This week, KPMG released its Venture Pulse Report for the second quarter of 2023 which looks at global trends in venture capital investment.

Although venture capital investment in Asia remained relatively soft in the second quarter of 2023, there is growing optimism for venture capital investment heading into the third quarter of 2023, particularly the hope for stronger IPO activity in mainland China and Hong Kong, a report by KPMG said.

In the second quarter of 2023, venture-capital backed companies in Asia raised $20.1 billion across 2,395 deals, KPMG’s Q2’23 Venture Pulse Report – Global Trends reveals. Venture capital fundraising in China during the first half of 2023 totalled $43.4 billion, compared with $46.9 billion in 2022, meaning that this year could see a resurgence in funds for investors to dispense to growing companies, the firm said.

The alternative energy, energy technology, and battery storage space continued to be an attractive area of venture capital investment in the region â€“ particularly in China, where lithium-ion battery component company Libode raised $374.7 million, solar technology firm Qingdian Photovoltaic raised $217.5 million, and fusion technology company Neo Fusion raised $216.1 million during the quarter.

Investment in artificial intelligence and generative AI remained strong in the second quarter of 2023 as one of the few resilient areas of investment in the market, the report shows. As of Q2 23, Alibaba said it had received a significant number of trial access requests for its generative AI tool Tongyi Qianwen, while Baidu announced that it had submitted its own generative AI tool Ernie bot for regulatory approval.

“Generative AI startups continue to attract incredible investor attention globally. While the advances in generative AI have been impressive, strong investment in broader AI-based technologies, in particular by large unicorns, has long been part of the Chinese startup ecosystem,” Egidio Zarrella, partner, clients and innovation, KPMG China, said. Zarrella anticipated that this trend would continue to accelerate in the foreseeable future.

India
In India, venture investment rose slightly in Q2 23, although it remained very subdued compared with many historical quarters – including the same quarter last year, which saw over $8 billion in VC investment, the report states. The largest deals in Q2 23 in India included a $700 million raise by edtech Byju, a $600 million raise by online optical platform Lenskart, and a $168.1 million raise by mobile balance management app company True Balance.

Fintech, edtech, and gaming continued to attract solid interest and venture capital investment in India during Q2 23. Agritech also remained high on the radar of VC investors in the country, although it remains a relatively nascent industry. As such, many of the agritech deals to date have been relatively small in terms of deal value, although deal sizes are expected to grow over time, KPMG said. 

Japan
Meanwhile, it is likely that Japan’s strong stock market performance recently has contributed to the positive sentiment of investors and to the continued growth and maturation of the VC sector in the country, KPMG continued. Startups have continued to grow, raising larger funding rounds at much higher valuations. In Q2 23, mobility company Go raised $103.1 million while energy company Kyoto Fusioneering raised $79 million. Biotech companies also raised solid funding rounds, including Heartseed ($20 million) and EditForce ($15.5 million).

IPO exits in Japan increased in Q2 23 compared with the same quarter last year, although the listed companies were all relatively small. In recent months, Japan has also seen several large technology companies announce plans to spin off business units to focus on their core business. If completed, these spin-offs will probably drive additional IPO activity in Japan. In Q3 23, the firm said that Japan is expected to change regulations relating to the origination of venture funds in order to attract more foreign VC investment into the country.

Outlook
According to the report, there is optimism in Asia heading into Q3 23, particularly in the Chinese mainland and Hong Kong, although there is no certainty that this optimism will quickly translate into increasing VC investment. There is also some hope for stronger IPO activity in Hong Kong and the Chinese mainland during the second half of the year, particularly given the planned spin-offs of a number of tech giant Alibaba’s business units. The success of these spin-offs could spur other initial public offering (IPO) activity, while potentially also driving a new wave of interest in technology companies in China, KPMG said.

“We are seeing more companies starting to undertake the work required to conduct an IPO – which will hopefully bode well for the IPO market in Hong Kong heading into the second half of the year, although actual exits may take time to materialise. If some of these early movers see good demand and results, then others will follow – which should start to improve the VC market as funds are recycled back into the secondary market," Irene Chu, partner, head of new economy and life sciences, Hong Kong region, KPMG China, said. 

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