In a striking downturn for the venture capital landscape, global VC investment has plunged to its lowest level in the last seven years. According to KPMG Private Enterprise’s latest Venture Pulse report, investments fell from $95.5 billion in Q2 2024 to just $70.1 billion in Q3 2024. This decline reflects a combination of geopolitical tensions like ongoing exit drought, anticipated seasonal lulls in investment across key jurisdictions, and increasing uncertainty surrounding the upcoming U.S. presidential election.
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The Resilience of AI
Despite the overall slump in VC investment, the artificial intelligence (AI) sector remains somewhat afloat. It accounted for six of the ten largest deals globally in Q3 2024, highlighting sustained investor interest in emerging technologies like AI. The standout deals included a remarkable $1.5 billion raise by Anduril Industries, followed closely by a $1 billion investment in Safe Superintelligence. These high-profile deals not only showcase the potential of AI but also underline a strategic shift among investors focusing on highly specialised applications rather than broader, more generic AI solutions.
Conor Moore, Global Head of KPMG Private Enterprise, said, “AI investments drove the lion’s share of VC investment activity in Q3 2024.” Yet, he cautioned that many AI deals were smaller than in previous quarters. Moreover, a trend is emerging where investors are leaning toward funding companies with targeted industry solutions, particularly in defense technology and biotech. This is because these two fields are some of the fastest-growing fields on the planet.
Regional Investment Trends: A Diverse Landscape
The USA continued to dominate global VC investment, capturing nearly 60% of the total investment deals in Q3 2024 with $41.4 billion. However, this figure represents a substantial decline from the previous quarter’s $58.6 billion, almost a 30% decline. With that being said, the Canadian market defied the downward trend, doubling its VC investment from $1.2 billion to $2.7 billion—its highest level in ten quarters—largely fueled by significant raises from legal tech firm Clio and AI company Cohere.
In Europe, the trend continued as VC investment fell sharply, plummeting to $12.5 billion, the lowest figure since Q2 2020. Historically a strong performer, the UK saw its investment nearly halved from $7.1 billion to $3.4 billion in the last quarter. In contrast, Germany stood out as a rare success story, with VC investment increasing from $2 billion to $2.4 billion, bolstered by major deals in AI and aerospace industries.
Asia experienced a similar decline, with investment dropping from $18.5 billion to $15.6 billion. China, the region’s largest market, reported its lowest VC investment in over a decade, totalling $6.1 billion. However, Japan bucked this trend, achieving a twelve-quarter high in VC investment at $1.8 billion. This was largely propelled by emerging tech companies, including a notable $214 million raise by Sakana AI.
The Dwindling Exit Landscape
The exit environment for venture capital has also been severely impacted. Global exit values dropped to a six-quarter low of $39.2 billion, primarily driven by a significant reduction in U.S.-based exit activity. Exit values in the U.S. plummeted from $25.2 billion to $11.2 billion, while the total number of exits fell to a seventeen-quarter low of 244. This means that most investors did not consider this time the right time to exit their investment. In contrast, Asia experienced a rebound in exit values, rising from $11.2 billion to $18.2 billion, suggesting that the region may be gearing up for a recovery.
Francois Chadwick, a Partner at KPMG in the U.S., expressed cautious optimism about future market conditions, stating, “We’ve had a long dry spell on the exit front globally, but market conditions are improving.” He emphasised that with interest rates dropping, mergers and acquisitions (M&A) activities are expected to pick up, presenting new opportunities for investors and companies. However, it’s worth noting that exiting from an investment is a big deal for many investors as it allows them to cash in their checks whenever they want. So, in most cases, investors look for companies that can exit within a few days, if they have to.
Looking Ahead: A Wait-and-See Approach
As we approach Q4 2024, the venture capital landscape is clouded with uncertainty about the market. The looming U.S. election will likely keep investors on the sidelines, adopting a wait-and-see approach until the political landscape stabilises in the country. Nevertheless, sectors such as AI and defence technology are poised to attract ongoing interest due to the pressing need for innovation.
While Q3 of 2024 marked a significant downturn in global VC investment, emerging trends—particularly in AI and certain regional markets—indicate that growth opportunities still exist. Investors and stakeholders will closely monitor these developments as they prepare for a pivotal year in 2025, depending on various factors. With potential signs of recovery in exit activity, the venture capital community remains hopeful that the sector can rebound, driven by evolving market dynamics and innovative technologies.
While the current VC landscape presents challenges, investors’ adaptability and the resilience of certain sectors suggest a complex but potentially profitable and favourable future ahead.
