Global VC investment remains muted, falling to US$77.4bil across 7,783 deals in Q2’23

• KPMG Private Enterprise’s Venture Pulse shows AI startups still hot
• VC deals in Asia drop from US$22.9bil across 3.1k deals to US$20.1bil

Chock full of data professional services firm KPMG issued its Venture Pulse Q2’23 report of the state of global venture capital investment with the headline figure showing that VC funding dropped for the sixth consecutive quarter in Q2’2023 – falling from US$86.2 billion (RM392.1 billion) across 10,121 deals in Q1’23 to US$77.4 billion (RM352.1 billion) across 7783 deals in Q2’23. 

[RM1 = US$0.219]

Increasing interest rates, stubbornly high inflation, domestic and geopolitical challenges - and including the protracted war in Ukraine and ongoing concerns about the stability of the global banking system all combined to make it a challenging quarter for VC investment across regions, despite global interest in Generative AI.

The Americas accounted for the largest share of VC investment with US$42.9 billion invested including six US$400 million + mega-deals during the quarter. VC investment in Asia fell for the 6^th consecutive quarter, reaching only US$20.1 billion, as Chinese investors continued to hold off on large deals. European investors also remained on the sidelines, falling for the 4^th consecutive quarter – to US$13.5 billion invested.

Mega-deals remain slow

Overall, there was a decline in the number of mega-deals this quarter, with some notable exceptions. US-based payments company Stripe’s US$6.9 billion raise was by far the largest VC round of the quarter globally. After Stripe, Singapore-based online marketplace startup Shein raised the next largest deal (US$2 billion), followed by US artificial intelligence startup Inflection (US$1.3 billion) and India-based educational technology company Byju’s (US$700 million). Eyewear retailer Lenskart, also based in India, rounded out the largest 5 deals with a US$600 million round. Overall, the top 10 deals globally were spread among 8 different countries. 

Investment in AI growing red-hot

Investment in artificial intelligence remained robust in Q2’23. Investor interest in AI has continued to surge in the wake of OpenAI’s introduction of ChatGPT in late 2022, and the announcement of Microsoft’s US$10 billion investment.

In Q2’23, Google made a US$450 million investment in Anthropic, while Amazon announced that it would make two language models available through its Amazon Web Services to support the building of bots by its customers.^[1] Microsoft-backed AI firm Inflection also had a massive US$1.3 billion deal late in the quarter. AI has quickly become a target sector for VC investors looking for their next Home Run or to avoid the fear-of-missing-out (FOMO), in part because of the multiplier effect that AI offerings could have in driving widespread disruption across industries.

Alternative energy, energy storage, and cleantech remain attractive to VC investors

The extended conflict between Russia and the Ukraine, ongoing concerns about energy availability and energy costs, and growing commitment to, and funding for, cleantech innovation in many countries has driven significant interest in the energy space.

This trend continued in Q2’23, with VC investors showing broadening interest across a growing diversity of energy solutions — from solar power technologies, offshore wind farms, and hydrogen and atomic energy applications to EV infrastructure, decarbonization solutions, and green finance focused offerings. Germany led the way with the largest deals of the quarter including a US$232 million raise by climate-tech startup 1Komma5 and a US$165 million raise by Electric Vehicle charge station company Jolt Energy.

 VC investment in Asia drops for sixth straight quarter

Overall VC investment in Asia dropped for the sixth straight quarter, accounting for just US$20.1 billion in deals, compared to US$22.9 billion in Q1’23. Corporate-participating VC fell in lockstep with broader patterns, falling to US$10.4 billion in Q2’23, the lowest quarterly total since 2017.

On a country-by-country basis, investment in China fell to a record low US$9.3 billion versus US$15.4 billion in Q1’23 while India rebounded from US$1.9 billion in Q1’23 to US$2.8 billion in Q2’23. Big deals in Asia this quarter included: Shein (US$2 billion), Byju’s (US$700 million) and Lenskart (US$600 million), Changfei (US$532 million) and Mandy (US$500 million) and KT Cloud (US$452 million).

While overall investment in Asia was relatively muted, pockets of strength remained. The alternative energy, energy technology, and battery storage space continued to be a very attractive area of VC investment in the region—particularly in China, where lithium-ion battery component company Libode raised US$375 million, solar technology firm Qingdian Photovoltaic raised US$217 million, and fusion technology company Neo Fusion raised US$217 million during the quarter.

VC investment across Americas drops slightly quarter-over-quarter

VC investment across the Americas dropped from US $47.7 billion in Q1’23 to US$42.9 billion in Q2’23. The US continued to account for the lion’s share of investment in the region, including a US$6.9 billion megadeal by Stripe. Other big deals included a US$1.3 billion investment in Inflection AI, followed by a US$450 million investment in Anthropic. New Jersey based CoreWeave (US$421 million) and Massachusetts-based ElevateBio (US$401 million) rounded out the top 5 deals for the Quarter.

Outside of the US, VC investment in Canada was relatively strong this quarter, helped by four US$100+ megadeals including a US$318 million raise by carbon capture technology company Svante and a US$175 million raise by vacation rental management company Hostaway. VC investment in Brazil remained subdued this quarter amidst a combination of macroeconomic and political uncertainty, including the turbulence that has resulted from the change in presidential regime in the wake of the Q4’22 election.

VC investment in Europe remains on hold

Overall VC investment in Europe declined for the 4^th consecutive quarter, reaching US$13.5 billion in Q2’23, down from US $14.4 billion in Q1’23. VC investors in Europe continued to play a waiting game, holding back on making major investments, particularly late-stage deals s given the amount of uncertainty in the market and the lack of exit opportunities.

The UK attracted the largest share of VC investment (US$4.1 billion) in Q2’23, including raises by Getir (US$475 million) and Builder AI (US$250 million). Germany attracted the second highest level of VC investment (US$1.9 billion) – including 1Komma5 (US$232 million) GetYourGuide (US$194 million) and Jolt Energy (US$165 million) followed by France (US$1.85 billion) – including a US$175 million raise by Ynsect. Venture capital investment was soft in the Nordics (US$964 million) and Israel (US$874 million) in Q2’23.

Trends to watch for in Q3’23

Overall VC investment is projected to remain relatively steady going into Q3'23. Ongoing geopolitical challenges, lack of confidence in exit opportunities, economic concerns and the continued potential for interest rate hikes will continue to impact deal volume despite ongoing record liquidity.