Collapse to $120 billion: how the war in Ukraine affected the global venture capital market

"VC investment globally dropped to a 6 quarter low in Q2’22 amid the ongoing crisis in Ukraine, high levels of inflation, and rising interest rates", – says a recent Venture Pulse report from KPMG. Mind selected the most interesting figures and facts from the study. 

That’s the number of deals that were closed in the Q2 – for a total of $120.2 billion. Researchers say that such a low level of investment has been seen by the industry for the first time in the last six quarters.

"Although there is still a large amount of funds available for investment on the venture capital market around the world, investors are expected to become more cautious. They focus on companies whose shares they already have in portfolios, on assets with effective profitability models and from sectors that are in the spotlight due to the war in Ukraine," the researchers comment.

And they also add: investors try to pressure the portfolio companies, trying to force them to focus on saving funds to survive turbulent times. In the second quarter valuations of a number of attractive private companies fell against valuations six months ago – such a decline is typical of many publicly traded technology companies around the world. This prompts several global venture capital funds to strongly advise their portfolio companies to reduce costs, be more selective in their hiring plans and rationalize the workforce to survive the current uncertainty.

This is the total amount of the top 10 deals during the QII. The largest funds were raised in the USA: Epic Games raised $2 billion, SpaceX – $1.7 billion, GoPuff – $1.5 billion, Faire – $816 million, Ramp – $748 million, The Boring Company – $675 million. Outside the US, main venture rounds are – Trade Republic, Germany ($1.15 billion), Dailyhunt, India ($805 million), Kitopi, UAE ($715 million) and CanSemi, China ($672 million).

More than half of the global venture investments market fell on the USA. "This country has shown the greatest VC resilience," the researchers say. 3374 deals were closed.

Venture capital investment in early-stage startups is slowing in Europe. In total, there were 2,220 deals worth $27.3 billion. The researchers specify that VCs fell in most jurisdictions of the EU. Although there are still countries in Europe that attract large funds: in addition to Germany, Switzerland (Climeworks – $650 million), Great Britain (SumUp – $626.7 million), Croatia (Rimac Automobili – $528.7 million) and Italy (Scalapay – $524 million, Habacus – $330 million).

"VCs in Asia fall for the second consecutive quarter due to relatively smaller deal sizes," the researchers said. 2,206 deals worth $24.5 billion were closed. China's Bavari Natural Environment raised $630 million, Indonesia's Xendit – $300 million, and India's Xpressbees and ShareChat also raised $300 million each.

However, one can predict that the largest number of deals all over the world are closed at the angel investment stage.

That’s how many startups became "unicorns" in the QII. More than one third of them are of the fintech domain. North and South Americas are the home of more than half of the new "unicorns" in the world. Unico and Stark Bank in Brazil, Kushki in Ecuador, the rest are from the USA. Europe saw 18 new unicorns from eight different countries (UK, Germany, Finland, Sweden, Norway, Netherlands, Switzerland, Israel). Asia also saw a fairly wide geographic distribution of the new unicorns: 17 from seven countries.

"While the number of unicorn births remained stable during the quarter, there is some concern. Companies valued at exactly $1 billion may consider making significant concessions to investors to maintain their status,” the researchers say.

Such is the number of the most relevant investment niches that are currently identified by researchers.

Renewable energy. "The rapid rise of energy prices in many regions of the world and increasing concerns about energy dependence have increased investor’s interest in alternative energy sources, energy storage and mobility. While electric vehicles and batteries continue to be the main focus of investment during the Q2, investors started turning attention to other areas – particularly hydrogen technology. Interest in other energy sources and solutions, such as the construction of small nuclear power plants in Europe, is also expected to increase over the next few quarters,” the report said.

For example, one of the largest deals in Europe was the $650 million investment in the Swiss Climeworks, which specializes in the technology of direct capture of carbon from the air.

Cybersecurity. Companies from this industry continue to attract attention, researchers say. Given the uncertainty surrounding the war in Ukraine and growing concern about potential cyberattacks, investments in cybersecurity increased in Q2 and are likely to increase further through 2022.

Logistics. There are also good prospects for investing in startups that focus on managing supply chain issues.

According to the report, the IPO market remained closed during the Q2 of 2022. This is a contrast to the record IPO performance in the year 2021. "After a large number of IPOs over the past two years, the window has closed, particularly in the US, Europe and Asia. As the asset valuations of many publicly traded technology companies have declined significantly, many companies that may have considered IPOs have now shelved their plans,” the researchers said.

Then they add: there is no end to the russo-Ukrainian war in sight, also there is high uncertainty on the market. Due to these factors, it is expected that the IPO will remain in limbo in the 3rd quarter as well. Investors and startups are hoping that the market will revive in the next 18-24 months. “Startups, especially late-stage startups that were expecting an IPO, had to quickly revise their plans. Companies find themselves in a “cash is king” situation– they need to find money to hold on until they can raise an additional round of private financing or an IPO,” the researchers explain.

This is the size of exits. It also fell sharply to almost the level of the first quarter of 2020. "After the record year of 2021, this situation was predicted. However, it is possible that as asset valuations normalize, buyers will eventually look to strike what can be considered deals,” the report said.

As a result, the researchers predict that in the Q3, the tendency to decrease the estimated value of assets will stay. This, in turn, can lead to a drop in investment volumes or a focus on alternative sources of funding. Deals in many regions are likely to take longer as investors are more careful about due diligence procedures.

Given the rising inflation and interest rates, the appeal of consumer-focused companies is likely to wane slightly among VCs in favor of B2B solutions and investments.