In the world of wild venture — June 2023 edition
A monthly guide to the world of venture investments news
In the June edition of the News Digest, we talk about the picks of the leading funds, the reasons for the global decline in startup investment, and developments in Europe.
We also continue our tradition of industry overviews, including healthcare IT, digital health, fintech, climate tech, food tech, e-commerce, supply chain tech, mobility, and AI.
Top Stories
- Where did the world’s top funds invest in Q1 2023?
PitchBook analyzed 125 early-stage deals from the world’s top 15 venture funds in its traditional column. The favorites were biotech, web3 & DeFi, AI & ML, fintech, health tech, DevOps, and enterprise SaaS.
Space tech, Agtech, AR\VR, Industrial tech, Edtech, and Climate tech were the least invested in. We monitor this section regularly and conclude that there are minimal changes compared to last year. Investors’ tastes are not changing.
- Why is investment in startups on the decline?
Since the beginning of the year, analysts have repeatedly noted a significant drop in startup investments. But opinions differ on the reasons for this phenomenon. The most popular hypothesis is that investors have become more cautious and selective in their deal picks. But what if this is only part of the puzzle?
Jan Voss has done an interesting study putting forward a second hypothesis. In his view, the decline in investment activity is related to the peculiarities of the life cycle of venture capital funds.
In short, funds have two periods: investment and follow-on. During the investment phase, the fund actively invests capital in new deals. Once investors have exhausted a certain amount of cash, the fund switches to follow-on mode. This means that only follow-on investments in portfolio companies are allowed.
During the follow-on period, funds significantly reduce management fees. As a result, LPs simply don’t want to get out of this savings mode and insist on delaying new investments. As a consequence, funds accumulate the money they can’t spend.
- European investment tendencies
According to the results of the last few months, the health tech industry has unexpectedly taken the top spot in Europe, reports Sifted. The money cooled off on the topic of health after the Covid-19 pandemic but has decided to come back. At the same time, the European classic, fintech, slipped to fifth place. Deep tech, leading the race just a few months ago, has also disappeared. The situation is very dynamic.
There is also a demand among investors for startups in the energy industry. No wonder since the war has made energy security more relevant than ever. In addition, Enterprise SaaS is in a strong position.
Products in the Fashion and Media categories received the least funding.
- US investors are leaving Europe
According to PitchBook, since the beginning of 2023, there has been a 22 per cent outflow of US investment from European deals. Instead, Americans prefer the domestic market. Part of the reason is the strengthening of the euro against the dollar.
Industries. Part One
- First quarter results for the Healthcare IT industry
In Q1 2023, investors closed 70 deals worth $1.3 billion, down 44.5 per cent year-on-year. Nevertheless, analysts note a resurgence of interest in the sector, which has recently suffered significantly. For example, compared to the previous quarter, investments increased by almost 185 per cent! It is not clear still how long this wave will last.
The most popular startup categories are EHR & Clinical Information and Operations.
The underdogs are Infrastructure & Compliance, Revenue Cycle, and Analytics.
- Continuing the medical theme, here’s a quick review of digital health from PitchBook
At the end of Q1, investors closed 71 deals worth $1.1 billion, down 42.3 per cent year-over-year. Analysts have noted a drop in investment levels in the industry since Q2 2020, which hasn’t stopped yet. Early-stage startups are being prioritized here, as investors are unsure of good exit opportunities for mature companies.
Popular startup categories are B2B telehealth, digital care management, and digital therapeutics & digital treatments. Separately, they highlight the market for weight management drugs, which has already surpassed $100 billion.
There was a similar report in the May issue but from CB Insights. We recommend that you read it as well to get a more complete picture.
- Money20/20 Europe 2023 conference on fintech reveals some interesting findings
In short, the B2B segment is getting all the attention from venture investors. Startups offering corporate payments, embedded finance, vertical software, and HR management and payroll are particularly popular.
Also discussed at the conference was banking-as-a-service (BaaS), which is generating mixed feelings. On the one hand, no one denies the potential and the size of the market. However, many respondents pointed out that there are already too many such products, and the market is saturated, which means it will be difficult to get your piece of the pie.
When it comes to generative AI, investors are cautious and conservative. The main challenge is to separate the hype from the reality.
Industries. Part Two
- Current Climate Tech review using 2022 outcomes
The industry includes all startups that help reduce greenhouse gas emissions. Last year, investors closed 2,023 deals worth $41.1 billion, the second-best year on record. Europe saw the largest increase in funding. The median seed-stage deal size was $2 million, while the pre-money valuation of companies held steady at $8 million. What startups raised the most capital?
Low-carbon mobility. This includes any air, land, or sea vehicle that uses battery power or clean fuel technology.
