Global venture capital (VC) investment dropped for the sixth consecutive quarter in Q2'2023 – falling from $86.2 billion across 10,121 deals in Q1'23 to $77.4 billion across 7783 deals in Q2'23. This is the lowest level of quarterly investment since Q2'20.

Increasing interest rates, stubbornly high inflation, domestic and geopolitical challenges, 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 international interest in Generative AI. 

The Americas accounted for the largest share of VC investment with $42.9 billion invested, including six $400 million + mega-deals during the quarter. This was a decline from $47.7 billion across 4,009 deals in Q1'23.

VC investment in Asia fell for the sixth consecutive quarter, reaching only $20.1 billion across 2,395 deals in Q2'23. This is a remarkable drop from $22.9 billion across 3,148 deals in Q1'23; largely due to Chinese investors continuing to hold off on large deals. However, early-stage deals remain resilient and exit activity increased slightly on IPO resilience. 

European investors also remained on the sidelines, falling for the fourth consecutive quarter. VC investment fell from $14.4 billion across 2,676 deals in Q1'23 to $13.5 billion across 1,861 deals in Q2'23. 

Globally, corporate VC participation in investment was also slow in Q2'23, accounting for $39.7 billion in investment, compared to $45.9 billion in Q1'23. First-time VC financing also remained weak in H1'23, accounting for just $17.1 billion globally. 

The global exit value increased slightly from a record low of $45.5 billion in exit value in Q1'23 to $51.5 billion in exit value in Q2'23. Overall, there was a decline in the number of mega-deals this quarter, with some notable exceptions. 

While traditional VC firms in the US still have cash they need to deploy, their caution has increased amid concerns about high valuations and the ability of start-ups to meet their projections. Prudent start-ups have, therefore, focused on cutting their burn rates in order to preserve cash and avoid the need to raise funds given current market conditions. These factors, combined with dealmakers taking more time to agree to pricing, have contributed to the slowdown in completed deals.

Bitten By The AI Bug

Investment in artificial intelligence (AI) remained robust in Q2'23 as investor interest in this technology surged. 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), partly because of the multiplier effect that AI offerings could have in driving widespread disruption across industries. 

Both Microsoft and Google have already made major inroads into the space, including Microsoft’s $10 billion investment in OpenAI during Q1’23, along with China’s tech giants — Alibaba, Baidu, and Tencent. As of Q2’23, Alibaba said that it had received a significant number of trial access requests for its generative AI tool Tongyi Qianwen, while Baidu announced that it had submitted its own generative AI tool Ernie bot, for regulatory approval.

Recently, Protect AI, a start-up focused on enhancing the security of AI systems, raised $35 million in a Series A funding round led by Evolution Equity Partners, with participation from Salesforce Ventures, Acrew Capital, Boldstart Ventures, Knollwood Capital, and Pelion Ventures. This latest funding brought the total raised by the start-up to $48.5 million.

On 27 July 2023, Software-as-a-Service (SaaS)-focused VC firm Together Fund launched its second fund with a target corpus of $150 million with limited partners across the US and Asia. While its first fund invested in DevTools (Developer Tools), SaaS and a few AI-based start-ups, the new one will focus on AI and SaaS start-ups, with cheque sizes ranging between $1 million and $5 million.

Commenting on the India highlights, Nitish Poddar, partner and national leader for private equity at KPMG in India, said, "While the last two quarters have been muted, we expect activity to be significantly higher by the end of this calendar year. The path to profitability and positive operating cash flow continues to be critical success factors for the business owners to attract funding." 

VC investment globally is not expected to change radically heading into Q3’23, although this prediction is in no way a certain bet. Given the continued geopolitical challenges, the lack of confidence in exits, ongoing uncertainty as to whether the world is or is not in a recession, and the possibility of future interest rate hikes, there remains the potential for VC investment to take another hit in Q3’23.

Generative AI will likely remain a very hot area of VC investment globally, particularly among large corporates looking to avoid missing out on what many see as a major multi-industry gamechanger. Alternative energy and energy storage are also expected to remain a critical focus area for investors, along with health and biotech.

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