KPMG has just released its venture pulse report for the second quarter of 2023, which looks at global trends in venture capital investment.   

A new report by KPMG shows that artificial intelligence and deep learning technologies were a hot area for venture capital investment both in Europe and globally during the second quarter of 2023.

In particular, UK-based Quantexa raised $129 million during the quarter to earn unicorn status – one of only a handful of startups in the region to do so this quarter, the Q2’23 Venture Pulse Report – Global Trends reveals. In the second quarter, the European Union also passed the AI Act, a detailed regulation governing AI use in the bloc, which requires generative AI systems in particular to be reviewed prior to commercial launch, the firm said. Meanwhile, the UK pitched its desire to become the home of AI safety regulations.

Energy and cleantech attracting VC investments across Europe
With no end in sight to the Russia-Ukraine conflict, alternative energy and cleantech continued to attract attention from venture capital investors in Europe, although ticket sizes were relatively modest during Q2 23, the report states. Interest in the space was diverse both geographically and at a product and solutions level with Germany’s 1Komma5 raising $232.1 million leading the way, followed by German energy storage company Jolt Energy raising $165.1 million.

UK investment remains subdued
Venture capital investment in the UK picked up quarter-over-quarter – although it remained subdued compared with the quarters seen in 2021 and early 2022. It was helped by a $475 million raise by delivery service Getir, and a $250 million raise by mobile app building company Builder.ai. Given the political and economic turmoil in the UK and high interest rates raising the bar on return requirements, causing investors to question their capital asset allocations, KPMG believes that a more moderate level of investment could represent a new normal for the UK until there is a reasonable period of stability. Venture capital fundraising has also slowed down considerably in the UK, with some funds closing at much lower levels than initially envisioned, the report reveals.

Germany sees steady investment
In Germany, venture capital investment was relatively steady in Q2 23, led by a $232 raise by energy firm 1Komma5, a $194 million raise by GetYourGuide and a $165.1 million raise by Jolt Energy. Solutions focused on ESG continued to be quite attractive to investors in Germany, in addition to AI and solutions focused on business productivity, KPMG said. There was also a small renaissance in health and biotech in Germany in Q2 23, with a $109.8 million raise by medical records company Patient21 and a $52 million raise by drug discovery company Ariceum.

Softness continues in the Nordics
Venture capital investment in the Nordics region in Q2 23 remained soft compared with the highs seen during 2021 and 2022, although it was relatively consistent with the levels seen prior to the pandemic, the firm continued. The investor focus is more on companies which are able to show capital efficient growth with optional pathways to profitability. Health and biotech investment remained resilient, while alternative energy and EV technologies continued to attract strong interest, the report shows.

Startup ecosystem in Ireland extends reach
Venture capital investment in Ireland remained slow this quarter, in spite of a $53.6 million raise by unified payments company NomuPay and a $32.5 million raise by medical device company Neuromod, the firm said. Ireland’s ecosystem showed its reach across Europe in Q2 23. Jolt Energy, which raised $165.1 million this quarter, was founded by Irish entrepreneurs who focused their startup on the German market given its much larger EV potential. 

Austrian market evolving rapidly
While total venture capital investment in Austria remains quite small compared with other jurisdictions in Europe, the country’s market is evolving and maturing at a rapid pace with a growing number of scale-ups in sectors ranging from crypto (BitPanda) and edtech (GoStudent) to proptech (PlanRadar), the firm continued. BitPanda, was the country’s first tech startup to achieve unicorn status.

The breadth of venture capital funds operating in the market has also grown, with new funds being introduced regularly. Most are focused on early-stage investments. Similar to other jurisdictions, Austria’s market faced some pressure in Q2 23, with a number of startups choosing to conduct extension rounds rather than new funding rounds, the firm added.

Investment soft in Israel
Venture capital investment in Israel remained soft in Q2 23 as tech startups continued to focus on becoming more efficient and profitable, cutting headcount and reducing their costs, the report reveals. Despite smaller deal sizes, Israel continued to see a diversity of companies raising funding. During the quarter, network management firm Coronet raised $75 million, medical device company Magenta Medical raised $55 million, healthtech Healthy.io raised $50 million, and fintech Novidea raised $50 million.

Trends to watch 
Heading into the third quarter of 2023, while venture capital investors in Europe continue to have dry powder or cash reserves available, they are likely to be reluctant to spend it given current market conditions and concerns about whether they will be able to raise new funds. Also, limited partners now have more investment options available to them. Exit activity is also expected to remain limited, with startups and their investors playing a waiting game in the hope that conditions improve and the market stabilises, the firm said.

In addition to AI, health and biotech, the entire gamut of alternative energy and cleantech is expected to remain a robust area of investment in Europe. Over the next few quarters, the fintech space could begin to see some consolidation in Europe as companies seek to achieve the scale needed for their business models to produce profits, the firm said.

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