Series A rounds likely bright spots in VC investing in Q1 2023 – KPMG

Supported by US investors' larger participation in early rounds, Series A in Europe have taken advantage of their comparatively lower valuations during Q4 2022, according to the firm's Venture Pulse report published today. This also led to the average seed stage deal size in Europe to soar significantly.

The trend is likely to continue in 2023 as a derisking strategy amid macro uncertainty, although longer diligence and deal completion periods are expected, Moore said, pointing to transactions taking up to three times as long compared to three years ago.

"Later stage rounds tend to be more expensive and the financial upside is just not there, so although earlier stages have significantly more risk, the upside is a lot greater," said Moore. "What's going against that is the pace of getting a deal done these days which will continue into 2023."

Overall, VC fundraising remained robust over Q4 and investing will continue to be active given the large amount of dry powder and the resilience of the venture industry, Moore said. However, a larger percentage of capital might be invested in more established funds as opposed to brand new funds, he added.

Meanwhile, Europe saw an overall drop in VC investment in the region in Q4 2022, hitting a two-year low. Larger rounds took a significant hit and exits plummeted to record lows in Q4, according to the KPMG study.

Moore believes there is "cautious optimism" that activity might resume in the 2H23. If that materialises, high quality assets that are ready to go public will go first, while those that are not in that category will likely have their sale processes pushed back to later in the year or into 2024.

Many sectors will face challenges over this quarter, but VC investment will likely continue apace in high-priority areas such as energy security and ESG, according to the KPMG report. While the focus over the near-term will be on energy independence and energy alternatives, interest in cleantech will likely accelerate as countries in the region work to meet their decarbonization targets.

Consumer-focused businesses will be among those hit the hardest as a result of buyers' greater focus on profitability these days, said Moore. Companies in the sector will have to explain how they will be profitable 18 months from now, whereas back in 2021 businesses essentially got valued based on their top line, he added.

"Corporates are being grilled on profitability, on their cash burn, with existing investors saying, look, we're not necessarily going to give you more money, you need to cut staff or real estate and take all steps to maintain profitability," said Moore.

Moreover, interest in lending solutions could also pick up as businesses might struggle to access cash and startups will have to look for innovative options to avoid down rounds.

The companies in need to get some type of financing are the ones in the worst position, said Moore. To the extent that they are getting equity financing, their valuation has come down and existing investors may put some terms into that equity financing "that can be fairly ugly and very beneficial to them but not to all the other investors."

"We've had some calls from some of the larger financial institutions who are coming up with sort of new financial instruments for situations where equity financing is just not an option and there needs to be some type of debt financing, which will be very expensive," added Moore.

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