Venture Pulse Q1 2023
The Venture Pulse report provides insights around trends, opportunities, and challenges in the U.S. venture capital market.
VC investment in the US remained very subdued for the third consecutive quarter, falling from $40.75 billion in Q4’22 to $31.7 billion in Q1’23. The decline was driven by a number of factors, including the protracted geopolitical uncertainty globally, the continued rise in interest rates, the ripples caused by the FTX bankruptcy and other crypto sector challenges in 2022, ongoing concerns about tech sector valuations, and the recent turbulence experienced by the global banking system.
Q1’23 VC investment in the US less than half the amount seen in Q1’22
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. While the decline in VC investment was relatively modest quarter-over-quarter, the level of VC investment in the US was less than 50% of the total amount invested during the same quarter in 2022. The decline in the total number of VC deals was even more pronounced—from a peak of 5196 deals in Q1’22 to a low of 2217 in Q1’23.
Alternative energy and greentech attracted some of the largest rounds in Q1’23, including an $800 million raise by low carbon infrastructure company Generate Capital and a $525 million raise by carbon and environmental commodities trading company Xpansiv.
Despite availability of dry powder, VC investors in US extremely cautious
While VC investors continued to have a large contingency of dry powder available to them as a result of the robust funding environment in the US during 2021 and 2022, Q1’23 saw investors showing significant caution with respect to their investments. Deal speeds slowed significantly as many VC investors conducted additional due diligence on potential deals in light of current market challenges and the ever-changing market conditions. In particular, VC investors enhanced 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.
Startups working to maximize efficiencies, negotiate bridge funding
During Q1’23, startups of all sizes continued to cut costs and conduct significant layoffs in a bid to conserve cash, maximize operational efficiencies, and extend their financial runway to delay potential fundraising activities. Startups valued at the $1 billion unicorn threshold were particularly reticent about new funding rounds given concerns about valuation cuts and the potential negative impacts associated with losing unicorn status. This led to 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.
M&A activity remains soft
M&A activity remained soft in Q1’23 as potential buyers juggled competing business priorities and concerns about target company valuations. 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.
Trends to watch for in Q2’23
With no end in sight to the current market uncertainty, VC investment in the US is expected to remain weak heading into Q2’23. Energy, cybersecurity, and defense will likely continue to attract investment, while generative AI will likely see investor interest grow significantly. 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.
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.
Conor Moore
National Leader, KPMG Private Enterprise
In the U.S. in Q1’23
VC deal value plummets further to $31.7 billion across 2217 deals
VC deal value plummets further to $31.7 billion across 2217 deals
Median deal size for early series rounds remain resilient
Median deal size for early series rounds remain resilient
Late-stage valuations plummet from $800+ million to only $250 million
Late-stage valuations plummet from $800+ million to only $250 million
Exits slide to lowest quarterly tally in years
Exits slide to lowest quarterly tally in years
LP’s concentrate capital on proven VC funds
LP’s concentrate capital on proven VC funds
Key insights from Venture Pulse Q1 2023
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Venture Pulse Q1 2023
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About the Pulse Series
The Pulse Series of reports—Venture Pulse and the Pulse of Fintech—analyze the latest global and regional investment trends and insights. Included in the reports we provide perspectives and analyses on the lifecycle of venture capital investments as well as overall fintech investment across the Americas, Europe, and Asia. In each report, we share the latest valuations, financing, deal sizes, mergers & acquisitions, exits, corporate investment, and industry trends.
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