Q1’23 Venture Pulse Report – United States

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.

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.

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 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.

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 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.

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.