Q4’22 Venture Pulse Report – Global trends

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 in both the Americas and Asia dropped for the fourth straight quarter in Q4’22, while Europe experienced a third quarter of declining investment. 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. China accounted for the majority of $500 million+ megadeals this quarter, including a $2.56 billion raise by GAC Aion, a $1 billion raise by SHEIN, a $631 million deal by SPIC Hydrogen Energy, a $631 million deal by Voyah Car Technology, a $562 million deal by ESWIN Material and $537 million going to Fei Hong Technology.

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.

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.

Given the challenging market conditions, IPO activity among VC-backed companies globally stalled significantly over the course of 2022, including in the Americas, Europe, and much of Asia. China was a major exception, likely due to its capital market being less interconnected with the global economy.

The lack of IPO opportunities has caused many unicorn companies to struggle, particularly those that had been planning for exits. During Q4’22, numerous unicorns laid off significant percentages of employees, reduced their real estate footprint, and undertook other cost-reduction initiatives in order to free up and conserve their cash, improve their profitability, and delay the need to hold additional funding rounds—potentially at much lower valuations.

Looking ahead to Q1’23, the VC market globally is expected to remain challenged, with consumer-focused businesses expected to see the most strain. The IPO window, particularly in the US will likely remain closed well into 2023, with little to suggest it will reopen fully in the first half of the year. As companies run out of cash, there will likely be an increasing number of down rounds and an in increase in M&A activity. Globally, there could also be a number of unicorn deaths over the next few quarters.

Given the ongoing energy crisis in Europe and concerns about sustainability and climate change, the broader energy sector will likely remain very hot, with investors continuing to make big bets on alternative energy technologies, electric and hydrogen powered vehicles, and battery storage.

On a global basis, cybersecurity, B2B solutions will likely remain very attractive areas of VC investment in Q1’23, in addition to health and biotech, regtech, and solutions with military applications. Investments in artificial intelligence are also expected to grow long-term, particularly in game changing areas like generative AI and conversational AI.