VC investment in the US remained very subdued for the third consecutive quarter, falling from $40 billion in Q4’22 to $31 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 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.
Defense technologies remain attractive to VC investors in US
Over the past several quarters, defense related technologies gained significant traction among VC investors in the US, with investments going into a wide range of related technologies, including AI powered defense platforms, autonomous military vehicles, and smart monitoring technologies. During Q1’23, the sector continued to attract large funding rounds, including a $230 million raise by autonomous drone manufacturer Skydio.
Consumer-focused technology companies continued to bear the brunt of the pullback in VC investment during Q1’23, although a few companies bucked the trend, including gamification-focused online cycling and running platform Zwift—which raised $620 million.
IPO door remains shuttered; take private activity strengthens
IPO activity in the US remained effectively dead during Q1’23, with little to suggest an imminent rebound. While a number of companies remained IPO ready, having already filed confidentially over the past twelve months, these companies have effectively pressed pause on their plans. 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.
Health modernization remains strong focus for investors
The COVID-19 pandemic shone a spotlight on the need to modernize the US healthcare sector. In the post pandemic world, both health system modernization and personalized medicine have continued to attract interest and VC investment, particularly in areas like physician interfaces, practice management, care management, and revenue and billing. During Q1’23, Monogram Health—a company focused on benefits management and care delivery for patients with kidney disease—raised $375 million, while Paradigm—a company focused on improving the integration of clinical trials into the broader health system in the US—raised $203 million.
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 in the US 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 Head of KPMG Private Enterprise in the Americas, Global Leader, Emerging Giants, KPMG Private Enterprise, KPMG International & Partner, KPMG in the US
VC deal value plummets further to $31.7 billion across 2217 deals
Median deal size for early series rounds remain resilient
late-stage valuations plummet from $800+ million to only $250 million
Exits slide to lowest quarterly tally in years
LP’s concentrate capital on proven VC funds
Top 10 deals dominated by Fintech (3) and cleantech (3) startups