investment in startups has almost halved

Since the beginning of the year, the volume of venture investments in startups, including high-tech ones, has more than halved. Even the growing interest in AI and next-generation chatbots cannot yet support the venture capital market. Experts explain investors’ caution by a number of factors – high discount rates of the world’s central banks, persistent inflation and general macroeconomic uncertainty caused by geopolitical risks. The most promising areas for venture investments are now considered AI, neural networks and innovative energy. Even the NATO military bloc is showing interest in them.

Politics hinders investment

According to research firm PitchBook, global venture investment has almost halved in the first half of the year. Researchers counted deals totaling $173.9 billion, down 48% from the first half of 2022. The number of transactions decreased by 19%.

Experts note that even a surge of interest in investing in AI, especially in neural networks and chatbots – in the wake of the popularity of ChatGPT – could not properly support the market. Of the total $173.9 billion, investments in AI startups amounted to $40 billion, including $10 billion invested by Microsoft in ChatGPT developer OpenAI.

• The most significant drop in the interest of venture investors in startups was recorded in Latin America – there the volume of transactions fell by 86% in the first half of the year.
• The second and third places in terms of the decline in venture capital investments are Europe and the USA – from 69% and 65%, respectively.

In 2021, as demand for the services of high-tech companies skyrocketed amid the COVID-19 pandemic, the venture capital market reached an all-time high. Deals totaling $745 billion were concluded.

The researchers believe that the record volume of investments in startups in 2021 may also be the reason for the low dynamics in the market this year.

Startups, which then secured a good amount of funding for themselves, and the investors who invested in them, prefer to take a wait-and-see attitude in the current weak market. They are afraid of losses when placing on the stock exchange or other ways to exit the capital.

“Many companies can get much less money invested then,” Mary D’Onofrio, partner at Bessemer Venture Partners, told Reuters in an interview.

PitchBook researchers note that investors are deterred from investing in startups by a number of factors. The main ones are the revaluation of the value of start-ups against the backdrop of rising discount rates and inflation, weak dynamics in the market for initial public offerings (IPO) and other ways of earning for venture investors who invest in small promising companies in order to increase their value and subsequent sale or listing on the exchange .

PitchBook’s Disappointing Findings confirmed and researchers of the international consulting and auditing company KPMG. At the end of July, they released a report stating that in the second quarter, the global venture capital market fell to $ 77.4 billion. The decline continues for the sixth quarter in a row.

Compared to the first quarter of this year, the decline was 10%. In terms of the number of transactions (7783), the reduction was even greater – by 23%. In addition to rising interest rates and remaining inflation risks, KPMG experts cite the military conflict in Ukraine and fears about stability in the banking market that arose in March-April USA And Europe.

• KPMG estimates that the largest number of venture capital deals in the second quarter were in the Americas region, at $42.9 billion.
• In the second market with a two-fold backlog, the Asian market is $20.1 billion.
• Europe was only in third place with $13.5 billion.

“The global venture capital market continues to be dominated by uncertainty amid geopolitical tensions, high inflation and the possibility of new rate hikes in a number of key jurisdictions,” said Conor Moore, head of private equity, KPMG Americas. In his opinion, venture capital investors around the world were extremely cautious in the second quarter, scrutinizing potential deals and prioritizing the profitability and long-term viability of startup business models.

“This is a rather interesting period of time – we have not seen such a level of economic and geopolitical uncertainty that has been superimposed on the phenomenon of a technology like AI for a long time – which both excites, and attracts, and raises fears with its ability to change the existing order in the world. It will be very exciting to watch the battle of these two forces,” says Conor Moore.

Asia won’t help us

Weak dynamics in the market of venture investments and start-ups is also observed in Asia. Moreover, in the second quarter the situation even worsened compared to the first quarter. According to the calculations of the research company Preqin, which the TV channel cites CNBCChina-focused venture capital funds raised only $2.7 billion in the second quarter, more than 50% less than in the first quarter of this year.

In the entire Asia-Pacific region (APR), venture investments amounted to $4.5 billion in the second quarter, which is a record low level in the last five years.

Speaking about the reasons for what is happening in the venture capital market of the Asia-Pacific region and, in particular, China, experts note increased regulatory risks. “Whenever a new element of regulatory risk is added, or the likelihood that the government may change its policy (regarding the control of venture capital investments.— “b”), this increases the overall risks that any venture investor cannot ignore, ”said Andrew Sherman, partner at the American law firm Brown Rudnick.

The situation is complicated by the slowdown in the recovery of the Chinese economy. Researchers from Preqin believe that this trend may lead to the fact that this year the market for venture capital investments in the Asia-Pacific region may be reduced to a minimum over the past ten years.

“Amid the current macroeconomic uncertainty and geopolitical tensions, investors continue to take a cautious stance,” said Preqin Vice President Angela Lai. “Currently, we do not see many investors looking to either return or invest directly in the Chinese market (startups) for the first time. — “b”)”.

Energy beam at the end of the tunnel

Against the backdrop of a rather pessimistic overall picture, experts highlight several positive aspects that may stimulate market recovery in the future. First of all, this is the segment of AI, neural networks and chatbots, which showed good dynamics this year after the high-profile debut of ChatGPT at the end of 2022.

• In addition to Microsoft’s $10 billion investment already mentioned in OpenAI, Google in May invested $450 million in AI startup Anthropic founded by former OpenAI employees.
• At the end of June, another AI startup Inflection attracted $1.3 billion

Venture capitalists include Nvidia, Microsoft, LinkedIn co-founder Reed Hoffman, former Google CEO Eric Schmidt, and Microsoft founder Bill Gates. As part of this investment round, the entire Inflection company, which introduced its Pi chatbot in the spring, was valued at $4 billion.

Among other promising areas for venture investments this year, KPMG names alternative energy, energy storage technologies and technologies for cleaning up the environment.

“The ongoing conflict between Russia and Ukraine, growing concerns about energy availability and energy production and storage costs, and growing interest in clean energy technologies are driving interest (of venture capital investors.— “b”) to energy. This trend was observed in the second quarter as venture investors showed interest in a variety of innovative energy segments – from solar and wind power plants, to hydrogen and nuclear energy, embedded in the energy supply system for electric vehicles, ”KPMG notes.

According to the results of the last quarter, Germany became the leader in this direction – it was there that the largest deals on venture investments in innovative energy were concluded.

• At the end of June, the Hamburg-based solar energy startup 1Komma5° attracted €430 million, and the entire company was valued at €1 billion.
• Another major venture deal in Europe was round funding for Irish start-up Jolt Energy, which has raised €150 million to expand its network of electric vehicle charging stations in the EU and the US.

The venture investment market may also receive unexpected support from international organizations. Last week it became knownthat NATO has created a $1 billion fund to invest in start-ups that are “designed to protect and develop fundamental principles: security, freedom and human development.” Among the areas in which the NIF (NATO Innovation Fund) venture fund is interested are AI and autonomous transport, biotechnology, quantum computers, innovative energy and materials.

The first rounds of investments are expected in September. All NATO member countries, including the recently admitted Finland and Sweden, which has not yet joined the alliance, take part in the work of the fund. They contributed €40 million to the fund.

Evgeniy Khvostik