An update on venture capital investment, how startups are responding, and where VC investment is likely to revive the fastest.
The initial public offering (IPO) window is firmly shut and venture capital (VC) investors continue to pull back from making big deals. In this edition of Privately Speaking, we provide an update on VC investment in the US, offer some insights into how some of the nimbler startups and private companies are responding, and look at where VC investment is likely to revive the fastest.
This is not the best time to be out looking for new funding in the US. The IPO market is effectively dead, with little evidence to support an imminent rebound. VC activity fell for the third consecutive quarter, down to $31 billion in Q1’23 from $81.3 billion a year earlier.1 Deal volume fell from 5,196 in Q1’22 to just 2,217 in Q1’23.2 Merger and acquisition (M&A) activity remains soft as potential buyers raised concerns about target company valuations.
United States VC deal activity by quarter
Source: Venture Pulse Q1 2023, Global Analysis of Venture Funding, KPMG Private Enterprise. Data provided by PitchBook, April 19, 2023.
Despite the availability of dry powder, VC investors in the US remain extremely cautious. Given the significant amount of uncertainty in the market both in the US and globally, it was no surprise that US-based VC investors continued to pull back from making large deals in Q1’23.
National Leader, KPMG Private Enterprise, KPMG LLP
While a number of companies remained IPO ready, having already filed confidentially over the past 12 months, these companies have effectively pressed pause on their plans. Both startups and corporates continued to batten down the hatches in Q1’23, prioritizing cost-cutting and operational efficiencies and laying off staff in order to reduce their spend.
Rumors suggest there was a spate of inside deals during the quarter, with companies giving up concessions in order to obtain additional funding to bridge the gap until market conditions hopefully improve, valuations rebound, and the IPO window reopens.
Find out in our most recent edition of IPO Insights, presented by KPMG Private Enterprise and KPMG Capital Markets Readiness.
Multiple economic and financial indicators still remain mixed as to whether the US is likely to enter a recession in the next several months, or perhaps even in early 2024. Given the current market challenges and ever-changing market conditions, many VC investors are now conducting additional due diligence on potential deals. In particular, VC investors are enhancing their scrutiny of the valuations of startups looking to attract funding, their profitability, and the long-term sustainability of their business models.
VC investors in the US also held off from supporting first time deals during the quarter, with many focusing primarily on companies within their existing portfolios. Simply put, investors are pulling back and battening down the hatches to the extent they can with their existing portfolio companies.
Get the KPMG complete US, regional, and global analysis of venture funding markets in Venture Pulse Q1 2023.
Defense technologies remain attractive to VC investors, with investments going into a wide range of related technologies, including AI-powered defense platforms, autonomous military vehicles, and smart monitoring technologies. Health modernization also remains a strong focus for investors, particularly in areas like physician interfaces, practice management, care management, and revenue and billing.
In the wake of the unexpected banking challenges experienced during Q1’23, fintech could also see renewed interest as startups look to elevate fintech-as-a-function solutions. Energy and cybersecurity will also likely continue to attract investment, while generative AI will see investor interest grow significantly.
Generative AI is a hugely exciting space. More and more companies are launching with various offerings, so I would expect increased investment in the space and the development of a robust ecosystem for how to use generative AI for good. At the same time, we’re also going to see a lot of focus on the more concerning facets of generative AI, including both legal and ethical. It’ll definitely be an interesting space to watch over the next few quarters.
National Leader, KPMG Private Enterprise, KPMG LLP
These market conditions will not continue forever. Already, there are signs that some indicators may be turning around.
There are hints that the Fed may be considering slowing the rate of interest rate rises. M&A activity is still expected to rebound as valuations stabilize, companies in hard-hit sectors run out of cash, and strategic investors look to acquire companies at more economical valuations. And should the market and valuations stabilize, there could be some renewed IPO activity towards the end of 2023, although it could take time before a startup is confident enough to lead the way out the door.
To be sure, Q2’23 is expected to be another tough quarter for VC investment globally—although there is some hope for a more positive second half of the year.
1, 2 Venture Pulse Q1 2023, Global Analysis of Venture Funding, KPMG Private Enterprise. Data provided by PitchBook, April 19, 2023.
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