Global VC investment fell to $57 billion in Q1’23—a particularly low note when compared to the high of $200+ billion seen in the same quarter just one year ago. Myriad factors combined to buffet the global VC market, from the protracted war in the Ukraine and other geopolitical uncertainties to concerns about the global banking system following the sudden turbulence seen in Q1’23. Stubbornly high inflation and still-increasing interest rates have also posed their own challenges.

Both VC investment and deals volume decline in major regions as large megadeals disappear

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.

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.

IPO window could stay closed through the end of the year; Asia may be the exception

The IPO window remained firmly shut in Q1’23, with very little indication that a reopening will be on the horizon within the next few months. Investor sentiment, particularly in the Americas and Europe suggests that the IPO window won’t open until late in the year or, quite possibly, not until 2024. Given their unique position globally, China and Hong Kong could be the exceptions. While Q1’23 saw IPO activity decline in both cases, there is some positive sentiment that regulatory changes in both locations could spark some renewed interest. This is particularly true with respect to the new 18C listing rules in Hong Kong—which make it easier for companies focused on next gen technologies, advanced hardware and software, new energy solutions, and agritech to list on the HKSE3.

Trends to watch for in Q2’23

Globally, VC investment will likely to remain soft heading into Q2’23 as VC investors across jurisdictions continue to show caution given the significant degree of uncertainty in the market. Investment in consumer retail and D2C companies will likely to remain very dry. Alternative energy and greentech, defence, cybersecurity, and B2B services will likely be the most resilient areas of investment globally, while generative AI could see a spike in investment given the strong spotlight shone on the space in Q1’23. Longer term, drone technologies could also see strengthening interest and VC investment—not only in the defence and logistics spaces, but also in emerging areas like agtech.

VC investors have become more comfortable investing in developing nations over the past few years—with areas like South America, Latin America, and Africa increasingly attracting funding. While these regions many not be a priority for investment in the short term, they will likely continue to grow on the radar of VC investors long term.

Global Venture financing

There are so many things happening at once right now that it’s difficult to even try to predict where the world is going. It’s not only the geopolitical challenges. It’s also the way the world reacted to those, to rising gas prices, and to the impact of inflation on everything. For the VC market, the rise in interest rates is also an enormous factor. Cash is quickly becoming more expensive. Heading into the second quarter the strong interest in alternative energy, EV solutions and the growing focus on generative AI will be an area to watch.

Jonathan Lavender
Global Head, KPMG Private Enterprise
KPMG International

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