Venturing on: Why and how to invest in global innovation
Steven Yang
Recent stock market volatility caused by a new AI challenger highlights how innovation is happening at pace on the world stage, which in turn provides compelling opportunities for venture capital investors.
On Monday 20th January 2025, while the world’s eyes were trained on Washington and the inauguration of Donald Trump, Chinese start-up DeepSeek released the latest iteration of its generative artificial intelligence (AI) chatbot. And while Mr Trump kicked off his second term in the White House with a deluge of executive orders, the ripple effects from DeepSeek’s launch soon similarly began to make waves on markets.
We’ve written about the immediate response to, and ramifications for investors of, these events already. What is particularly interesting in a private equity context, is how these events underscore the broad, global innovation that is happening at pace in this most disruptive of sectors, much of it financed by venture capital (VC).
Beyond the headlines, it is the dynamism and innovation of start-ups with bold ambitions to disrupt the status-quo that is the main attraction of venture investing. It happens around the world, throughout market cycles, and offers the promise of generational opportunities that can turn into the very biggest investment wins.
OpenAI, the company whose AI models are most directly challenged by DeepSeek, itself began life as a small upstart start-up, albeit one with big ambitions and rich backers, among them Elon Musk and current CEO Sam Altman, himself a serial venture investor. At the end of January, and in spite of the market ructions, it was revealed the company is in talks for a new funding round that would value the business in the region of $300bn.
That may sound like a big number for a pre-profit business, but the potential of the technology is clear and era-defining. The same was true of companies that now make up eight of the top 10 most valuable public companies, with notable VC firms among their early investors. These investments have generated phenomenal returns for the venture backers equating in many cases to three-figure multiples of the first institutional financing.
Sizing up the market
Of course, the venture market is far broader and deeper than the few household technology names that represent some of its biggest successes. Globally, $3.5 trillion was invested in venture capital between 2020 and 2024, according to data from Pitchbook. Meanwhile, large institutional investors have consistently directed 20-25% of their private equity allocation into venture capital.
Venture capital investing centres primarily around start-ups based in the top 20 innovation hubs globally, with around 70% concentrated around key cities in the US, China and UK. Key sectors are those that thrive on entrepreneurial disruption and innovation, including technology, ranging from the rapidly evolving field of AI through to enterprise software and cybersecurity; healthcare, focusing on life sciences and biotechnology; and financial services, especially technology-enabled innovation in areas such as payment solutions.
To put some numbers on where venture capital dollars are directed (see chart below), over the five years from 2020 to 2024 information technology accounted for the largest share of investment (35%) – and it generated by far the most ‘unicorns’, a term referring to start-ups valued at more than $1bn (50% of unicorn value distribution).
Notably, while AI represented only 3% of the overall investment total over the same period, it is a growing investment themes with an increasing share of unicorn value distribution (12%). Of the more than $100bn invested in the sector, $70bn has been invested since 2022. Healthcare and financial services are both similarly prominent areas of investment (12% and 11% respectively), and account for a similar share of unicorn value distribution (7% and 6%).
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