Q3’22 Venture Pulse Report – Global trends

Globally, the energy sector was one of the biggest winners in terms of VC investment globally, with numerous companies around the world attracting large funding rounds. In addition to battery-maker Northvolt and electric vehicle infrastructure company TerraWatt’s $1 billion+ megadeals, US-based power development company TerraPower raised $750 million and China-based Gokin Solar raised $369 million. ESG more broadly also continued to attract VC investment in Q3’22, led by US-based carbon offset company Xpansiv’s $500 million raise.

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.

Global CVC investment pulled back somewhat in Q3’22, as CVC investors showed much of the same caution as their institutional counterparts. While corporate investors often pull back quickly when market conditions worsen, current drivers of investment have helped keep funding solid, if lower than the peaks seen in 2020 and 2021. In many regions, companies in key sectors — such as energy, automotive, and financial services — are standing at a crossroads, pressured by the need to innovate. This is helping to keep corporate VC activity moving, if more conservatively and at a slower pace than in recent quarters.

A number of corporates are likely also looking at the challenges faced by startups and at the declining valuations environment to determine whether they might be able to make strategic acquisitions at more realistic prices over the next few quarters.

Healthcare and biotech have always been hot areas of VC investment, even before the pandemic pushed VC investment in the sector to new heights. While activity in the space has slowed somewhat, aging populations, talent shortages, and health systems needing modernization are expected to keep investors interested for the foreseeable future. AI-enabled biotech continued to be particularly attractive to investors in Q3’22, in addition to areas like at home testing and care, while interest in mental health solutions grew. During the quarter, US-based virtual care and at-home therapeutics company Bioformis raised $320 million, UK-based at-home care company Cera Healthcare Technology Systems raised $312 million, and China-based biotech firm Sironax raised $200 million.

Over the last few years, many VC investors, PE firms, and private offices globally have focused their investments on mid and late-stage deals, rather than on early-stage ones. With market conditions deteriorating, this focus is expected to escalate as investors increase their focus on companies with proven business models and companies able to show revenue. New startups in many regions will likely find it increasingly difficult to attract investments beyond angel and seed stage. This could have long-term ramifications as a lower volume of early-stage companies now will affect the health of the VC market globally long-term.

Companies at other deal stages that are not generating revenue or showing profit are also likely to struggle as they move to raise their next funding round. This could drive some cleanup in maturing industries with numerous players as the best find ways to survive and thrive and others fall by the wayside.

With challenges expected to continue into Q4’22, VC investors globally are expected to remain very conservative with their investments, focusing primarily on proven companies with resilient business models and those able to show profitability. Deals will likely take more time to complete as investors conduct robust due diligence, particularly on forecasts. Startups will likely also place more emphasis on rightsizing their business so they can conserve cash and better position themselves for a new funding round.

While the IPO door is expected to remain firmly shut, there could be an upswing in M&A activity as companies consider alternative exit plans, some sectors begin to see consolidation, and companies unable to raise new funding rounds look for potential buyers.