Global VC deals volume drops significantly, with investment sinking from US$531.4 billion across 51,894 deals in 2022 to $344 billion across 37,808 deals in 2023 amid a thematic backdrop of geopolitical, macro-economic, and other challenges, said KPMG recently.
These challenges include conflicts in the Ukraine and Middle East, high interest rates and inflation, a parched exit environment, and ongoing concerns related to startup valuations, the firm noted.
The Americas accounted for more than half of VC investment this year ($183.6 billion), while the Asia-Pacific region attracted $92.4 billion and Europe $62.3 billion, according to the Q4’23 edition of KPMG Private Enterprise’s Venture Pulse – a quarterly report highlighting VC investment trends globally and in key regions around the world.
Report highlights
- Q4’23 was a particularly soft quarter for the VC market, with global investment falling to $74.9 billion across 7,572 deals—the lowest levels since Q2’19 and Q3’16 respectively.
- Europe experienced the sharpest decline in funding—from $18 billion in Q3’23 to $13.8 billion in Q4’23.
- The Asia-Pacific region also saw quite a slump, with investment falling to $18.8 billion in Q4’23—the lowest level since Q1’17.
- As VC investors globally continued to pressure their portfolio companies to reduce costs and enhance their focus on profitability, both VC investment and deal speed slowed significantly.
- The one major light in an otherwise dim quarter was artificial intelligence (AI) space—where investments were incredibly frothy as investor interest accelerated. During the quarter, AI-focused startups accounted for three of the $1 billion+ funding rounds this quarter, including a $2 billion raise by Anthropic, a $1.7 billion raise by Metropolis, and a $1 billion raise by Relativity—all in the US.
- Despite hopes that the exits of UK-based Arm and US-based Instacart and Klaviyo in Q3’23 would help open the IPO door, results were mixed and global exit value dropped from $85.8 billion to $43.5 billion quarter over quarter.
The exit values in 2021 for VC-backed companies stood at a massive $1.5 trillion. Since then, exits have faltered—with only $225 billion in exit value this year, said Conor Moore, Global Head, KPMG Private Enterprise, KPMG International.
This obviously impacts all stages of VC investment and until some of our current geopolitical and macroeconomic uncertainties are clarified, the prospects for any significant recovery in the exit market remain unlikely, he said, adding that there also added uncertainties with the upcoming US election.
This is all no doubt contributing to the much slower deal activity and the pull-back in investment, particularly at the later deal stages, he predicted.
AI the big winner in Q4’23
VC investment in AI continued to accelerate in Q4’23, with three companies in the US attracting $1 billion deals (Anthropic - $2 billion, Metropolis - $1.7 billion, Relativity - $1 billion), according to the report.
In the US, AI-focused companies attracted six of the ten largest VC deals of the quarter. Europe also saw three very large AI deals (Germany-based Aleph Alpha - $486.1 million, France-based Mistral AI - $434 million, Israel-based AI21 Labs - $208 million), KPMG said.
In the Asia Pacific region, AI-focused Biren Technology also raised $280 million during Q4’23, the firm added.
Given high interest rates, ongoing global conflicts, and little sign that the IPO market will reopen fully in the first half of 2024, VC investment globally will likely remain quite subdued in Q1’24, KPMG predicted.
AI will likely remain one of the most attractive areas of VC investment well into the year, while M&A activity could see some pick-up as opportunistic buyers look for bargains, KPMG added.
