The Herding Crisis in Venture Capital: Why Everyone’s Chasing AI and Forgetting Everything Else

More and more VCs are acting like momentum traders, piling into whatever’s trending, whether it’s AI, LLMs, or the latest AI-meets-FinTech play. The problem? It’s driving valuations through the roof in a handful of sectors while starving equally promising areas like climate tech, infrastructure software, and real-world FinTech of the capital and talent they deserve.

Numbers tell the story:

AI dominance in VC

• Global VC funding for AI startups rose to approximately US$131.5 billion in 2024, a ~52% increase from the prior year.

• In Q1 2025, AI-related investments in the U.S. accounted for ~71% of all VC funding in that period, up from ~45% in 2024 and ~26% the year before.

• In H1 2025, global VC funding reached around US$205 billion, up ~32% from H1 2024.

• In Q3 2025, global VC investment hit US$120.7 billion with the Americas (led by the U.S.) receiving US$85.1 billion, AI again dominating.

• North America’s share of global AI startup funding: In 2024, ~75.6% of global AI VC flows went to North American companies (~US$106.24 billion) and in 2025 that share rose to ~86.2%.

FinTech stagnation (outside AI overlay)

• Global FinTech investment in H1 2025 was US$24 billion across 2,597 deals, marking only a ~6% increase from H2 2024 (US$22.4 billion) – modest growth relative to the AI surge.

• In Q2 2025 global FinTech funding reached US$11 billion (22% increase QoQ and YoY) but deal volumes fell (~390 deals, down from ~450 in Q2 2024) showing selectivity over breadth.

Why this matters for 404Fund (and why it should matter for you)

Valuation risk & exit risk

• When everyone chases a narrow sector, valuations inflate, competition for deals increases, and the margin for error shrinks. In AI especially, some startups may raise large sums before proving business model or exit path. This means that valuations are ballooning so much that company exits will have to be absolutely massive for VCs to generate profits.

Overlooked opportunity in non-herd sectors

• If capital is being channeled overwhelmingly into AI, it may create arbitrage for other sectors (including non-AI FinTech, infrastructure, underserved markets like Canada, compliance/regtech, B2B verticals) where valuations are more reasonable, competition is less crowded, and yield could be more disciplined. That presents an opportunity for a fund like ours.

Geography matters

• Since North America is capturing a growing share of AI funding (~86% in 2025) it means Canadian startups aiming to scale into the U.S. gain an advantage, but also face stiffer competition. It also means we need to think about cross-border structuring, regulatory risk, talent migration, valuations etc.

Herd mentality leads to “copycat” risk

• Many startups are now labelled “AI X” (e.g., AI for payments, AI for credit scoring, AI for wealth), but the actual differentiation may be minimal. If we invest in deals simply because they have “AI” in the deck, we risk falling prey to the same herd. Instead we should focus on true moats, domain expertise, regulatory advantage, defensibility.

404Funds position & Angle

At 404Fund we position ourselves as contrarian but disciplined. The data shows the herd is overwhelmingly chasing AI. We believe that creates excess risk and inflated valuations in many parts of that space and simultaneously opens windows of opportunity elsewhere. Our positioning therefore:

• Dual strategy: Stay plugged into AI/FinTech where real value exists, but focus a meaningful portion of our thesis on non-AI FinTech verticals, Canadian-U.S. cross-border arbitrage, underserved segments and infrastructure.

• Terms discipline: Given the large checks and mega-rounds dominating the market, we emphasise terms, governance (consistent with our founder governance stance), and exit clarity.

• Avoid the copycats: We explicitly avoid investing in deals where “AI” is just tacked on without substance. We prioritise domain expertise, defensibility and market need.

• LP story: For our LPs, we articulate that we are not herding, we are selective, contrarian, and structured for real value creation, not just chasing the next “AI wave”.