The market headwinds and uncertainties around the world are plaguing global venture capital (VC) investments. Coronavirus pandemic-induced production and logistics crisis, Russia’s invasion of Ukraine, inflation, rising interest rates and the escalation of tensions between the United States and China have all been clouding the global economic outlook.

And venture capital firms and their investments are among those most vulnerable when it comes to the impact of such uncertainties. For instance, the SoftBank Vision Fund, which upended the world of venture capital with splashy bets on dozens of prominent startups, this week announced it posted a whopping $21.68 billion loss in the April-June quarter, as value evaporated from its investments in the market rout. This is the second-largest quarterly loss for the Vision Fund.

That contributed to a loss of 3.16 trillion yen ($24 billion) net loss for the Japanese technology giant SoftBank Group Corp. and was a reversal from its 762 billion yen profit in the same quarter a year earlier. That is a record quarterly loss for the company. This somewhat means the fund lost $10 million every hour for three straight months or over $3,000 every single second.

This and other similar examples shed a spotlight on the situation of the global venture capital market.

As for Türkiye, the venture ecosystem continues to grow, spearheaded particularly by startups engaged in gaming and financial technologies. One of Türkiye’s leading information and communication technologies companies, Türk Telekom spearheads the growing engagement by corporations in venture capital investments. Its corporate venture capital company, TT Ventures, continues to boost its investments, particularly in health and education.

VC investments fall

Shedding light on the latest trends in the industry, a report by KMPG showed venture capital investments globally dropped to a six-quarter low in the second three-month period of this year, amid the ongoing crisis in Ukraine, soaring inflation and rising interest rates.

Given the number of geopolitical and macroeconomic uncertainties affecting the VC market globally, the Q2’22 Venture Pulse Report suggests venture capital investments could remain somewhat soft into the third quarter.

The quarterly report spotlights the major trends, challenges and opportunities facing the venture capital market globally and in key regions around the world.

The report says venture investments have declined amid ongoing geopolitical uncertainties, supply chain issues, and factors such as rising inflation and interest rates.

Global venture capital investments dropped considerably, from $165.3 billion across 11,468 deals in the first quarter to $120.2 billion across 8,420 deals in the April-June period, the report showed.

Both the number of deals and the total amount of VC investment dropped in the Americas, Europe and Asia during the second quarter.

VC investment in the U.S. showed the most resilience, helped by three deals of over $1 billion: a $2 billion raise by Epic Games, a $1.7 billion raise by SpaceX and $1.5 billion raise by GoPuff.

The largest raises outside of the U.S. included a $1.15 billion deal by Germany’s Trade Republic, an $805 million raise by India-based Dailyhunt, a $714 million raise by Kitopi in the United Arab Emirates (UAE) and a $650 million raise by Switzerland-based Climeworks.

Cash preservation

"With geopolitical uncertainties and the decline in the volume and number of transactions of the global VC market, technology companies are going through a challenging period," said KPMG Turkey M&A advisory partner Gökhan Kaçmaz.

"The decline in valuations and the poor performance of technology companies in the markets led to a slowdown in IPO (initial public offering) activities in the second quarter. We observe that investors are instructing portfolio companies to preserve their cash. There is a similar outlook for the third quarter of 2022, with profitability being critical for startups," Kaçmaz noted.

While there continues to be a reasonable amount of dry powder in the VC market globally, particularly in the U.S., the Americas more broadly, and Europe, investors are expected to become more cautious with their investments, focusing on companies within their portfolios, companies with strong paths to profitability, and companies in sectors being put in the spotlight by the current crisis in Ukraine, the KPMG report suggests.

VC investors pressure portfolio companies to focus on preserving cash to ride out the storm. A number of high-flying private companies saw their valuations drop in the second quarter compared to six months ago – a decline echoing the experience of many publicly traded tech companies around the world.

This is driving several global VC firms to direct their portfolio companies to tighten their wallets, be more selective with their hiring plans, and rationalize their workforce in order to ride out the current uncertainties. Many VC investors and startups view cash preservation as essential to avoid down-rounds and defer new funding rounds until the market turbulence improves.

Supply chain and automation

While investor interest in consumer-orientated businesses waned during the second quarter, interest remained relatively high in a number of other sectors. Supply chain and logistics continued to attract a significant amount of attention as companies looked for ways to address ongoing supply chain challenges.

Piggy-backing off the focus on supply chain management, VC investors also showed continued interest in automated vehicles – from long-haul transportation to the development of automated vehicles for use in warehouses, on farms, and at other industrial or manufacturing sites or facilities. Drone technologies have also remained firmly on the radar of VC investors.

Alternative energy

Skyrocketing energy prices in many regions of the world and growing concerns over energy dependencies helped drive investor interest in alternative energy options, energy storage and mobility even higher in the April-June period.

While electric vehicles and batteries continued to be a major focus for investment during the quarter, areas like hydrogen-based technologies also gained additional attention. Over the next few quarters, interest in other energy sources and solutions is also expected to pick up – such as the development of small-scale nuclear plants in Europe.

Unicorn status in jeopardy

There were 97 new unicorns – startups with a valuation of over $1 billion – birthed globally in the second three-month period of this year, with fintech companies representing more than a third.

The Americas accounted for over half of the world’s new unicorns, with the U.S. hosting all but three in Latin America (Unico and Stark Bank in Brazil and Kushki in Ecuador). Europe saw 18 new unicorns come from eight different countries (U.K., Germany, Finland, Sweden, Norway, Netherlands, Switzerland, Israel), reflecting the incredible geographic diversity of the European VC market.

Asia also saw quite a geographic spread of new unicorns, with 17 coming from seven jurisdictions. While unicorn births remained steady during the quarter, there are concerns that down rounds could cause unicorns with $1 billion valuations to lose their status. Top player in Türkiye’s fast-growing e-commerce sector Hepsiburada losing its unicorn status can be put forth as an example.

That is why companies valued at exactly $1 billion could consider giving significant concessions to investors to retain their unicorn status.

Areas to watch

Given the number of geopolitical and macroeconomic uncertainties affecting the VC market globally, the KPMG report suggests there will likely continue to be downward pressure on valuations, which could lead to decreasing levels of investment or leveraging alternative sources of financing.

It also says VC deals in many regions would likely take longer to complete as investors enhance their due diligence of deals.

Against this background, fintech is said to likely remain a strong area of investment in many regions around the world, in addition to supply chain and logistics, cybersecurity, and alternative energy.

Given rising inflation and interest rates, consumer-focused companies will likely lose some luster with VC investors in favor of B2B solutions and investments, the report said.