The global venture capital (VC) landscape in Q2 2023 witnessed a significant slowdown in investments, totalling $84 billion as indicated in the Dealroom’s global venture capital update for the second quarter of the year. This figure represents a nearly 6% decrease from the previous quarter. Amid this period of turbulence, the United States, China, and the United Kingdom retained their positions as the leading recipients of VC funding. However, the United States presented a grim picture with a sharp 26% drop in VC investments compared to Q1 2023, marking the lowest quarter in the country since Q1 2018.
Globally, without significant deals like the reported $10 billion investment into OpenAI and a $6.5 billion round for Stripe in Q1 2023, the overall VC results would have been far worse in the first half of the year. Comparatively, China and the UK experienced a marginal increase in VC investments, with a 6% and 2% increase respectively.
An interesting shift was observed in the VC investment growth in several other countries. A total of seven out of the top ten countries reported growth in VC investments in the second quarter of the year as compared to the first one, a marked contrast from 2022 when only France experienced an increase of 5%. Some countries even demonstrated a significant surge. For instance, Switzerland and Singapore reported a stunning growth of over 100% in Q2 versus Q1. South Korea witnessed an 88% increase. Canada and Germany also saw a growth in VC investments by 29% and 25% respectively.
Impact on startups and sectors
Startups globally had to weather a challenging climate in Q2 2023. A total of $16 billion were invested in early-stage startups. This reduction becomes more pronounced when compared to the peak period, indicating a significant 33% downturn. In the growth stage, a somewhat stable trend was observed, with $31 billion invested in Series B and C rounds in Q2 2023, indicating a marginal increase of 1% from Q1. However, when compared to the peak, this represents a sizable downturn of 51%, showcasing the ongoing challenges facing venture capitalists and startups alike. Late-stage startups were similarly impacted with $35 billion invested in Q2 2023, representing a 14.6% decline compared to Q1 and a drastic 73% fall from the peak.
The second quarter of 2023 also saw a decrease in the number of new unicorns being minted globally. Only 16 new unicorns emerged compared to 27 in Q1 2023, 100 in Q2 2022 and 210 in Q2 2021. It is interesting to note that HealthTech, which raised the most VC investment in this quarter, unsurprisingly accounted for 30% of these unicorns, followed by FinTech and energy.
In terms of sectors, climate tech and deep tech emerged as the fastest-growing segments, according to the above-mentioned report of Dealroom. These sectors encompass a wide range of industries, including clean energy, energy storage, lab-grown meat, quantum computing, and generative AI, all of which demonstrated robust growth trajectories.
The exit environment
Despite the turbulence and contraction in global VC investments, signs of market stabilisation are starting to emerge. According to Q2 2023 PitchBook Venture First Look data, while valuations continued to fall, the quarterly capital raised by startups remained relatively steady for the past three quarters.
However, the exit environment for these investments remained challenging. Exit activity remained subdued. Despite witnessing a slight resurgence of nearly 12% in global exit activity in the second quarter of the year compared to the first one, it is still a substantial 88% down from its peak in Q2 2021. This challenging exit environment was driven by factors such as increased global inflation, heightened geopolitical tensions, and more active antitrust scrutiny, all of which constrained large acquisitions and minimised public market opportunities.
Data Source: PitchBook
The situation is particularly stark in Europe where the exit activity amounted to a meagre €1 billion, reflecting a steep drop of 67% from Q1 and a staggering 98% decline from the peak in Q3 2021. Due to uncertainties in valuation and market volatility, many startups and investors opted to delay their exit plans. As a result, exit activity in Europe for the first half of the year was just €4B, marking a significant 95% drop from the peak of €80B in H2 2021.
Data Source: PitchBook
It is also worth noting that Israel's venture capital activity suffered a significant downturn due to proposed changes to its judicial system. This uncertainty led to a 74% year-over-year decrease in VC investment for Israeli startups in the first half of 2023, significantly outpacing the global decrease of 49%. The number of deals closed by startups in Israel also declined, dropping by 45% as compared to the global reduction of 34%. This unsettling climate caused Israeli entrepreneurs to consider relocation and foreign firms to rethink investments, creating an atmosphere of uncertainty in what was once called the “Startup Nation”.
Conclusion
While the general venture capital trend seems to be in a downturn, some specific areas and sectors hold potential for growth. The rise of health and technology-driven startups, particularly in the areas of HealthTech, FinTech, Climate Tech, and Deep Tech, signals a shifting investor focus towards sectors that are increasingly relevant in today's changing global landscape. These sectors offer innovative solutions to real-world problems, making them attractive investment avenues.
Moreover, the resilience displayed by countries like Switzerland, Singapore, South Korea, Canada, and Germany in growing their VC investment against the downward global trend is a testament to the dynamism of the VC landscape. These countries show how adaptability and strategic investments can drive growth even in challenging times.
On the other hand, the case of Israel serves as a reminder of the profound impact that geopolitical factors can have on the VC landscape. It highlights the need for stable and conducive business environments to maintain and attract investor confidence.
Moving forward, startups, investors, and governments must work together to navigate these turbulent times. The collaboration will be key to identifying growth opportunities, supporting innovative startups, and ultimately driving a recovery in the global VC market. Despite the challenges, the potential for innovation and growth in the venture capital ecosystem remains strong, promising a dynamic and evolving future.
