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March 26, 2025 | 7 min read
Managing Director
Private markets have seen continuous innovation cycles over the past 50 years — from personal computing to the mobile revolution to cloud computing. Market defining companies have emerged from each of these waves, creating lasting value for end users and driving strong returns for the firms that backed these companies. While markets ebb and flow, innovation continues to march forward and generate strong investment opportunities.
Artificial intelligence (AI) is the latest transformative technology impacting all aspects of life with the potential to fuel growth across a broad range of industries. This article includes insights gained from conversations we have had with GPs on the front lines of AI about where private equity and venture capital investment opportunities are today and the potential impact this technology will have on incumbent companies.
AI is technology that allows computers or machines to perform complex tasks usually done by humans, like reasoning, decision making, and creating. While the genesis of AI dates back decades, it surged into the mainstream with the launch of ChatGPT in late 2022. This marked the introduction of generative AI (GenAI) to the masses, a significant leap beyond traditional AI applications. It is this new component — the creation piece, the generative capabilities — that has captured the world’s fascination today. We are in the early innings of this next innovation wave, but what’s clear is that the market opportunity is vast. This leads to a deep, diverse, and rapidly evolving investment landscape.
Companies shown above are intended for illustrative purposes only. While these may be actual investments in the HarbourVest portfolio, there is no guarantee they will be in a future portfolio. A reference to a specific company does not constitute a recommendation to invest nor an indication that HarbourVest funds or accounts hold any specific company.
Excitement surrounding GenAI has led to incredible innovation and growth in the market. The value of global PE/VC-backed investments in artificial intelligence rose nearly 200% in 2024, attracting $56 billion across 885 deals.1 The technology’s longer-term prospects also appear favorable. AI’s total addressable market is expected to approach $1 trillion by 2027 and grow at a compound annual rate of up to 55% over the next three years.2
A tech stack refers to a collection of technologies, frameworks, and infrastructure components that are used together to build and deploy computer systems. There are two major categories within the AI tech stack where most venture managers have focused to date: infrastructure and applications.
Infrastructure: The foundation on which everything is built. Infrastructure includes tools, models, cloud platforms, and compute and hardware. Cloud platforms are not a major focus for most venture managers today, nor are compute and hardware; these layers are typically dominated by large tech incumbents and focus on chips, hardware, and fundamental computing resources. So, we will concentrate on the remaining infrastructure segments layered above that:
Foundation models: The pre-trained, large models that require vast amounts of data and resources to train. There are general-purpose foundation models and domain-specific models which are built for specific industries.
Tools and enablement: These are the “picks and shovels” that support and build a scalable AI ecosystem, from providers of data or data labeling to those that help manage model safety and security. Venture managers with deep technical expertise have invested at this layer.
Applications: The application layer is comprised of end-user-facing applications that cater to both consumers and enterprises. This is an area of focus for many general partners (GPs) today due to enhanced model accessibility and maturing infrastructure. Within applications, it is helpful to delineate between vertical applications focused on serving a specific industry, and horizontal applications which have broader functional use cases.
Companies in the vertical applications category leverage AI functionality and build custom solutions that solve industry-specific pain points; to date, they have seen less competition from large tech incumbents.
Horizontal applications offer broader, more generalized, adaptable functionality for consumers and businesses. They can assist with data-driven decision making, task automation, and more.
Across these areas, investors are often interested in what these companies really need to be successful in the AI space. First, like any firm, an AI company needs to demonstrate all the traditional factors that make any company successful — from a strong go-to-market motion to good governance practices to effective leadership. These elements are vital. Second, is that robust talent, data, and distribution are paramount to AI companies.
Talent: AI companies today need highly skilled employees with deep technical expertise, often gained from years of training and education; many have worked in a handful of exceptional research institutions and labs. This talent pool is limited, so there is significant competition for the best AI builders and engineers.
