Despite a decline in VC funding during Q2’22, the VC market in the US showed resilience during the quarter, with investment higher than in any quarter prior to Q1’21. The quarter included three $1 billion+ funding rounds, including a $2 billion raise by Epic Games, a $1.7 billion raise by SpaceX and a $1.5 billion raise by GoPuff.

Startups focusing on reducing cash burn

With the inflation rate soaring, interest rates on the rise, and growing indications that the US is entering a recession, startups at all levels of maturity in the US are evaluating their operations and moving to rein in their cash burn. During Q2’22, companies started reconsidering their growth strategies, adjusting their headcount and, in the case of many consumer-focused businesses, looking at ways to improve and enhance their unit economics. Many VC investors have also directed their portfolio companies to focus on cash preservation in order to delay their need for new funding or to support their operations while waiting for the IPO market to reopen.

Cybersecurity and supply chain companies continue to attract attention

Given the ongoing uncertainty related to the crisis in Ukraine and growing concerns related to potential cyberattacks, VC investment in cybersecurity in the US held strong in Q2’22 and is well-positioned to remain hot heading into Q3’22. Companies focused on helping companies manage supply chain issues also continued to attract VC investment.

VC investor interest in e-commerce businesses fell in the US during Q2’22, in part due to the declining valuations of public companies in the space, in addition to rising inflation and interest rates. A small number of companies managed to buck this trend, including wholesale marketplace company Faire, which raised $816 million during the quarter.

IPO market remains shuttered in Q2’22

The IPO exit door in the US remained firmly shuttered in Q2’22, a sharp contrast to the record-shattering IPO results seen throughout 2021. With market uncertainty high and no end in sight to the crisis in Ukraine, IPO exits are expected to remain stalled into Q3’22. M&A activity, however, is well positioned to grow as acquirers look to take advantage of the decline in valuations to make more affordable deals. PE activity could also increase as companies flounder or fail to raise new funding rounds.

Narrow focus for ESG investments as investor priorities shift

Alternative energy, electric vehicles, and batter storage continued to attract VC investment in the US during Q2’22. While these areas are likely to remain attractive to VC investors in Q3’22, other environmental, social and governance (ESG) areas could see a decline in investment as both companies and investors juggle rapidly rising input costs, supply chain challenges, and other immediate concerns. Despite any short-term decline in investment, ESG solutions as a whole are expected to remain a key priority over the longer term.

Trends to watch for in Q3’22

Heading into Q3’22, VC investment in the US could dip—a trend not unexpected given most summer quarters in the US see a decline in activity as a significant number of VC market participants take vacations. The current geopolitical uncertainty and macroeconomic environment could also negatively impact the level of VC investment.

Valuations are expected to remain soft in Q3’22. Companies in industries like alternative energy, cybersecurity, and supply chain management will likely remain attractive to investors, while discretionary consumer-focused companies will likely lose their luster.

The IPO market will likely remain closed in Q3’22, although M&A activity could increase as investors look to take advantage of the drop in valuations to make acquisitions and some industries see companies consolidating to improve their market position.


Venture financing in U.S.

Companies in the US are really starting to tighten their belts. Almost everyone is going to need to hunker down and ride this out for however long it will last…and that’s still the $64,000 question: how long is this going to last? It’s not clear yet. Although there will certainly be some outliers….cybersecurity will likely buck any downward trends, along with anything that’s embedded in solving supply chain issues.

Conor Moore
Global Leader — Emerging Giants,
KPMG Private Enterprise, and Partner KPMG in the US

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