This week, KPMG has released its venture pulse report for the second quarter of 2023, looking at venture capital investment globally.

Venture capital investment across the Americas held relatively steady in the second quarter of 2023, with the US accounting for the lion’s share of investment in the region, a new report by KPMG reveals.

Despite the relatively stable level of venture capital investment in the US, the total number of deals in the US continued to decline – falling to a level not seen since 2015, the Q2’23 Venture Pulse Report – Global Trends reveals. Uncertainty continued to permeate the market, amidst ongoing geopolitical challenges and concerns about inflation and interest rates. Dealmaking was very sluggish, with most funding rounds at all deal stages taking longer to complete. Artificial intelligence-focused deals proved one of the few exceptions, driven by skyrocketing interest in the space in the wake of ChatGPT’s launch late in 2022.

Investment also dropped slightly, in spite of a $6.8 billion raise by payments processing company Stripe. The deal was the largest venture capital raise in the US by far during the quarter, followed by two large raises in the artificial intelligence area – a $1.3 billion raise by Microsoft-backed Inflection, and a $450 million raise by AI company Anthropic.

While traditional venture capital firms in the US still have cash they need to deploy, their caution has increased amid concerns about high valuations and the ability of startups to meet their projections, KPMG continued. Prudent startups have also focused on cutting their burn rates in order to preserve cash and avoid the need to raise funds given current market conditions. These factors, combined with dealmakers taking more time to agree to pricing, have contributed to the slowdown in completed deals.

Investment in the US is expected to remain soft heading into the third quarter, KPMG said. Given the uncertainty in the market and the possibility of further interest rate hikes, at least during the rest of 2023, investment in the US could fall further over the next quarter absent of a Stripe-like transaction. Nevertheless, AI will likely remain a very strong area of investment, with corporates taking a strong role in making venture capital investments in the space. The alternative energy, electric vehicle, and EV battery spaces are also expected to remain on the radar of investors in the US.

Canada
Outside of the US, venture capital investment in Canada was relatively strong this quarter, attracting another solid quarter of investment in the second quarter of the year, the report reveals. This was helped by a $318 million raise by carbon capture technology company Svante, a $175 million raise by vacation rental management company Hostaway, a $120 million raise by blockchain protocol company LayerZero, and a $110 million raise by Abdera Therapeutics.

With the exception of a handful of larger deals, venture capital investments in Canada continued to revolve around small and mid-sized deals during Q2 22, the firm continued. Companies from across a wide variety of sectors attracted funding, highlighting the diversity of Canada’s startup ecosystem. Corporates continued to be quite active in Canada, with participation expected to remain resilient heading into the third quarter of 2023, as corporates look for deals and synergistic opportunities, the firm said. 

Brazil sees investment slowdown
Venture capital investment in Brazil remained relatively weak in Q2 23 due to a combination of macroeconomic and political uncertainty, including the turbulence that has resulted from the change in presidential regime in the wake of the Q4 22 election, KPMG continued. With major tax reforms on the horizon, many venture capital investors have pulled back from making major investments while awaiting more clarity on the changes that will be implemented and the impact they will have on both corporates and on startups.

Fintech continued to account for the largest share of venture capital investment in Brazil, although deal sizes were much smaller than those seen during the peak quarters of Q2 21 and Q4 21. The largest deals of the quarter included a $21.8 million raise by auto shop focused budgeting and claims management software company Cilia.  Business productivity solutions companies and energy-focused fintech companies also attracted attention in Q2 23.

Despite the ongoing slowdown in funding, there continues to be optimism for Brazil’s longer-term venture capital market outlook. The country’s ecosystem has matured quite rapidly in recent years, with a growing number of venture capital firms and funds, corporates, and other knowledgeable market players participating in the market. These players will likely help fuel a resurgence in venture capital investment in Brazil and across Latin America once some of the uncertainty dissipates, the firm said.

AI gains focus
Sectors almost across the board continued to face challenges in Q2 23. AI – and its sub-vertical generative AI in particular â€“ was one very noticeable exception, with interest from investors rising dramatically in the wake of OpenAI’s introduction of ChatGPT in late 2022, the announcement of a $10 billion investment in OpenAI by Microsoft in Q1 23, and generative AI announcements by other major tech companies. In Q2 23, Google made a $450 million investment in Anthropic, while Amazon announced that it would make two language models available through its Amazon Web Services to support building bots by its customers. Microsoft-backed AI firm Inflection also had a massive $1.3 billion deal late in the quarter, the report reveals. 

AI has quickly become a target sector for venture capital investors looking for their next home run or to avoid the fear-of-missing-out (FOMO), in part because of the multiplier effect that AI offerings could have in driving widespread disruption across industries, the firm said. 

Trends to watch
Heading into the third quarter of 2023, venture capital investment is expected to remain relatively subdued across the Americas as investors remain very cautious in light of the ongoing market uncertainty. While investment in Brazil will likely remain soft in Q3 23, the significant amount of dry powder or cash reserves and the growing number of market players is expected to drive a resurgence in activity once uncertainty wanes and interest rates begin to fall.

Mega-deals will likely remain rare, although there could be an increase in mature startups raising funding rounds in order to give liquidity to their early employees. Given the amount of dry power still in the market, very hot sectors like AI will likely continue to attract outsized investments heading into Q3 23. Investments in alternative energy, B2B productivity, and health and biotech are also expected to remain somewhat resilient over the next quarter, the report states.

On a global level, venture capital investments remained relatively steady in the second quarter of 2023 and that is not expected to change radically in the third quarter, with generative AI likely to remain a hot area of investment, KPMG concluded.