Data: Data is the lifeblood of AI companies. Models are hungry for data and need significant inputs for training. Beyond models, AI companies can build more defensible moats if they can leverage unique, proprietary data sets.
Distribution: This is a key consideration because incumbents are playing an active role in this innovation cycle and have strong existing distribution channels. Companies need to have distribution on their own, through partnerships, or operate in a market segment where incumbents do not have a right to win.
Many investors are asking questions about the implications of the GenAI revolution. Are incumbents or startups better positioned? What is the risk of AI disruption in current portfolios? Will AI present risks for certain software categories?
Prior to the advent of AI, cloud computing was the most recent technical “revolution.” Legacy companies frequently struggled to adopt the new technology, as moving from on-premises to the cloud required a rewrite of their tech stack and business model.
When it comes to AI, however, large tech incumbents are better positioned than in previous innovation waves. First, unlike the transition to the cloud, incumbents can more easily integrate AI into their existing systems, allowing for faster adoption and product enhancements. Second, AI is heavily dependent on large data sets, so companies with years of operating history and unique data have a significant advantage.
This does not mean challengers cannot win — in some parts of the tech stack, we expect startups to lead the way. For example, while incumbents may have a leg up on horizontal applications due to their significant resources, distribution, and data, many venture managers see the greatest potential for startups in vertical applications. These companies leverage AI to develop sector-specific products and more differentiated solutions. Startups may be better positioned to create these tailored, embedded workflows for industries such as healthcare, law, and finance.
Additionally, strategic partnerships between tech incumbents and AI startups also present compelling opportunities. Examples include Microsoft’s partnership with OpenAI and Amazon’s partnership with Anthropic. These alliances can give AI startups an advantage in terms of resources, compute power, and distribution.
While large tech incumbents have aggressively pursued AI, there are other companies beyond those that are at risk of disruption. The level of risk for legacy software businesses often depends on end market, workflow, and use case.
Mission-critical software businesses that are difficult to swap out within an organization will not be as impacted by AI. Customers are more likely to stick with their current software companies and wait for them to implement AI instead of switching to a new provider.
Businesses that have years of data from their own customers will be able to train data sets to make useful applications in short order — giving them a competitive edge.
Examples include: Compliance software, ERP systems, and financial fraud tools.
Services and support companies (such as call centers) are more likely to be negatively affected by AI. These companies are built on people and labor hours, and AI could replace these less efficient, more expensive options.
Companies that leverage externally generated or publicly available data are more exposed to AI risks. For example, analytics or business intelligence tools built on top of non-proprietary data are vulnerable.
Examples include: Marketing platforms, design tools, and customer service.
These legacy businesses will need to adapt to the changing landscape to compete with large tech incumbents and AI-native startups. Some will evolve and become more resilient, while others will be outcompeted or displaced. General partners are focused on supporting their existing portfolio through this transition by providing key insights and sharing lessons learned on integrating AI.
The rise of AI has driven energy usage to record levels, serving as a catalyst for alternative energy sources including solar, wind, natural gas, and nuclear. AI algorithms are computationally intensive, requiring vast amounts of specialized hardware and are expected to place extensive demand on the power grid. Many of the largest cloud service providers and data center operators have committed to 100% renewable energy usage.3 The convergence of a sharp increase in need for data center capacity, renewable energy generation, and grid modernization is expected to drive a meaningful increase in the need for private capital investment into digital power and infrastructure.
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The global AI race continues to accelerate. Each day brings a new breakthrough, a new company, a new tool that will change the way we live, work, and communicate. The pace of innovation is fast. In the past year, we saw advancements in agentic work and reasoning models, AI expand to become more applicable in fields like math, biology, and robotics, and the release of DeepSeek, which sent ripples through the AI community as well as the public markets.
While there is real value being created and captured today, we know from watching cycle after cycle that people tend to overestimate impact in the short-term but underestimate it in the long-term. We believe the focus should remain on long-term value creation — the durable value that will persist as AI transforms existing business and creates entirely new categories.
