Deep tech investment 2024-2025: will AI continue to dominate?

No year in tech is ever boring and 2024 was no exception. Who would have bet in January that Elon Musk would be playing a pivotal role in a Trump presidency in 2025, for example?

But while the innovators continue to innovate (or go into politics), the outlook for those businesses at the start of their tech journey is less clear.

Interest rates remain high, global economic uncertainty shows no signs of abating and unstable and unpredictable geopolitics continue to cast a shadow.

Against that backdrop, what tech will thrive and what will wither in 2025?

AI has dominated both the tech landscape and the conversation since ChatGPT burst onto the scene in November 2022, and that has led to huge swathes of investment.

According to S&P Global Ratings, more than $20 billion was invested in generative AI deals in the first three quarters of 2024, putting it on track to exceed the $22.7 billion raised in 2023.

Meanwhile, data from Crunchbase cites AI as the top sector when it comes to dollars invested – accounting for more than a quarter of total funding.

The second largest beneficiary was healthcare and biotech, followed by fintech.

But as 2024 ends, there are whispers that some organisations are struggling to scale the implementation of AI, along with rumours that some of the big AI models seem to have hit something of a wall in terms of progress, all of which could mean funding slows down in 2025.

Some think that gen AI is simply growing up a bit, pointing to the rise of so-called AI agents that can perform specific tasks without human intervention, such as an intelligent assistant that can manage your daily tasks from scheduling appointments to managing finances.

Maria Rotilu is the founder of OpenseedVC, which offers up to £150k in angel funding to pre-seed and start-ups. She told BI Foresight that she is “already seeing agent models enabling businesses to streamline their operations while AI co-pilots are revolutionising productivity for workers.”

She added: “These solutions frequently leverage generative models in combination with proprietary core IP or unique value propositions to deliver cutting-edge, industry-specific capabilities.”

Such start-ups, she says, enjoy “faster routes to market, lower initial costs and the ability to generate significant revenue even from early enterprise use cases which makes them highly scalable and attractive investments for early-stage VCs.”

Duncan Johnson, CEO of Northern Gritstone, an investor in spinouts from the universities of Manchester, Leeds and Sheffield, told BI Foresight that the investment in gen AI has never really gone to early stage start-ups.

“We don’t have any gen AI in our pipeline which I find quite interesting. It could be that if it is being done in universities it may well be in collaboration with the big corporates who own the IP, which suggests that the area is being dominated by the large firms with the budgets,” said Johnson.

“That might be why we don’t see it in the spinout world. I’ve always been quite surprised that we haven’t seen more of that pure play type of AI.”

What Northern Gritstone does have on its books are some very successful firms which have AI embedded at the heart of their systems.

Firms such as Opteran, a spinout from Sheffield University, which has been inspired by the brains of insects to develop neuromorphic software which enables autonomous machines to move through challenging environments without the need for extensive training or data.

Johnson thinks that AI is just becoming a prerequisite for tech spinouts.

“I think AI is now a core component in everything we look at. Even if it’s in advanced materials or therapeutics they are using it to help accelerate. If you haven’t got AI as part of the business model, you’re missing a trick.”

Other sectors that he is excited about for 2025 include medtech.

“We saw the first drug that had been designed around CRISPR come to market recently and I thought that was a really important moment. And I think that will be an interesting area going forward.”

Camel companies

The health and life sciences sector saw £1.8bn raised by UK start-ups in 2024, according to HSBC Innovation Banking, which expects this to continue in 2025.

But medtech specifically saw global funding drop by 35% last year, leading to what Diana Röttger from Apex Ventures calls “camel companies”.

“They are surviving but they would thrive with more funding. I hope that next year these surviving camels gain more commercial traction and then we can invest in them,” she told BI Foresight.

And she is optimistic. Not only did last year see a record number of FDA approvals for medical devices, but also a number of large labs digitising medical data, both of which make the move into AI-based software a real option for both scientists and hospitals.

One firm on her books, Quibim, has just signed a deal to provide AI diagnostics for prostate cancer in all Philips MRI scanners. Another, Contextflow, has become the first AI radiology tool to be underwritten by European health insurers.

Röttger also sees great potential for firms using AI in drug discovery, while gen AI could become a standard aid for nurses and doctors on their ward rounds.

“We’re going to see doctors and nurses have a microphone with them where they constantly talk in order to feed an AI system,” she told BI Foresight.

Such a system would need to be trained on the specifics of an individual hospital and ensure all the data was ring-fenced. It would likely need to leap through a lot of regulatory hurdles but is already being discussed at medical conferences, said Röttger.

Back office – your time has come

Last year was not a great one for deeptech projects that are unlikely to see return on investment for 10-15 years.

Johnson doesn’t see that changing in 2025.

“I think that deep tech generally, with its longer gestation periods, is still slightly out of favour. Until we get a more risk-on market, and that will be driven by interest rates at one level and starting to see the exit backlog unclog so there’s more liquidity, I don’t think we’re going to see massive change in what’s been a pretty dull market for the last 30 months.”

One area that could be becoming more liquid is fintech, an industry that traditionally the UK has excelled in.

“I think next year is looking like we’re going to have a couple of fintech IPOs happen, like Revolut and Monzo. Everything in venture is connected and as soon as the IPO windows open then that signals to those further down the track that there is a path to liquidity. Anecdotally I’m seeing people say that things are starting to pick up,” said Sophie Winwood, operating partner of Foxe Capital.

But, as with AI, she thinks investment in fintech is going to change in 2025.

“One area that is getting a lot of interest is the realm of tax and accounting. Historically that is very people-dependent but you’re now starting to see it be automated with AI and we’re just at the beginning of that shift.”

Similarly, Winwood thinks insurancetech will thrive.

She points to firms such as Flock, which is already using real-time telemetry data to help inform car insurance.
“We’ve seen a lot of innovation around the front office stuff because that was the sexy stuff that can be sold. And there was never any money for the back office, but now we’re starting to see automation in things like procurement and supply chains, that intersection of fintech and e-commerce,” she told BI Foresight.

Zombie investors

Overall funding for the tech industry fell by around 15% in 2024 compared to 2023, according to Crunchbase.

It means that VCs are increasingly being enticed towards those companies that are already doing well.

Writing in Forbes, Elena Volotovskaya, head of Softline Venture Partners, predicts 2025 will see a surge in mega-deals with unicorns. 

The term ‘unicorn’ refers to start-ups that are worth $1bn, and the number of them has skyrocketed in recent years – up from 142 worldwide in 2015 to more than 1,200 in 2024.

“Mega-deals involving these companies are on the rise and this trend shows no signs of slowing down,” writes Volotovskaya.

She also noted that the current state of venture capital has been likened to a zombie apocalypse, due to the number of so-called zombie investors, which are operational but unable to make investments, becoming an increasingly common sight in 2025.

Winwood thinks that there will be a day of reckoning for zombie funds.

“At some point the funds will have to return their capital,” she said, adding that 2025 will likely see some VCs go by the wayside while smaller funds merge with bigger players.

According to HSBC Innovation Banking, more than 70% of total VC investments for UK start-ups in 2024 came from foreign investors, particularly from the US.

Winwood’s fund is US based and she thinks seeing more foreign interest can only be a good thing for UK start-ups.

“Having the US invest in the UK can be really helpful for firms that are looking to expand to the US. Some think that it is annoying that we are losing potential to the US with companies that end up listing on the US stock exchange, but for me it is a positive,” she said.