In the World of Wild Venture. May 2023
A monthly guide to the world of venture investments news
In the May issue of the News Digest, we report on venture capital sentiments, current startup valuations, and deal sizes. We also have some news on defense tech, A2A, and vector databases. And as an appetizer, there are plenty of industry reports. These include Infosec, Agtech, Retail Tech, Insurtech, AI, Crypto, Foodtech, Supply Chain Tech, SaaS, Medtech, Digital Health, and Gaming.
Top Stories
Surveying 58 venture investors from PitchBook
At the end of April, PitchBook analysts conducted a survey of venture investors from various regions to gauge their sentiments about the industry. For example, 31.6% believe that generative AI will bring the most innovation for at least the next 12 months. Another 20.4% voted for climate tech and 12.5% for biotech.
Roughly the same number of respondents said that AI will see the most growth. Enterprise technology, fintech, and e-commerce will benefit the most from AI adoption.
43.1% of investors expect startup funding to decrease over the next year. 32.8% believe the situation will not change and only 24.2% remain optimistic.
The most painful macroeconomic factor affecting the development of the venture capital industry is the increase in interest rates.
Interestingly, opinions on the 2022 turmoils' consequences, such as the bankruptcy of banks, were evenly divided. On the positive side: layoffs at large tech companies allowed startups to compete for talent; reduced capital inflows to startups with unnecessary and/or weak innovations; and startup valuations return to more rational levels.
On the negative side: the weakening of good companies and the crowding out of entrepreneurs; a focus on maintenance rather than growth innovation; and investor fear.
Today's VC industry favors investors
According to PitchBook, there is now an increased demand for investment. At the same time, investors are in no hurry to throw money around, especially in the later stages. Startups, in turn, are in the role of beggars; they have to work hard to get capital.
Current U.S. startup valuations and deal sizes
The median pre-money valuation of seed-stage companies today is $12.9 million. The average valuation is nearly $20 million. Compared to the same period last year, this is an increase of almost 30%. An excellent result.
It should be noted that macroeconomic shocks have a minimal impact on the early stages. However, the reasons for the increase in valuations of young companies are not only due to their invulnerability to global factors. Investors, who have become more selective, have done their best. As a result of selection, more and more strong startups remain in the market, which has a positive impact on the final valuation.
The average deal size at the seed stage in the first quarter of 2023 was around $4 million.
Europe's latest startup valuations and deal sizes
The median pre-money valuation of seed-stage companies is now €5.5 million. The average valuation is close to €10 million. The average deal size at the seed stage for the first quarter of 2023 is around €1 million. There is no significant growth in the European market. The situation looks stable.
Also recommend a similar global study by CB Insights, whose authors recorded the opposite, falling estimates by 11% ($12.4 million). Nevertheless, the final figures are comparable to those described above.
Industries. Part One
Information Security Investments
Investors made 127 deals worth $2.5 billion in the first quarter. Startup funding has been consistently low here for a long time, analysts said. The number of deals is so limited that the authors could not even find out details about the companies' valuations.
The same trend is seen in exits, which are minimal. Interestingly, in the information security industry, investors prefer mature companies. The main activity is in the later stages, not in the early ones.
Such low activity in the industry is surprising since it is information security startups that are supposed to develop products to counter AI threats. Key trends: using generative AI for security operations; machine identity management; passwordless authentication; post-quantum cryptography; and privacy-as-code.
Vector databases. A novelty where the money hides
AI training requires data sets. Today, such sets come in the form of traditional, or in other words, structured databases. For example, text, video, or photos. However, such data cannot keep up with the growing needs of AI. As a result, unstructured, also known as vector databases, have emerged.
The point is that this approach allows you to search and find patterns in cross-types of sources simultaneously. For example, text-based searches for similar videos or vice versa.
CB Insights reports that 80% of data will be unstructured by 2025. Startups already seem to be rising to the challenge. Investment in the sector is up for the second year in a row.
While investors made seven deals worth $109 million in all of 2022, analysts counted four deals worth $176 million in the first quarter of 2023 alone. Meanwhile, one startup in the industry was valued at $750 million.
In summary, this sector is sparsely populated by investors and startups alike, which presents good opportunities for capital.
A2A payments. A novelty in e-commerce
CB Insights analysts have seen increased investor interest in products that offer A2A payments. This system allows money to be sent between bank accounts without intermediaries such as Visa or Mastercard. As a result, the transaction becomes faster, safer, and cheaper. It is interesting to note that this technology accounts for $1 out of every $10 spent in global e-commerce. And that is a solid 10%.
Defense Tech
Defense technology has been a hot topic of discussion lately. But what do venture investors think about this mysterious industry? PitchBook analysts have been tracking the sector since 2016, and have noticed its steady growth. Over the past six years, investors have closed 4,744 deals worth $135 billion. Those are impressive numbers. The most popular exit option here is M&A. It should be noted that the industry tends to consolidate and control is with the big players.
Interestingly, defense technology is far more than just weapons. It includes anything that can contribute to national security. For example, the segments that attracted the most investment in 2022 were renewable energy and power generation ($3.9 billion), sensing, connectivity, and security ($3.4 billion), and biotechnology ($3.2 billion). Much attention is also being paid to dual-use products, which can be useful in both peacetime and military applications.
Governments are the main drivers of the sector's growth. By and large, the initiative and demand for such products come from them. By 2027, the defense technology market is expected to be worth $184 billion, growing at a compound annual growth rate of 16%.
