The ‘rock bottom’ of a venture capital downturn is yet to be fully felt this year as deals struck in the first quarter unrealistically buoy investment figures, a KPMG venture chief has warned.
In a new Venture Pulse report, Big four firm KPMG said that funding levels globally remained “robust” despite VC investment dropping to a six quarter low of $120bn in the three months to June, as war in Ukraine, high levels of inflation, and rising interest rates rocked global markets.
But KPMG’s Head of Private Enterprise in the US, Conor Moore, told City A.M. yesterday that investment levels would continue to tumble this year as the full force of the economic downturn began to bite.
“Have we hit rock bottom yet? My personal view is I don’t think we have,” he said in an interview.
“I sit in a lot of board rooms and a lot of board members don’t necessarily think we have. There’s more bad news to come and more uncertainty to come.”
‘Dry powder’ and deals agreed in the first quarter of the year, when economic conditions were more favourable, have lifted investment figures so far, Moore said, while an unrealistic boom in valuations last year was set to come crashing down over the next few quarters.
“Things were being valued at significantly higher amounts than they should have been by any economic, rational analysis – companies shouldn’t be worth 20 times revenue 30 times revenue,” he said.
“So we’re getting into a period here where there’s some more realistic valuations. And I’m not sure that kind of reality has been reflected in the statistics you’ve seen in this report.”
The decline in valuations has already started to show in Europe this quarter, with buy-now pay-later firm Klarna falling from a $46bn to $6.7bn valuation this month.
Moore’s warnings came after venture investment in the UK fell to $8.6bn in the second quarter, down from $10.2bn in the previous three months, as VC firms began to pull back from the deals that fuelled an investment boom in 2021.
Fintech firm SumUp was the most valuable UK deal in the second quarter of the year, raising $626.6m, while cleantech firm Newcleo raised $318.75m and GoCardless bagged $312m.
Private markets have been hit by a downturn that has rocked public tech stocks this year, as investors grow wary of long term growth stocks amid a looming recession.
The IPO market globally has also remained largely shuttered as a result of the turbulence which has caused VC investors to pull back from some rounds without an exit on the horizon.
“After a strong run of IPO exits over the last 2 years, the IPO window has slammed shut, particularly in the US but also in Europe and Asia,” KPMG said.