Q3’23 was a particularly quiet quarter for the VC market globally, with both total VC investment and the number of VC deals dropping between Q2’23 and Q3’23. On a regional basis, while there was a decline in total investment in both the Americas and Asia, European deal activity increased slightly quarter-over-quarter.

The Americas accounted for the largest share of VC investment globally in Q3’23, with the US accounting for the vast majority of this total, including a $997 million raise by battery recycler Redwood Materials. In light of the uncertain market conditions, many VC investors in Europe have raised the bar in terms of their investment criteria. This has likely contributed to some of the slowdown in deal volume as VC investors narrowed their focus to supporting the biggest bets and highest quality companies in more mature sectors and ones that have shown less resilience in the current market climate.

Interest in AI is on the rise among VC investors globally

While VC investors globally continued to be very cautious with their investments—conducting greater levels of due diligence than in recent years, pulling back from late stage deals, and focusing primarily on companies with very strong business strategies and paths to profitability—AI has been a significant exception. Globally, AI has continued to see a major acceleration in VC investment, although investors have taken different approaches to the space, with some choosing to make a bunch of small bets on early stage companies across the AI ecosystem and industries in order to get in early, and others taking six to nine months to understand the outside market opportunity before honing in on specific companies in which to invest.

During Q3’23, a wide variety of AI companies raised large funding rounds, including US-based Databricks ($500 million), Neuralink ($280 million), Japan-based Telexistence ($170 million), and Germany-based Aleph Alpha ($225 million).

Tough quarter for VC investment in the Nordics

While VC investment in the Nordics region continued to be soft in Q3’23, there were a number of indications that suggested that the tide might be ready to turn heading into Q4’23 and Q1’24. In particular, the quarter saw Sweden-based Green Steel raise $1.6 billion in equity funding.9 From a fundraising perspective, the Nordics region saw two major new funds closed during the quarter, including the £1.1 billion hard cap close of Verdane’s Capital XI fund –focused on supporting growth companies looking to digitalize and decarbonize the economy in Europe.10 NordicNinja also announced a $214 million fund with a focus on climatech, deeptech and digital society.

Trends to watch for in Europe during Q4’23

VC investment in Europe is expected to remain soft in Q4’23, as companies continue to face difficulties raising funding. The high interest rate environment could also see VC fundraising activity remain subdued, which could have long-term consequences for the VC market. If the VC market remains tight, there will likely be more focus on consolidation as industry winners continue to raise funds and other startups lose momentum or fade into obsolescence. Despite a general slowdown in investment, AI will likely remain very attractive to VC investors, in addition to cleantech and health and biotech.

It will be important to watch the IPO market over the next quarter or two; while the IPO of UK based Arm was a positive signal after a lengthy drought, more successful exits are needed to revitalize the market and give LPs more confidence in potential exit opportunities.

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