Market uncertainty stifles pace of US venture capital investments in Q1’2023

US venture capital (VC) investment remained subdued for the third consecutive quarter, according to the Q1’2023 edition of Venture Pulse, a quarterly analysis by KPMG Private Enterprise. VC investment fell from $40.75 billion in Q4’2022 to $31.7 billion in Q1’2023. The decline was driven by numerous factors, including geopolitical uncertainty, a continued rise in interest rates, ongoing concerns about tech sector valuations and recent turbulence in the global banking system.

Given the significant amount of uncertainly in the market, US-based VC investors continued to pull back from making large deals in Q1’2023. 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 in the same quarter in 2022. The decline in the total number of VC deals was even more pronounced, with a low of 2,217 deals in Q1’2023 compared to 5,196 deals in Q1’2022.

“It was an extremely challenging quarter for the VC market globally, in part because every region faced similar struggles—including intensifying market uncertainties,” said Conor Moore, Head of KPMG Private Enterprise in the Americas Region & Leader, KPMG Private Enterprise Emerging Giants Network, KPMG International. “If there was one bright star this quarter, it was most certainly the alternative energy and cleantech sector, which saw companies across regions still attracting large deals.”

Alternative energy, healthtech and cybersecurity remain top-of-mind for investors

With geopolitical uncertainty and energy costs being a major contributor to inflation, investors’ focus on alternative energy was not surprising. Alternative energy and greentech attracted some of the largest rounds in Q1’2023, including an $800 million raise by carbon and environmental commodities trading company Xpansiv. Energy is expected to remain a big ticket for US investors heading into Q2’2023.

In the post-pandemic world, both health system modernization and personalized medicine have continued to attract interest and VC investment. During Q1’2023, Monogram Health raised $375 million for its focus on benefits management and care delivery for patients with kidney disease. Paradigm raised $203 million as it works to improve the integration of clinical trials into the US health system.

Due to the ongoing risk of cyberattacks and data breaches, the cybersecurity space is expected to remain quite resilient despite the rocky VC market conditions. The US continued to attract the largest VC deals in the cybersecurity space, with US-based cloud security firms Netskope and Wiz raising $401 million and $300 million respectively, while all-in-one security firm Aura raised $205 million.

Despite the availability of dry powder as a result of robust fundraising in 2021 and 2022, investors remain significantly cautious. Deal speeds slowed substantially. VC investors conducted additional due diligence on potential deals in light of current market challenges; they enhanced their scrutiny of startups looking to attract funding; and also held off on supporting first-time deals during the quarter, with many focusing primarily on their existing portfolios.

Meanwhile, 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.

Trends to watch in Q2’2023

VC investment in the US is expected to remain weak heading into Q2’2023. Energy, cybersecurity and defense will likely continue to attract investment, while generative artificial intelligence (AI) will likely see investor interest grow significantly. In the wake of unexpected banking challenges experienced globally, fintech could also see a renewed interest as startups look to elevate fintech-as-a-function solutions.

Over the past several quarters, defense-related technologies gained significant traction among VC investors in the US, with investment dollars going to a wide range of related technologies, include AI-powered defense platforms, autonomous military vehicles, and smart monitoring technologies.

AI generated the most buzz this quarter as the ripples from OpenAI’s launch of ChatGPT made their way through all markets. While this interest will likely take time to translate into additional investment, the excitement for the space is quite marked. It is likely that the next few quarters will see an explosion of activity in the space as companies look to transform activities like customer loyalty, marketing automation, back-office management and chatbot type offerings.