US Venture Capital Investment Falls from 2021 Highs but Should Remain Robust, Says KPMG Private Enterprise’s Venture Pulse Report

Geopolitical uncertainty and supply chain challenges drive renewed emphasis on support technologies 

US Venture Capital (VC) investment declined for Q1 2022 from 2021’s record-breaking levels, although it remained substantially higher than every quarter prior to 2021, according to the latest edition of Venture Pulse by KPMG Private Enterprise, which analyzes VC trends globally and in key jurisdictions around the world.

After a mammoth 2021, a slowdown could be expected in venture financing simply given fears of an overheated market leading investors to pull back. That said, investment levels remained robust, with US VC-backed companies having raised $70.7B across 3,723 deals in Q1 2022.

“Coming quarters will reveal the full extent to which ongoing supply chain issues, new troubles with commodity pricing, inflation and policy changes could together impact the venture realm in particular,” said Conor Moore, head of KPMG Private Enterprise, Americas, and partner at KPMG US. “However, offsetting government support for cleantech and the sheer level of dry powder in the US could still bolster deal-making for the remainder of the year.”

The impact of instability on investment activity

Ongoing disruptions to the global supply chain, combined with geopolitical uncertainties have emphasized domestic availability of certain products required to help drive economic growth in the US.

The semiconductor industry in particular garnered attention in Q1 2022, with Intel announcing that it will build a semiconductor plant in the US. Additional VC investment will likely flow to the semiconductor space over the next few quarters along with other critical support or input technologies.

What does this mean for LPs? At this stage of the venture ecosystem’s maturation, the market size means sufficient investment opportunities for LPs to make plenty of commitments. Despite the tumult of Q1 2022 across multiple arenas and markets, LPs remained bullish on the venture asset class domestically. However, given the disparity between capital raised aggregates and the count of closed funds, significant outliers exerted an impact.

Notable Q1 2022 deals:

• Biotechnology company Altos Labs raised $3 billion
• Drug discovery company Eikon Therapeutics raised $517 million

IPO market door swings shut in Q1 2022

At the end of 2021, US investors expected a backlog of highly valued private companies to go public in early 2022. These IPO exits, however, failed to materialize in the wake of the volatility in public markets during Q1 2022. This volatility hit technology stocks particularly hard, meaning IPOs are likely off the table for now. While a small number of companies could potentially go public despite this turbulent environment, most appear to have shelved their plans for now given the market uncertainty.

“Globally, capital markets have had a turbulent start to the year, which has effectively slammed the door shut on most IPO activity for the moment,” said Moore. “Given the heightened geopolitical tension on top of shifting macroeconomic factors like interest rates and inflation, IPO activity remains soft heading into Q2 2022.”

Healthtech and biotech continue to attract VC investment domestically

In the wake of the COVID-19 pandemic, health and biotech companies have continued to attract significant funding from VC investors in the US. Investments have been quite broad, including digital healthcare models and software, supporting medical practitioners, drug discovery and medical devices.

As both medical practitioners and users of digital health services have become more comfortable with virtual models of care over the past two years, digital mechanisms to enhance care should continue to be an area of interest to investors moving forward.

Downward pressure on valuations sparking unicorn concerns

With significant uncertainty in the market, valuations are starting to decline. This is leading to concern that some unicorns many not be able to raise new funds at or above their previous valuations – a circumstance that has been practically unheard of over the last two years.

“At this point, flat is the new up,” said Moore. “If the situation intensifies, some unicorns may be required to hold down rounds. Others might decide to maintain their war chest rather than raise new funds, which could stall valuation increases and create a number of ‘Zombies.’”

Agtech sparks new interest

Agtech gained a significant amount of attention from US VC investors during Q1 2022. Notable highlights include a $400 million Series E raise for indoor vertical farming company Plenty and a $34 million Series B raise for cell-cultured seafood company Finless Foods’ $34 million.

Given the increasing importance of food security and sustainability both domestically and globally, it is expected that investments in agtech will grow in the coming quarters.

Key trends to watch:

• What does 2022 have in store for the industry? Given the amount of dry powder available in the market, VC investment is expected to remain relatively robust in the US heading into Q2 2022. Geopolitical uncertainty, rising inflation, and increasing interest rates will likely be major factors in investment conversations.
• What key industries should be watched? While fintech, healthtech, and EV technologies are expected to remain hot areas of VC investment in Q2’22, proptech is also well positioned for growth given increasing real estate prices and the rapid rise of investors interested in secondary real estate markets outside of Silicon Valley, New York and Los Angeles.
• What about the infrastructure plan? The US federal government’s recently passed infrastructure plan is also expected to pour money into a number of key sectors, including traditional infrastructure, internet connectivity, and electric vehicle infrastructure. As the plan is put into action, it will likely create new opportunities for startups – which could, in turn, catalyze VC investment.

SOURCE: https://info.kpmg.us/news-perspectives/industry-insights-research/q1-22-venture-pulse.html