VC investment in AI continues to climb

Generative AI funding surged in early 2025, reflecting rapid adoption, rising demand for industry-specific solutions and ongoing innovation in AI hardware, writes Grit Young

The growth in venture capitalist (VC) funding for generative artificial intelligence (GenAI) investments continued to accelerate during the first half of 2025.

According to the EY Ireland Generative AI Key Deals and Market Insights study total deal value reached a new record of $49.2 billion.

This amount is higher than the total for all of 2024, which was a record year with an 80 percent growth rate.

This growth trend is expected to continue into the second half of the year with the launch of new GenAI platforms and their faster revenue-generating capabilities.

The trend is being driven by increased adoption of AI among businesses and consumers, rising demand for industry-specific AI solutions and ongoing innovation in AI hardware.

The significant fall in training costs for foundation models has also contributed to the attractiveness of GenAI investments.

The reduction in the number of deals reflects growing market maturity, with average deal size increasing as the focus shifts to later-stage GenAI investments.

Innovative platforms spur funding

Advances in technology are playing a critical role.

VCs are increasingly focusing on GenAI application businesses building specialised software using third-party foundation models.

The development of software, platforms and tools for use cases responding to specific market needs, is creating new paths to profitability and clearer returns on VC investment.

While the value of VC funding in GenAI rose in the first half of the year, deal volume fell by close to 25 percent compared to the previous six months.

The fall-off in earlier-stage deal activity is an indication of market maturity.

The more established pure play GenAI companies, along with legacy tech players, have come to dominate the foundational GenAI space, limiting opportunities for new entrants and increasing risk for investors.

US dominance increases

The concentration of deal activity in the US is staggering. Last year, the US accounted for nearly 70 percent of the deal count and 85 percent of the value in the GenAI space.

For the first half of 2025, it commanded a 97 percent share of deal value. The trend towards fewer, higher-value deals was reflected in the fact that its share of deal volume fell to just under 62 percent.

Europe, the Middle East and Africa (EMEA) accounts for just two percent of deal value and over 23 percent of total deals, indicating the relative paucity of major deals in the region during the period.

Where are the unicorns?

This investment imbalance is reflected in unicorn statistics in the AI field.

Of 39 acknowledged AI unicorns around the world, just three are in Europe, while two are in Israel and 29 in the US.

This prompts deeper questions about the state of innovation in Europe and whether it will be possible for the region to close the investment gap with the US.

Europe has established a clear leadership position for itself in AI regulation, but there is a fear in some quarters that this has been at the expense of innovation.

This is not a binary question, however, and balance is required.

It is important to regulate powerful technologies but regulation must not be allowed to impede innovation unreasonably, particularly if it applies only in one region.

Unfortunately, there is little or no prospect of achieving global agreement on AI regulation. The Chinese government is investing significantly in AI, with the quantum of investment difficult to track.

Middle Eastern countries are seeking to position themselves as hubs for technology as they prepare their economies for a post-fossil fuel world. The US is, meanwhile, powering ahead both in investment and innovation.

Regulation versus innovation

There is a view that it doesn’t matter where the innovation happens as long as Europe can benefit from advances in GenAI.

There has been some reassessment in light of the Draghi Report, however. There is now growing recognition that this is a strategically important question for the EU’s economic and technological sovereignty.

Regulation matters in numerous ways, but probably most acutely in relation to access to data.

Countries in the Middle East, for example, enjoy better access to data and this gives them a distinct advantage in the development of AI products and services, along with the financial firepower of sovereign wealth funds to back them.

The EU is responding: the European Commission has designated 13 member states to host a network of AI Factories, strategically distributed across the continent to ensure widespread access to AI resources and to foster regional innovation.

It also plans to mobilise more than €20 billion annually from public and private sources for investment in AI.

Alongside these initiatives, there are plans to promote AI adoption in public services and SMEs and to train 250,000 AI professionals with a focus on inclusivity and regional distribution.

These are all important steps, but there is still some way to go on regulation.

Unfortunately, Ireland has lost out in the competition for EU AI hub locations due to the perceived inability of the country to deliver a data centre of the scale required to support a hub.

Access to capital

The plan to mobilise capital is welcome but more needs to be done, as the €20 billion target is likely to represent only a small proportion of global VC investment, if and when it does materialise.

Despite high levels of AI adoption in Ireland—63 percent of Irish startups have adopted AI, with 36 percent embedding it at the heart of their business models according to a recent report produced by Amazon Web Services—the funding environment for Ireland’s early-stage AI companies remains challenging.

The pain point for these companies tends to be in the €1 million to €10 million funding space, just above the level where the State, through Enterprise Ireland and the Ireland Strategic Investment Fund, can meet their funding needs and below the level where they can attract the attention of international VCs.

For Ireland, the strategy should be similar to fintech and green tech, an obvious area of focus for future AI development.

Grit Young is Technology Sector Leader at EY Ireland