Grid infrastructure covers technologies that improve the efficiency, stability, and sustainability of power grids and make better use of unconventional energy sources.
Industrial decarbonization through petrochemical alternatives, low-carbon mining approaches, and waste treatment technologies.
Intermittent renewables mean solar and wind power generation technologies, considering both hardware and analytics.
The following companies, however, attracted the least money.
Land Use. Technologies to monitor and reduce emissions from non-industrial or commercial land, including alternative fertilizers, leak detection, and monitoring of land use changes.
Dispatchable energy sources. Clean energy production through geothermal, hydroelectric, and nuclear technologies.
Clean Fuels. Production of low-carbon fuels, for example, hydrogen, biofuels, waste to energy/fuel, and air to fuel.
- Food tech investments
In Q1, investors closed 197 deals worth $2.3 billion. This represents a decline in activity of up to 40 per cent compared to the previous quarter, but do not jump to conclusions. At the same time, the median pre-money valuation of companies rose 57 per cent to a solid $27 million. In addition, the median deal size increased by 87.5 per cent to $6 million — an unexpected and welcome surprise.
Most likely, the industry is consolidating. The number of deals is decreasing, but their quality is increasing.
The startups that attracted the most investment were e-commerce, alt-proteins, and bioengineered food.
The underdogs are Discovery & Review and Food Production.
- E-commerce investment activity
Analysts still see many difficulties in the e-commerce industry. Investment in the sector has continued to decline for several quarters in a row. Reasons include rising interest rates, investors’ focus on profitability, and a greater emphasis on software spending. Market participants also complain about fierce competition and rising customer acquisition costs.
At the end of Q1, investors had 83 deals worth $3.4 billion, down 72 per cent year-over-year. Although online consumer spending hit a record $1.1 trillion and continues to grow, investors are very cautious about putting money into projects.
The most popular startup categories are B2B commerce, omnichannel commerce, supply chain, and creator economy.
The underdogs are AI & ML, AR\VR, and personalization.
Industries. Part Three
- Supply Chain Tech Investment Review
In Q1, investors closed 195 deals worth $2.4 billion, down 81.8 per cent year-over-year. The sector peaked abnormally in 2021, after which funding collapsed all the way back to 2018. All in all, things are not so good here.
The least amount of capital was invested in startups offering freight tech and warehousing tech. However, enterprise supply chain management and last-mile delivery are popular, which is surprising.
- How’s the Mobility industry doing?
According to the first quarter results, investors closed 229 deals for $5 billion. Compared to the same period last year, the average deal size was down 50 per cent. There is little reason to be optimistic. In 2022, for example, the level of investment fell as far back as 2017. It is frightening to think what will happen now.
The mobility sector is problematic and resembles a one-act play where everything depends on electric cars. But even these remain a risky and capital-intensive investment. In addition to EVs, products in auto commerce and micromobility remain noteworthy.
- Lastly, let’s take a look at the AI industry according to PitchBook
The AI sector is somewhat similar to the neighbor above. Only here, generative AI plays the role of the whales that sustain the universe. In the first quarter, investors made $22.7 billion in deals, of which only $6 billion went to something different.
In the May issue, we looked at a similar report from CB Insights, which came to similar conclusions. Without generative AI, the industry has long lacked both investment and interesting projects.
Non-VC-related, but informative and even funny
Read Vice’s article on how British Humor Got Started.
Trends have lost their once great significance, reports Fast Company. A legitimate consequence of the constant use of the word at every convenient and inconvenient opportunity. I hope we haven’t taken part in it.
According to Psychology Today, to be happier, scientists recommend looking for meaning in random life events.
Also, Psychology Today recommends saying “and” instead of “but.”
Generative AI is terrible at cooking, according to the Eater article.
The AI can easily steal your girlfriend or boyfriend. An interesting experiment in the Vice article.
Poverty is not a common nor a natural human condition, according to a study by ScienceDirect.
Insider feature on 8 habits that make you poorer. What a coincidence!
Vanity Fair picks the best to watch in 2023.
Read The New York Times article about how ordinary walking can improve social skills.
Aeon’s advice to men – follow the traditions of the ancient Greeks and walk more often…without pants.
The oldest book in human history is about taxes and beer, reports the Literary Hub.
Just to look more solid on social media, adults admitted to going to restaurants more frequently. Read more in the Independent article.
Useful Data, that can come in handy
Digital twins applications and perspectives reviewed by PitchBook.
Bloomberg’s EV market review.
Expanded data on gaming investment activity, which we reviewed in our May Digest.
What skills and knowledge should a VC staff member have today? Read the Sifted article.