The global Venture Capital (VC) market has fallen significantly in the last few months, according to the latest edition of Venture Pulse – a quarterly report published by KPMG Private Enterprise on VC trends globally and in key jurisdictions around the world. The report shows that VC investment was approximately $57 billion in Q1’23 compared to over $200 billion in Q1’22. The main reasons for the fall were the protracted war in Ukraine, increasing interest rates, stubbornly high inflation, domestic and geopolitical challenges, and concerns about the stability of the global banking system, which all combined to make it a difficult quarter for VC investment across all regions.
By René Schöb, Partner, Head of Tax and Legal, KPMG in Romania
However, there were encouraging signs from specific sectors. Despite the global uncertainty, the alternative energy and cleantech sectors continued to attract significant funding rounds accounting for many of the largest deals in the quarter, including the largest deal in every region surveyed. In view of the war in Ukraine and the sharp rise in energy costs, this focus on alternative sources is not surprising.
Moreover, In the wake of the immense buzz created by the release of ChatGPT by OpenAI, interest in generative AI grew significantly. While this interest will likely take time to translate into additional investment, the excitement for the space was quite marked. The large global tech giants were particularly quick to announce their own generative AI offerings. Generative AI is still very much an emerging tech area, with applicability across many different sectors and customer activities. It is likely that the next few quarters will see a major explosion of activity in the space as companies look to transform activities like customer loyalty, marketing automation, back-office management, and chatbot type offerings. Some aspects of generative AI could also however, come under increasing scrutiny due to the possible legal ramifications associated with the use of generative AI produced work.
In Europe, both the number of VC deals and total VC investment fell for the fourth straight quarter, dropping from $15.7 billion in Q4 ’22 to $9.8 billion in Q1 ’23. The decline was particularly stark when set against the record number of VC deals and VC investment seen during the same quarter in 2022. VC investors in Europe were increasingly cautious in Q1’23, taking a heavier hand with their portfolio companies—scrutinizing their internal budgets, pressuring them to cut costs and become more efficient, and holding them accountable to agreed-upon milestones. We might expect that over the next couple of quarters, VC investors could begin to pick and choose between their portfolio companies, pulling back from making follow-on investments in companies they do not believe can survive. This could spur M&A activity as startups look to sell in order to avoid failing.
In terms of individual countries in Europe, the largest deals in Q1 ’23 were in the UK and Germany. In spite of a generally subdued picture following a significant slowdown in Q4 ’22 as result of both global issues and an unsettled domestic political environment, the UK saw the largest deal in Europe, a $601 million raise by fintech player Abound. Other significant deals included a $160 million raise by B2B focused fintech the Bank of London, a $149 million raise by EV automotive company One Moto, and a $140.3 million raise by autonomous vehicle software firm Oxbotica. Business services and energy transition continued to attract significant attention from VC investors in Q1’23.
While VC investment in Germany remained soft relative to historical norms in Q1’23, in common with the general global and regional picture, the country nevertheless attracted two of Europe’s largest deals in the quarter; a $228 million raise by alternative energy leasing company Enpal and a $151 million raise by PE investment platform Moonfare. Corporates in Germany remained active, although they showed far more caution than in recent quarters—focusing their energy, attention, and investments only on startups with very clear value. Alternative energy continued to be a big draw for VC investors in Germany, driven not only by regional energy concerns but also by the German government’s decision to shut down its nuclear plants and by the growing focus of domestic automotive companies on new energy vehicles.
Some governments in Europe have recently taken steps to enhance support for startups, a move which may help tackle the fall in VC investment. The UK’s budget included £3.5 billion to help the country become a scientific and technologic superpower, including funding to support next-gen supercomputing and AI research. During the quarter, the German government also launched a €1 billion fund to support growth stage deeptech and climatetech companies, while the European Investment Bank Group and five EU member states announced the European Technology Champions Initiative: a $3.75 billion fund to address funding gaps and support late-stage growth companies in the region.
In spite of the generally difficult global picture, Romania continues to offer opportunities for VC investors, particularly in view of its vibrant tech start-up sector. At least looking at 2022 figures, as set out in the Romanian Venture Report 2022 (prepared by How to Web in partnership with KPMG in Romania and KPMG Legal), the most recent report covering the local market, the picture has been of strong growth in VC funding for the tech sector for several years. For example, the total volume of deals in 2022 was worth €101.7 million in 2022, compared to €91.4 million in 2021. Perhaps more strikingly, the volume of transactions increased 12-fold between 2017 and 2022. Moreover, the volume of series A transactions (a critical stage in the funding process for a start-up) almost tripled to €42.6 million compared to the previous year (€15.3 million). The total volume of seed transactions increased by 29% in 2022 compared to 2021.
Furthermore, the top deals in Romania in 2022 were spread across a very diverse range of industries, which suggests great potential for years to come. While we await 2023 figures for Romania, it is particularly encouraging that Q4’22 was actually the second best performing quarter in terms of transaction volume (after Q2) with €35 million (from 20 transactions). Q4’22 was also 51% up on the same quarter the previous year. Moreover, various investment programs are available to support Romanian tech start-ups; the European Investment Fund (EIF), the Recovery Equity Fund (financed from Romania’s Recovery and Resilience Plan and managed by the EIF) and InvestEU. These help the development of the start-up sector and hence make it more attractive to VC investors.
While the report’s message is that globally VC investment is currently subdued, Romania is an emerging market in which VC investment in the tech sector has shown considerable growth in the last five years. The numbers may be small compared to those in more developed markets, such as Western Europe and the U.S. but this is an indication of Romania’s potential. The key to success for VC investors will be long term focus, together with detailed planning and a thorough analysis of the market as well as of potential pitfalls.