HarbourVest Partners, LLC (“HarbourVest”) is a registered investment adviser under the Investment Advisers Act of 1940. This material is solely for informational purposes; the information should not be viewed as a current or past recommendation or an offer to sell or the solicitation to buy securities or adopt any investment strategy. In addition, the information contained in this document (i) may not be relied upon by any current or prospective investor and (ii) has not been prepared for marketing purposes. In all cases, interested parties should conduct their own investigation and analysis of the any information set forth herein and consult with their own advisors. HarbourVest has not acted in any investment advisory, brokerage or similar capacity by virtue of supplying this information. The opinions expressed herein represent the current, good faith views of the author(s) at the time of publication, are not definitive investment advice, and should not be relied upon as such. This material has been developed internally and/or obtained from sources believed to be reliable; however, HarbourVest does not guarantee the accuracy, adequacy or completeness of such information. The information is subject to change without notice and HarbourVest has no obligation to update you. There is no assurance that any events or projections will occur, and outcomes may be significantly different than the opinions shown here. This information, including any projections concerning financial market performance, is based on current market conditions, which will fluctuate and may be superseded by subsequent market events or for other reasons. The information contained herein must be kept strictly confidential and may not be reproduced or redistributed in any format without the express written approval of HarbourVest.
“Professional Investor” under the Securities and Futures Ordinance (Cap. 571 of the Laws of Hong Kong) (the “SFO”) and its subsidiary legislation) means:
(a) any recognised exchange company, recognised clearing house, recognised exchange controller or recognised investor compensation company, or any person authorised to provide automated trading services under section 95(2) of the SFO;
(b) any intermediary, or any other person carrying on the business of the provision of investment services and regulated under the law of any place outside Hong Kong;
(c) any authorized financial institution, or any bank which is not an authorised financial institution but is regulated under the law of any place outside Hong Kong;
(d) any insurer authorized under the Insurance Ordinance (Cap. 41 of the Laws of Hong Kong), or any other person carrying on insurance business and regulated under the law of any place outside Hong Kong;
(e) any scheme which-
(i) is a collective investment scheme authorised under section 104 of the SFO; or
(ii) is similarly constituted under the law of any place outside Hong Kong and, if it is regulated under the law of such place, is permitted to be operated under the law of such place,
or any person by whom any such scheme is operated;
(f) any registered scheme as defined in section 2(1) of the Mandatory Provident Fund Schemes Ordinance (Cap. 485 of the Laws of Hong Kong), or its constituent fund as defined in section 2 of the Mandatory Provident Fund Schemes (General) Regulation (Cap. 485A of the Laws of Hong Kong), or any person who, in relation to any such registered scheme, is an approved trustee or service provider as defined in section 2(1) of that Ordinance or who is an investment manager of any such registered scheme or constituent fund;
(g) any scheme which-
(i) is a registered scheme as defined in section 2(1) of the Occupational Retirement Schemes Ordinance (Cap. 426 of the Laws of Hong Kong); or
(ii) is an offshore scheme as defined in section 2(1) of that Ordinance and, if it is regulated under the law of the place in which it is domiciled, is permitted to be operated under the law of such place,
or any person who, in relation to any such scheme, is an administrator as defined in section 2(1) of that Ordinance;
(h) any government (other than a municipal government authority), any institution which performs the functions of a central bank, or any multilateral agency;
(i) except for the purposes of Schedule 5 to the SFO, any corporation which is-
(i) a wholly owned subsidiary of-
(A) an intermediary, or any other person carrying on the business of the provision of investment services and regulated under the law of any place outside Hong Kong; or
(B) an authorized financial institution, or any bank which is not an authorised financial institution but is regulated under the law of any place outside Hong Kong;
(ii) a holding company which holds all the issued share capital of-
(A) an intermediary, or any other person carrying on the business of the provision of investment services and regulated under the law of any place outside Hong Kong; or
(B) an authorized financial institution, or any bank which is not an authorised financial institution but is regulated under the law of any place outside Hong Kong; or
(iii) any other wholly owned subsidiary of a holding company referred to in subparagraph (ii); or
(j) any person of a class which is prescribed by rules made under section 397 of the SFO for the purposes of this paragraph as within the meaning of this definition for the purposes of the provisions of the SFO, or to the extent that it is prescribed by rules so made as within the meaning of this definition for the purposes of any provision of the SFO.