Industries. Part Two
Agtech Q1 Results
In Q1 2023 investors made 172 transactions for $1.9 billion. The activity is lower than in the previous quarter, but it is worth waiting at least until the middle of the year to draw any conclusions. To the surprise of analysts, the median pre-money valuation of companies instead of a negative trend showed growth by as much as 20%. This may be related to the consolidation of investments. The number of deals decreased, while the cheques grew. Agtech investors prefer mature companies and consider early-stage startups too risky.
Trends: Aquaculture, biomaterials, plant biotechnology, field IoT, drones, analytics, and specialized marketplaces.
Retail Tech. You can't go lower
According to CB Insights, investors closed 563 deals in the first quarter of 2023 (the worst since 2014) for $5.3 billion (the worst performance since 2016). Investment in the industry has been declining for years, and the trend hasn't stopped.
Insurtech Review
Insurance is still a troubled industry. It peaked in 2021, but already in 2022, investments plummeted by 42.4% and continue to fall. At the end of the first quarter of 2023, investors had 115 deals worth $1.1 billion, the worst performance since 2018.
In addition to the common problems of the VC industry, such as inflated valuations, the insurance sector is also very capital-intensive. Most of the activity here is among late-stage startups, trying to squeeze something out of them. Early-stage companies are not even thinking about getting into this business, which has clearly passed its prime. The only segment where investment has increased is commercial insurance.
Investing in AI has slowed down
According to CB Insights, investors closed 554 deals worth $5.4 billion in the Q1 of 2023, down 43% from the previous quarter. The worst performance since 2018. Analysts note that most of the money is going to generative AI, while all other categories are experiencing a lack of funding or interesting projects.
Industries. Part Three
Crypto Industry Q1 2023 Results
In Q1 of this year, investors closed 353 deals worth $2.6 billion. Investments have fallen for the fourth quarter in a row and have dropped to 2020 levels. The only categories of startups that remain popular: Layer 2 (L2) products and cryptocurrency storage. Analysts warn that the decline in activity will continue into 2023, and the industry doesn't expect anything great in the near future.
A Surge in Foodtech Investment in Europe
Sifted reports that investment in European Foodtech has grown by 30% to $1.3 billion in 2022. The biggest hit is lab-grown alternative proteins.
On the other hand, Agritech is not so lucky in Europe. Here, investment grew by only 5% to a modest $561 million. The main interest of investors is vertical farms and precision agriculture.
And what's not having the best luck at Agritech are indoor farms. PitchBook says that investments in this category fell 91% year over year.
Supply Chain Technology Investments
In the first quarter of 2023, investors closed 195 deals worth $2.4 billion, down 81.8% from the same period last year. Investment in the industry has never been stellar and has remained stable. There was an unusual influx of money in 2021, and then it was back to square one. Freight technology suffered the most. Enterprise supply chain management, on the other hand, lost the least money.
Enterprise SaaS
The enterprise SaaS industry is one of the strongest in VC investment today. Year after year, the space shows strong growth and no signs of slowing down. Macroeconomic difficulties? Forget it, there aren't any. According to first-quarter results, investors closed 363 deals worth $13.9 billion. Excellent performance. The most popular startup categories are ERP (enterprise resource planning) and CRM. Also, watch AP (analytics platforms) and SCM (supply chain management).
Industries. Part Four
Some recent information about Medtech
In the first quarter, investors completed 122 deals valued at $1.8 billion. Such small numbers are the norm for the industry, so it should come as no surprise. Medtech is a niche sector with few startups and few investors. The activity of the latter has decreased a bit recently, but nothing unusual can be observed. The situation is stable.
Interestingly, this industry is not so fond of early-stage startups, where funding has decreased by 30 percent. Another peculiarity of the sector is a number of specific challenges that are unique to medical technology. First and foremost is the difficult financial situation of the healthcare end markets.
Digital Health
In Q1, investors closed 397 deals worth $3.4 billion. Activity has stabilized but at a very low rate. Investments fell to the level of early 2019.
The most popular startup categories are Care delivery and navigation tech; Monitoring, imaging, and diagnostics tech; Drug R&D tech.
The least popular: Digital pharmacy tech; Health insurance & RCM tech; Digital therapeutics & wellness tech.
Gaming
The last review for today is on the gaming industry. In the first quarter, investors participated in 140 deals worth $1.1 billion. Compared to the previous two quarters, investment has increased slightly but remains very modest overall. Analysts note that a market correction is underway. The peak of activity in the gaming industry was during the pandemic, which is now behind us. Global consumer spending is down 5 to 11%, which clearly affects the venture capital sector.
The most popular startup categories are Development and Content Creation; Developer Tools; Content Developers & Publishers.
Non-VC-related, but informative and even funny
Using generative AI, scientists have found a way to decode human thoughts into text, according to Vice.
Most people are right-handed because of evolutionary logic, reports Big Think.
Looks like surfing the web could help fight dementia, SciTechDaily reports. Well, at least it's got some benefits.
To get a better rest, you should not relax but have an interesting free time. Turns out Aristotle talked about it.
On the nature of human laughter, we recommend an article from Psychology Today.
According to a recent study, the most successful venture capital funds don't tweet. Anyway, off we go.
Food of the Future in a review by Sifted. Foodtech startups will come in handy. There are even volcanic microbes in it!
The human brain prefers sounds that come into the left ear, Technology Networks says.
The first documented kiss in human history. It's 4,500 years old.
It's almost official: memes are the language of love because they help you know compatibility by their sense of humor, Mashable reports.
Nostalgia helps fight stress, reports PsyPost.
Useful Data, that can come in handy
Investment in the Web3 industry plunged 82% year over year, Crunchbase reports.
Big report from PitchBook on how generative AI can improve certain industries.
How much does it cost to train AI in an in-depth piece from a16z.
A new review of the computer games market from Newzoo.
An update on energy investment from the IEA.
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