The Americas, Europe, and Asia all saw VC investment decline further in Q1’23 as VC investors continued to shy away from large, late-stage deals. During the quarter, only one jurisdiction attracted a $1 billion+ megaround. Deal activity on the other end of the spectrum showed far more resilience, with investment and deals activity remaining quite robust for pre-Seed and Series A deals.

 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.

Generative AI comes into the spotlight

In the wake of the immense buzz created by the release of ChatGBT by OpenAI, interest in generative AI grew significantly. While this interest will likely take time to translate into additional investment, the excitement for the space was quite marked. The large global tech giants were particularly quick to announce their own generative AI offerings. During Q1’23, Google announced that it was integrating AI-powered writing features into Google Workspace1, while Microsoft announced plans to integrate AI into its Microsoft 365 offerings2.

Generative AI is still very much an emerging tech area, with applicability across many different sectors and customer activities. It is likely that the next few quarters will see a major explosion of activity in the space as companies look to transform activities like customer loyalty, marketing automation, back-office management, and chatbot type offerings. Some aspects of generative AI could also however, come under increasing scrutiny due to the possible legal ramifications associated with the use of generative AI produced work.

Alternative energy companies account for the largest VC deal in every region during Q1’23

Alternative energy, including electric vehicles, was by far the biggest ticket sector in Q1’23 — accounting for many of the largest deals of the quarter, including the largest deal in every region. In the Americas, US-based alternative energy infrastructure company Generate raised $880.6 million; in Asia, China-based EV company Zeekr raised $750 million; and in Europe, Germany-based alternative energy leasing company Enpal raised $228 million.

With the war in the Ukraine and the fact energy costs a major contributor to inflation, the focus of investors on alternative energy wasn’t surprising. Whether investment will continue to increase or reach a plateau as Europe becomes more self-reliant will be worth watching, although the sector has attracted quite a diversity of investments — which could keep investment in the space robust for some time.

It continues to be the perfect storm for the VC market affecting most sectors. The Nordics region had a quiet start to Q1'23, where VC firms are probably more focused on securing existing investments with bridge-funding. While Denmark-based Hemab Therapeutics' $135 million raise stood out, other deals were smaller, primarily under $20 million. With uncertain geopolitical and macroeconomic environment, late-stage companies in the Nordics are deferring new equity funding rounds to late 2023 or 2024. However, the growing biotech sector in the region presents opportunities for investors to watch.

Simon Vinberg Andersen
Partner, Startup & Venture Services
KPMG Denmark

Key highlights from Europe

Both the number of VC deals and the total VC investment in Europe fell for the fourth straight quarter, dropping from $15.7 billion in Q4’22 to $9.8 billion in Q1’23. The decline was particularly stark when set against the record number of VC deals and VC investment seen during the same quarter in 2022.

VC investors more stringent with portfolio companies

VC investors in Europe were increasingly cautious in Q1’23, taking a heavier hand with their portfolio companies—scrutinizing their internal budgets, pressuring them to cut costs and become more efficient, and holding them accountable to agreed-upon milestones. Over the next couple of quarters, VC investors could begin to pick and choose between their portfolio companies, pulling back from making follow-on investments in companies they don’t believe can survive. This could spur M&A activity as startups look to sell in order to avoid failing.

Nordics region has quiet start to the year

Q1’23 was a very quiet quarter of VC investment in the Nordics. Denmark-based biotech company Hemab Therapeutics’ $135 million raise was the largest round of the quarter, highlighting the growing biotech sector in the region. Other VC deals during Q1’23 were much smaller—primarily under $20 million—as less International late-stage investments occurred and local investors completed primarily smaller early-stage deals. Given the uncertain geopolitical and macroeconomic environment, many late-stage companies in the Nordics have adjusted their plans to defer new equity funding rounds in to late 2023 or 2024.

Trends to watch for in Q2’23

Q2’23 will likely be another challenging quarter for VC investment in Europe, given the unrelenting amount of uncertainty permeating the market. Traditional VC investors will likely remain cautious, scrutinizing deals carefully to assess whether business models will be resilient, while also putting more pressure on their portfolio companies to cut costs. Some well-capitalized corporates may start to see the current environment as an opportunity rather than a challenge, particularly when it comes to making acquisitions. Non-core carveouts and bolt-on deals could also increase. Should market challenges intensify over the next few quarters, governments in Europe could step up their supports for startups.