Both the number of VC deals and the total of VC investment in the US continued to fall in Q4’22, with VC investment dropping to less than a third of the amount raised during the record quarter experienced during Q4’21. While there continued to be a wealth of dry powder in the VC market, many VC investors pulled back from making major investments.

Increasing focus on energy and ESG investments

Over the past year, the US government has implemented legislation quite favourable to the development of the EV ecosystem and to the development of energy infrastructure more broadly. This support has helped spur additional interest and VC investment in the space. During Q4’22, alternative energy and battery storage saw significant interest from VC investors in the US. Nuclear innovation company TerraPower raised $830 million during the quarter, while energy storage company Form Energy raised $450 million.

Renewed interest in cleantech and ESG has also helped drive investment in the US, both directly in ESG-focused solutions and in regtech solutions as companies look for better ways to understand and report on their energy efficiency and ESG activities and, in certain cases, manage their regulatory reporting requirements.

Other sectors that remained attractive to VC investors during Q4’22 included military and space-focused solutions, B2B solutions, and health and biotech.

Threshold-valued unicorns working to avoid down rounds

During Q4’22, the US VC market continued to see startups looking for ways to obtain funds without taking a hit to their valuations. A number of companies held flat rounds or conducted an extension of an existing funding round in order to raise bridge funding and potentially avoid the negativity associated with holding a true down round. The pressure to maintain an existing valuation is particularly true among companies hovering at the $1 billion unicorn company threshold given the negative publicity and employee morale that would likely result from losing unicorn status. The quest to maintain a valuation could lead companies to accept much more stringent deal terms, such as multiple liquidation preferences or ratchets, heading into Q1’23.

Exit activity drops to five-year low as IPOs remain non-existent and bump in M&A fails to materialize

Exit activity took a significant hit over the course of 2022, dropping to a multi-year low by the end of Q4’22. IPO activity in the US remained stalled as the public markets continued to weather the storm of high inflation, rising interest rates, and macroeconomic uncertainty and the valuations of many late stage companies faced continued downward pressure.

M&A activity remained far more subdued than predicted last quarter, likely driven by investors holding back to see if valuations drop further and companies undertaking significant cost-cutting activities in order to avoid running out of cash and being forced to sell under less-than-optimal conditions.

Trends to watch for in Q1’23

Looking forward to Q1’23, VC investment in the US is expected to remain subdued, except in high priority sectors, including energy and B2B solutions. We could also see large pension and sovereign wealth funds examining their investment allocations—which could affect VC investment levels later in 2023.

Given the number of tech sector layoffs occurring in the US, particularly in Silicon Valley, talent will likely be an area to watch over the next few quarters to see how talent costs are affected or whether there is an upswell in new startups.

IPO activity is expected to remain dead well into 2023 in the US as companies continue to delay exits. Down rounds will likely become more common as late stage companies run out of runway to delay new funding rounds. This could cause a number of unicorn companies to lose their status as their valuations drop below the $1 billion threshold—or accept less-than-optimal deal conditions (e.g., rachets) in order to maintain their position.


Venture financing in U.S.

There’s been a real proliferation of energy companies among the top deals in Q4’22. There are two reasons for this. First, if there’s a space that VC investors globally continue to believe they should be putting money into, it’s energy or climate-related tech. And second, because a number of other sectors have been depressed, the acceleration in the energy space is particularly noticeable.

Conor Moore
Global Leader — Emerging Giants,
KPMG Private Enterprise, and Partner, KPMG in the US

  • VC deal value plummets to $36 billion across 2935 deals

  • Investment in B2B, software and energy hold steady

  • Corporate VC drops to lowest levels since Q4’19

  • Exits slide to lowest quarterly tally in years

  • $1 billion+ Mega-funds experience record year


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