VC investment globally dropped to a six-quarter low in Q2’22 amidst the ongoing crisis in Ukraine, high levels of inflation, and rising interest rates. With no end in sight to the uncertainty, VC investment could remain somewhat soft heading into Q3’22.
Largest mega-deals limited to the US
Both the number of deals and the total amount of VC investment dropped in the Americas, Europe, and Asia during Q2’22. VC investment in the US showed the most resilience, helped by three $1 billion+ deals: a $2 billion raise by Epic Games, a $1.7 billion raise by SpaceX and $1.5 billion raise by GoPuff. The largest raises outside of the US included a $1.15 billion deal by Germany’s Trade Republic, an $805 million raise by India-based Dailyhunt, a $714 million raise by Kitopi in the United Arab Emirates, and a $650 million raise by Switzerland-based Climeworks.
Despite dry powder, global VC investors becoming more cautious
While there continues to be a reasonable amount of dry powder in the VC market globally, particularly in the US, the Americas more broadly, and Europe, VC investors are expected to become more cautious with their investments, focusing on companies within their portfolios, companies with strong paths to profitability, and companies in sectors being put in the spotlight by the current crisis in Ukraine.
VC investors pressure portfolio companies to focus on preserving cash to ride out the storm. A number of high-flying private companies saw their valuations drop in Q2’22 compared to six months ago—a decline echoing the experience of many publicly traded tech companies around the world. This is driving several global VC firms to direct their portfolio companies to tighten their wallets, be more selective with their hiring plans, and rationalize their workforce in order to ride out the current uncertainties. Many VC investors and startups view cash preservation as essential in order to avoid down-rounds and defer new funding rounds until the market turbulence improves.
Soaring energy prices driving attention to alternative energy
Skyrocketing energy prices in many regions of the world and growing concerns over energy dependencies helped drive investor interest in alternative energy options, energy storage, and mobility even higher in Q2’22. While electric vehicles and batteries continued to be a major focus for investment during the quarter, areas like hydrogen-based technologies also gained additional attention. Over the next few quarters, interest in other energy sources and solutions is also expected to pick up—such as the development of small-scale nuclear plants in Europe.
IPO exits stall worldwide amid poorly performing public markets
After a strong run of IPO exits over the last two years, the IPO window has slammed shut, particularly in the US but also in Europe and Asia. With valuations of many public technology companies down considerably, many companies that may have considered an IPO exit have now delayed their plans for the foreseeable future.
While SPAC activity globally has been quiet in 2022, there continues to be many SPACs looking for targets, particularly in the US. Many of these SPACs will see their two-year window of opportunity closing within the next twelve months. This could drive some renewed activity over the next few quarters, particularly if market conditions improve.
Trends to watch for in Q3’22
Given the number of geopolitical and macroeconomic uncertainties affecting the VC market globally, there will likely continue to be downward pressure on valuations, which could lead to decreasing levels of investment or leveraging alternative sources of financing. VC deals in many regions will likely take longer to complete as investors enhance their due diligence of deals.
Fintech will likely remain a strong area of investment in many jurisdictions around the world, in addition to supply chain and logistics, cybersecurity, and alternative energy. Given rising inflation and interest rates, consumer-focused companies will likely lose some luster with VC investors in favor of B2B solutions and investments.
A robust global economy combined with changing consumer behavior sparked two years of explosive growth in venture capital investment around the world. However, recent geopolitical and economic concerns appear to have finally turned the tide, as investors have started to pull back and take caution, increasingly focusing their investments on companies with a clear path to profitability
VC investment slows to $120.2 billion across 8,420 deals
Up-rounds continue at record proportion
Record dry powder supporting resilient valuations
Total exit value drops to lowest levels in 2 years
United States home to 6 of top 10 deals globally