The first of such classes of additional “professional investor”, under the Securities and Futures (Professional Investor) Rules (Cap. 571D of the Laws of Hong Kong), are:
(k) any trust corporation (registered under Part VIII of the Trustee Ordinance (Cap. 29 of the Laws of Hong Kong) or the equivalent overseas) having been entrusted under the trust or trusts of which it acts as a trustee with total assets of not less than HK$40 million or its equivalent in any foreign currency at the relevant date (see below) or-
(i) as stated in the most recent audited financial statement prepared-
(A) in respect of the trust corporation; and
(B) within 16 months before the relevant date;
(ii) as ascertained by referring to one or more audited financial statements, each being the most recent audited financial statement, prepared-
(A) in respect of the trust or any of the trust; and
(B) within 16 months before the relevant date; or
(iii) as ascertained by referring to one or more custodian (see below) statements issued to the trust corporation-
(A) in respect of the trust or any of the trusts; and
(B) within 12 months before the relevant date;
(l) any individual, either alone or with any of his associates (the spouse or any child) on a joint account, having a portfolio (see below) of not less than HK$8 million or its equivalent in any foreign currency at the relevant date or-
(i) as stated in a certificate issued by an auditor or a certified public accountant of the individual within 12 months before the relevant date; or
(ii) as ascertained by referring to one or more custodian statements issued to the individual (either alone or with the associate) within 12 months before the relevant date;
(m) any corporation or partnership having-
(i) a portfolio of not less than HK$8 million or its equivalent in any foreign currency; or
(ii) total assets of not less than HK$40 million or its equivalent in any foreign currency, at the relevant date, or as ascertained by referring to-
(iii) the most recent audited financial statement prepared-
(A) in respect of the corporation or partnership (as the case may be); and
(B) within 16 months before the relevant date; or
(iv) one or more custodian statements issued to the corporation or partnership (as the case may be) within 12 months before the relevant date; and
(n) any corporation the sole business of which is to hold investments and which at the relevant date is wholly owned by any one or more of the following persons-
(i) a trust corporation that falls within the description in paragraph (k);
(ii) an individual who, either alone or with any of his or her associates on a joint account, falls within the description in paragraph (k);
(iii) a corporation that falls within the description in paragraph (m);
(iv) a partnership that falls within the description in paragraph (m).
