The war in the Ukraine, high rates of inflation, rapidly rising interest rates, soaring energy prices, the looming threat of a global recession, and other macroeconomic factors combined to create a storm of challenges both within the global VC market and more broadly during Q4’22. These concerns drove a significant amount of alignment in major investment trends across regions, overshadowing many more localized concerns during the quarter.

VC investment globally dropped for the fourth straight quarter in Q4’22. While the total of VC investment looked particularly weak compared to the record quarterly high set during the same quarter last year, it remained comparable to the levels of investment seen prior to the onset of the Covid-19 pandemic.

 Late stage VC investment saw the sharpest drop amidst falling valuations and concerns about the profitability and sustainability of business models given worsening global economic conditions.

Cost-cutting becomes a key priority as companies preserve cash and VC investors focus on profitability

In Q4’22, numerous global technology companies, announced significant cost-cutting measures—primarily headcount reductions and the reduction of real estate footprints. In the VC market, such efforts also became the norm this quarter as startups worked to preserve cash, delay new funding rounds, and respond to pressure from their investors to become more efficient. The prioritization on cost-cutting extended across companies operating in a wide variety of sectors.

B2B and business productivity solutions—already a strong area of VC investment—will likely continue to gain steam over the next few quarters as both corporates and more mature startups look for ways to streamline their operations, bring more efficiencies into their business, and get more value from every dollar.

Energy sector very hot among global VC investors

2022 saw global VC investor interest in everything energy grow very rapidly, driven in part by a number of governments moving to prioritize energy independence and numerous companies considering energy alternatives and ways to become more efficient amidst soaring energy costs. In Q4’22, energy was an incredibly hot sector for VC investment, with numerous subsectors attracting large ticket sizes, including alternative energy vehicles, battery technologies, and alternative power generation and distribution technologies. Broader cleantech and ESG-related solutions also saw strong interest from VC investors.

Global uncertainty has reduced the appetite for VC investment. Despite this, the EU is performing relatively well and valuations have not been significantly affected - yet. In the Nordics, we have seen the lowest number of deals in Q4'22 for 7 years. But it is positive that the average deal size remains at a relatively high level. As a VC funded company, you should take into account the decreasing investment appetite and act with due diligence both through cost reduction and when planning the next funding - especially if you are after one of the later rounds. It will be interesting to see what happens in 2023.

Simon Vinberg Andersen
Partner, Startup & Venture Services
KPMG Denmark

Key highlights from Europe

VC investment in Europe plummeted to a two-year low in Q4’22, amidst an environment of high inflation, rising interest rates, the ongoing war in the Ukraine, and skyrocketing energy prices. Compared to recent quarters, the largest deals in Europe during Q4’22 were substantially smaller — although still sizeable and geographically diverse — led by 3 deals in the electric vehicle and mobility ecosystem - a $500 million raise by Sweden-based Einride, a $295 million raise by Sweden’s Volta Trucks and a $245.9 million rase by French battery producer Verkor.

VC investors in Europe prioritizing companies in their own portfolios

During Q4’22, VC investors across Europe showed increasing caution, putting a significant amount of pressure on their portfolio companies to cut costs and reduce their spend. While mature startups undertook the most publicised cost-cutting measures in Europe during the quarter, primarily major headcount reductions and reductions in real estate, the later part of Q4’22 saw a wave of smaller VC backed startups starting to follow suit.

Nordics region remains attractive to VC investors

The Nordics region continued to attract solid interest from VC investors in Q4’22 in terms on deal value, most prominently in the energy and electric vehicle space, despite a drop in total VC investment. In addition to Sweden’s Einride ($500 million) and Volta Trucks ($295 million), Norway-based food delivery platform Oda raised $151 million—although the latter was at a substantially lower valuation than the company’s previous funding round. Trends in the Nordics region are lagging a bit behind vs. for example the US. This could result in softer investment in Q1’23 as the VC market in the region sees more impact from the global downturn and the runways of the companies start to shorten.

Trends to watch for in Q1’23

Looking forward to Q1’23, VC investment in Europe is expected to remain relatively soft, with no end in sight to many of the challenging factors affecting the VC market. While many sectors will likely face challenges over the next quarter, VC investment will likely continue apace in high priority areas, including energy, energy security, and ESG. While interest over the near-term is expected to focus on energy independence and energy alternatives, interest in cleantech will likely accelerate as countries in the region work to meet their decarbonization targets.

Interest in lending solutions could also pick up as companies struggle to access cash and startups look for innovative options to avoid down rounds.