Francisco on health tech and longevity | Hosted with Nayeema Raza.
Cerebral Valley AI Summit | Nov. 12 in San Francisco on artificial intelligence | Hosted with Volley.
Five Notable Deals
Mainspring Energy, Auradine, Science Corp, Hammerspace, General Matter
Khosla Ventures had a busy week, with investments in several hard-tech funding rounds. Plus, Founders Fund has a new nuclear tech play run by partner Scott Nolan.
Generator startup Mainspring Energy raised a $258 million Series F round led by General Catalyst. Other investors include Amazon's Climate Pledge Fund, DCVC, Temasek, Marunouchi Innovation Partners, M&G Investments, Pictet Group, Lightrock, LGT Bank, Khosla Ventures, and Gates Frontier.
Blockchain and AI infrastructure startup Auradine raised an additional $153 million in funding for its Series C round led by StepStone Group. Other backers include Maverick Silicon, Premji Invest, Samsung Catalyst Fund, Qualcomm Ventures, Mayfield, MARA Holdings, and GSBackers.
Science Corp, a Neuralink competitor that’s making retina implants, brain implants, and research equipment, raised $104 million in fresh funding led by Khosla Ventures.
AI-powered data management startup Hammerspace raised $100 million in strategic growth funding from ARK Invest and Altimeter Capital.
General Matter, which makes high-assay low-enriched uranium for nuclear power, raised $50 million in a funding round led by Founders Fund.
What They’re Saying
Meta & Alphabet Leaders, Critics Face Off on Antitrust
Tech companies faced antitrust prosecutors this week. Here’s what some parties thought.
“I thought that Instagram was better at that, so I thought it was better to buy them.” — Mark Zuckerberg, on his decision to scrap plans to build an internal camera product for Facebook and purchase the rival social platform.