Lisa Morgan, Freelance WriterMarch 11, 20258 Min Read Cagkan Sayin via Alamy StockAccording to Pitchbook News, 35.7% of venture capital investments in 2024 were made in AI and ML startups, which isnt surprising given Big Techs investment in the same space. Meanwhile, EY reported that in Q4 2024, AI startups represented 60% of investments. While AI will continue to be a major focus area, under the Trump administration, theres a more bullish attitude about crypto, so some VCs are adding those companies to their portfolios while others are investing in space tech and ESG.If you increasingly think about agents interacting with one another without necessarily humans in the loop, you need to have a payment layer that is as scalable as millions of agents. [This is] the biggest promise in what's happening on the crypto front, says Pascal Unger, managing partner of pre-seed VC firm focal.He also says software is moving from, or has moved from, a system of engagement to a system of intelligence. That system of intelligence enables AI-powered automation that is accelerating the pace of business.One of the ways that weve added to our diligence is trying to understand the current AI tech stack that founders are leveraging, what all theyve tried and how much people lean into constantly getting better and trying experimenting. Understanding why [founders] chose a certain tech stack says a lot about peoples willingness to lean into these things, which will eventually, at least we believe, translate into faster speed.Related:Execution speed is critical, so software abstraction enables founders and their teams to get to market faster with solutions.You move from incredibly in the weeds into a manager and orchestrator of different tools, and you spend a lot more time on oversight and thinking and structuring things so thats changed, says firms Unger. I won't be surprised if we get a useful warm up period for new products where it needs to get to know us, basically, and it gets better over the first three to six months. That will become a normal thing down the road. We [also] believe in the importance of nailing distribution. If you want to build a differentiator product from the start, you now need to nail the distribution even earlier.Pascal Unger, focalPascal Unger, focalThat approach results in faster early-stage growth, such as going from zero to more than $10 million in less than a year. Unger says that just three years ago, that sort of company performance would have been an outlier.Hemant Mohapatra, partner at Lightspeed Venture Partners, expects 2025 to be a lot like 2024, but the target segments will shift. As AI foundational layers stabilize and the winners become more apparent, the next phase will focus more on middleware and application startups.Related:At Lightspeed we have been very active globally across the AI stack -- foundation models, data, middleware, both horizontal and vertical apps, as well as AI enabled services, says Mohapatra. Our investment strategy remains the same: Find the most compelling founders with clear right to win in their categories and find and back them no matter which part of the world they come from.Mohapatra sees a lot of potential in AI and gaming in terms of creating immersive worlds dynamically, non-player characterswith advanced conversational capabilities and personalized gameplay.We are also very early in LLMs controlling various software tools to get complex jobs done and we will see a few mind-boggling demos here in 2025, says Mohapatra. I also expect consolidation across the middleware layer -- LLMs or scaled out AI companies looking to vertically integrate across data, tool orchestration or memory infrastructure.Daniel Kang, CEO and co-founder of Y-Combinator backed startup Flowbo and former VC at SoftBank Vision Fund expects the proportion of VC investments in AI to likely increase over time for a few reasonsRelated:Most of the AI discussion is not just about the technology, but its position as a platform. Foundational model companies like Anthropic and OpenAI have made it easy for anyone to use their technology to build on top of it, says Kang. Its akin to Apple creating a mobile platform powered through the iOS for others to build apps, shifting the platform from desktop to mobile. Thats why many wrapper companies will continue to emerge.Meanwhile, models are improving by the day, which is creating more opportunities for startups. However, the complexities will likely require greater precision, which is probably why many middle layers already exist between the foundational models and applications.On top of that, intense competition among model providers like OpenAI and Anthropic is creating a downward pricing pressure to provide compute at cost, says Kang. APIs costs have already been revised several times to be cheaper, while their app products, ChatGPT and Claude, have remained the same.He expects general purpose application as wrappers to lose their edge as models improve and companies require more specialized solutions for specific tasks or functions. That probably will mean verticalization and the middle layers adapting general models for specific requirements.For apps specifically, the primary differentiation will likely be around distribution and brand more than technology, as the models improve and costs fall, says Kang. Foundational models and middle layers will probably