For the purposes of paragraphs (k) to (n) above:
An institutional investor as defined in Section 4A of the SFA and Securities and Futures (Classes of Investors) Regulations 2018 is:
(a) the Singapore Government;
(b) a statutory board as may be prescribed by regulations made under section 341 of the SFA, as prescribed in the Second Schedule of the Securities and Futures (Classes of Investors) Regulations 2018;
(c) an entity that is wholly and beneficially owned, whether directly or indirectly, by a central government of a country and whose principal activity is —
(i) to manage its own funds;
(ii) to manage the funds of the central government of that country (which may include the reserves of that central government and any pension or provident fund of that country); or
(iii) to manage the funds (which may include the reserves of that central government and any pension or provident fund of that country) of another entity that is wholly and beneficially owned, whether directly or indirectly, by the central government of that country;
(d) any entity —
(i) that is wholly and beneficially owned, whether directly or indirectly, by the central government of a country; and
(ii) whose funds are managed by an entity mentioned in sub‑paragraph (c);
(e) a bank that is licensed under the Banking Act 1970;
(f) a merchant bank that is licensed under the Banking Act 1970;
(g) a finance company that is licensed under the Finance Companies Act 1967;
(h) a company or co‑operative society that is licensed under the Insurance Act 1966 to carry on insurance business in Singapore;
(i) a company licensed under the Trust Companies Act 2005;
(j) a holder of a capital markets services licence;
(k) an approved exchange;
(l) a recognised market operator;
(m) an approved clearing house;
(n) a recognised clearing house;
(o) a licensed trade repository;
(p) a licensed foreign trade repository;
(q) an approved holding company;
(r) a Depository as defined in section 81SF of the SFA;
(s) a pension fund, or collective investment scheme, whether constituted in Singapore or elsewhere;
(t) a person (other than an individual) who carries on the business of dealing in bonds with accredited investors or expert investors;
(u) a designated market‑maker as defined in paragraph 1 of the Second Schedule to the Securities and Futures (Licensing and Conduct of Business) Regulations;
(v) a headquarters company or Finance and Treasury Centre which carries on a class of business involving fund management, where such business has been approved as a qualifying service in relation to that headquarters company or Finance and Treasury Centre under section 43D(2)(a) or 43E(2)(a) of the Income Tax Act 1947;
(w) a person who undertakes fund management activity (whether in Singapore or elsewhere) on behalf of not more than 30 qualified investors;
(x) a Service Company (as defined in regulation 2 of the Insurance (Lloyd’s Asia Scheme) Regulations) which carries on business as an agent of a member of Lloyd’s;
(y) a corporation the entire share capital of which is owned by an institutional investor or by persons all of whom are institutional investors;
(z) a partnership (other than a limited liability partnership within the meaning of the Limited Liability Partnerships Act 2005) in which each partner is an institutional investor.
An accredited investor as defined in Section 4A of the SFA and Securities and Futures (Classes of Investors) Regulations 2018 is:
(i) an individual —
(A) whose net personal assets exceed in value $2 million (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe in place of the first amount;
(B) whose financial assets (net of any related liabilities) exceed in value $1 million (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe in place of the first amount, where “financial asset” means —
(BA) a deposit as defined in section 4B of the Banking Act 1970;
(BB) an investment product as defined in section 2(1) of the Financial Advisers Act 2001; or
(BC) any other asset as may be prescribed by regulations made under section 341; or
(C) whose income in the preceding 12 months is not less than $300,000 (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe in place of the first amount;
(ii) a corporation with net assets exceeding $10 million in value (or its equivalent in a foreign currency) or such other amount as the Authority may prescribe, in place of the first amount, as determined by —
(A) the most recent audited balance sheet of the corporation; or
(B) where the corporation is not required to prepare audited accounts regularly, a balance sheet of the corporation certified by the corporation as giving a true and fair view of the state of affairs of the corporation as of the date of the balance sheet, which date must be within the preceding 12 months;
(iii) A trustee of a trust which all the beneficiaries are accredited investors; or
(iv) A trustee of a trust which the subject matter exceeds S$10 million; or
(v) An entity (other than a corporation) with net assets exceeding S$10 million (or its equivalent in a foreign currency) in value. “Entity” includes an unincorporated association, a partnership and the government of any state, but does not include a trust; or
(vi) A partnership (other than a limited liability partnership) in which every partner is an accredited investor; or
(vii) A corporation which the entire share capital is owned by one or more persons, all of whom are accredited investors.
Continuation solutions encompass a host of transaction types in which a GP secures interim liquidity and/or additional primary capital for their LPs in a strongly performing asset, or set of assets, that the GP will continue to own and control. Specifically, they include continuation funds, new funds created by GPs for the purpose of acquiring the asset(s) that continue to be managed by the same GP and capitalized by one or several secondary buyers, or equity recapitalizations involving a direct equity or structured equity investment into a portfolio company. These transactions can also include a parallel investment from the GP’s latest fund into that same pool of assets (a “cross-fund trade”).
