Q2’23 Venture Pulse Report – Global trends

Investment in AI and generative AI remained hot in Q2’23 as startups around the world looked to accentuate their AI capabilities and VC investors enhanced their focus on the AI space, seeing it as one of the few resilient areas of investment in the current market.  Corporate investors showed the most interest in the generative AI space, particularly global tech giants with the massive data sets required to underpin robust generative AI solutions.

Both Microsoft and Google have already made major inroads into the space, including Microsoft’s $10 billion investment in OpenAI during Q1’23, along with China’s tech giants—Alibaba, Baidu, and Tencent. As of Q2’23, Alibaba said that it had received a significant number of trial access requests for its generative AI tool Tongyi Qianwen, while Baidu announced that it had submitted its own generative AI tool Ernie bot for regulatory approval.

Regulators globally have also enhanced their focus on AI, with a growing number investigating how best to regulate the sector. During Q2’23, the European Union passed an AI Act, which sets out regulations related to the use of AI in the region. In particular, the new regulations require that any generative AI systems be reviewed prior to being put into commercial use.

VC investors continued to hold back from making large, late-stage deals in most jurisdictions during Q2’23, with a couple of exceptions. US-based global payments processor Stripe raised a $6.9 billion, while Singapore-based online fashion retailer Shein raised $2 billion. Both companies took major hits to their valuations as a result of their new funding rounds More broadly, the steep decline in late-stage deal value and number of deals—particularly for Series D+ deals—continued in Q2’23. This continued pullback was not a surprise given ongoing investor concerns about valuations and a lack of exit opportunities.

The IPO market globally remained in drought mode during Q2’23, particularly in the US. Given the growing number of companies looking to IPO once the window reopens, some have turned their attention to improving their attractiveness to the market in advance—improving their operational efficiencies, reducing unnecessary head count and other costs, and improving their financial metrics and profitability.

The extended conflict between Russia and the Ukraine, ongoing concerns about energy availability and energy costs, and growing commitment to and funding for cleantech innovation in many countries has driven significant interest in the energy space over the last eighteen months. This interest continued in Q2’23, with VC investors showing broadening their interest across a growing diversity of energy solutions—from solar power technologies, offshore wind farms, and hydrogen and atomic energy applications to EV infrastructure, decarbonization solutions, and green finance focused offerings. Battery storage also continued to attract a significant amount of VC investment.

VC investment globally is not expected to change radically heading into Q3’23, although this prediction is in no way a certain bet. Given the continued geopolitical challenges, the lack of confidence in exits, ongoing uncertainty as to whether the world is or is not in a recession, and the possibility of future interest rate hikes, there remains the potential for VC investment to take another hit in Q3’23.

Generative AI will likely remain a very hot area of VC investment globally, particularly among large corporates looking to avoid missing out on what many see as a major multi-industry gamechanger. Alternative energy and energy storage are also expected to remain a critical focus areas for investors, along with health and biotech.