continue to differentiate through tech. While the timing is unclear, the rise of middle layers seems imminent.Where Else Money Is FlowingViktor Shpakovsky, general partner at the Beyond Earth Technologies VC firm thinks space tech is a smarter bet than AI or crypto.AI and crypto have dominated headlines, but both sectors are showing signs of overinflation and speculative hype. Meanwhile, space tech is emerging as the most promising industrial growth sector, driven by government backing, geopolitical competition and technological breakthroughs, says Shpakovsky. With Trump [in] office, defense and space budgets are set to increase dramatically. Elon Musk and SpaceX continue to push commercial space forward at an unprecedented pace. At the same time, the US-China space race is accelerating, forcing the US government to invest aggressively in private space companies. These factors make 2025 the defining moment to bet on space tech over speculative software trends.He further reasons that AI and crypto are overcrowded and over-valued. While AI has become VCs latest gold rush, he says inflated values and copycat startups are challenges. Moreover, every startup claims that they have AI, but few have defensible technology or clear revenue models.As for crypto, he says the boom-and-bust cycle is predictable, because the crypto industry follows a well-known pattern: hype-driven speculation, price surges, regulatory crackdowns, and mass failures.Both AI and crypto sectors are flooded with startups, leading to undifferentiated competition and thinning margins, says Shpakovsky. Meanwhile, space tech remains an underinvested frontier with clear industrial demand. Unlike AI and crypto, space tech is a government-backed industrial growth sector. This isnt just about launching rockets -- its about building trillion-dollar infrastructure for the next era of human civilization.Viktor Shpakovsky, Beyond Earth TechnologiesViktor Shpakovsky, Beyond Earth TechnologiesInstead of chasing the next overhyped AI startup, Beyond Earth Technologies focuses on industries where AI is just a tool, not the entire business model. Its portfolio is built around lunar infrastructure, space robotics, next-gen energy and propulsion, in-space manufacturing, satellite intelligence, and space situational awareness.Benson Chang managing partner at Epipelagic Ventures expects a shift in 2025 -- not away from AI -- but toward infrastructure, cybersecurity and pragmatic applications with clear revenue models.Crypto may regain traction, particularly where blockchain solves real inefficiencies, says Chang. Weve refined our investment playbook to prioritize capital efficiency, durable moats and execution over hype. We need more than cutting-edge tech -- we must show defensibility, go-to-market traction and strategic innovation. The bar for funding is higher, and investors are backing leaner, more resilient teams.Anton Chashchin, founder and CEO at private fintech group N7 Capital, expects AI to remain a dominant investment theme attracting major inflow, but he warns that VCs should not overlook macroeconomic factors including persistent inflation and high interest rates.The global economic forecast is not as positive as we would like it to be. A predicted slowdown in global economic growth will make VCs more selective, prioritizing more sustainable startups with clear paths to profitability and not just AI use, says Chashchin.He also expects a greater focus on crypto because the Trump Administration strongly emphasizes it, which has fueled market growth and optimism.Considering that the total crypto market cap is projected to exceed $4 trillion, digital assets are no longer a speculative thing but an asset class attracting capital, says Chashchin. The institutionalization of the sector is also accelerating, meaning VCs should not ignore this opportunity.He also sees greater investments in renewables and ESG.As alternative types of energy become cheaper and more competitive, more companies operating in this field will receive funding from VCs, says Chashchin. The ongoing surge in ESG investment, projected to reach $50 trillion in assets under management this year, also highlights the growing demand for climate-focused solutions. With governments worldwide prioritizing clean energy, venture capital is shifting towards startups that are developing clean energy technologies or building infrastructure for their construction.Bottom LineAI investments are expected to remain high in 2025, with greater emphasis on the middle and application layers. Meanwhile, VC firms are making other investments, such as in crypto, space tech, renewable energy, and ESG.Read more about:Technology StartupsAbout the AuthorLisa MorganFreelance WriterLisa Morgan is a freelance writer who covers business and IT strategy and emergingtechnology for InformationWeek. She has contributed articles, reports, and other types of content to many technology, business, and mainstream publications and sites including tech pubs, The Washington Post and The Economist Intelligence Unit. Frequent areas of coverage include AI, analytics, cloud, cybersecurity, mobility, software development, and emerging cultural issues affecting the C-suite.See more from Lisa MorganWebinarsMore WebinarsReportsMore ReportsNever Miss a Beat: Get a snapshot of the issues affecting the IT industry straight to your inbox.SIGN-UPYou May Also Like