In the first new year’s note, we’re talking about macroeconomics, the global VC industry condition, and our own goals
vc #startups #investments #tech
At the beginning of 2023, we’re going to apprehend the current macroeconomic circumstances, what it means for venture capital investments, and what startup tendencies are worth watching closely. Are you ready for the next twelve months ahead? We’ll make sure you do.
Bigger Picture
A couple of weeks ago, a media outlet asked how we would describe the current state of the VC industry in one sentence. And we wrote “heavy hangover after a loud party.” As BlackRock reports in its 2023 forecast, the old rules no longer work. We are entering a new world order where big swings and risks are commonplace. Stagnation and recession are our dear neighbors now.
Analysts warn that inflation will slow but still remain high. The following factors contribute to this situation: population aging, geopolitical tensions, as well as the gradual shift from traditional fuels. Besides, central banks will not be able to help us now as they did two years ago. We are essentially still dealing with their “gift”, issuance.
All of this together means that it’s difficult to raise money, for both funds and startups. In our opinion, investors will become more conservative. On the other hand, there's a widespread belief among startups that crises are a great time for strong founders and high-profile projects, Sifted reports. The ghosts of Airbnb and Slack, which appeared in the midst of the financial crisis of 2008-09, are already in the air.
Among the promising sectors for investment in the current environment, BlackRock singles out energy, fintech, healthcare, and infrastructure.
If you would like to explore macroeconomics in more detail, we also recommend forecasts from Goldman Sachs, J.P. Morgan, Morgan Stanley, Bank of America, and Barclays.
Closer Look
If we go down from the global economy to the VC industry, investors highlight the following tendencies, according to PitchBook's survey of European, Central Asian, and African funds. We find some matters particularly interesting.
First, investors are not expecting a sudden upswing and an end to the crisis. Instead, they recommend coming to terms with the circumstances and tightening your belts. In 2023, the fall will continue. Only the best startups should get money.
Second, the attention to due diligence will grow significantly. Investors are more scrupulous in evaluating startups and less and less willing to give money blindly. There will probably be fewer deals, as each one is going to take a longer time.
Early-stage startups will continue to dominate. This is primarily due to the loss of interest in late-stage companies, where it’s difficult to make a successful exit.
And lastly, one of the most promising industries for investment, according to respondents, was cleantech. The sector has shown stable growth for the third year in a row.
Technology Trends in 2023 according to PitchBook
In the presentation, the authors talk about 12 sectors that investors should pay attention to.
Robotics and intelligent field equipment. Pandemics, climate change, global population growth, and geopolitical challenges are increasing the need for food. Innovative agricultural equipment has improved dramatically and is now beginning to receive commercial applications.
Artificial Intelligence. AI has been around for a long time, but only now commercial business models have started to appear. A striking example is products from OpenAI.
Climate Tech. Interest is growing due to the passage of the Inflation Reduction Act (IRA) in the U.S., the growing need to manage climate change, and commitments to reduce emissions.
Crypto. Due to high-profile scandals and bankruptcies last year, many well-known market players stopped investing in the industry. However, at the end of 2023, investors will probably become more confident as the number of dubious companies will decrease and there will be more real cases of such products' application.
Real-time e-commerce. We are talking about the sale of goods by influencers during the live streams.
Cultivated Protein. Previously, the industry had been hampered by regulators. However, the U.S. Food and Drug Administration (FDA) gave the green light to UPSIDE Foods, which introduced such a product for the first time last fall. As a result of this precedent, analysts expect a surge in investment.
Information security. This area is becoming an increasing priority due to the growth of cloud databases.
Insurance. There was a significant decline in 2022. The drop, however, is expected to continue with the growing market crisis and low profitability of the insurance sector.
Smart Homes. Despite the crisis, the bulk of financing here was high in 2022. The volume of the market also remains broad, but it’s increasingly being taken over by large technology companies.
Mobility. Over the past five years, an unprecedented amount of capital has flowed into the vertical. Main interests: autonomous driving and related systems, electric cars, and last-mile delivery. In 2022, as the IPO window closed and the stock prices of many newly listed companies plummeted, investors backed off. Mass consolidation of startups is expected.
Digital Banking. Neobanks received a record amount of funding in 2021. However, about 95% of them have not yet reached profitability. Such banks are expected to have an even harder time earning in the short term, especially as inflation pressures continue to mount on consumer spending.
Remote control will expand because of investor abandonment of autonomous vehicles and delivery efforts. In 2022, investment and enthusiasm for autonomous vehicles went down the drain. After years of expectations that autonomous vehicles were just around the corner, with billions of dollars invested in them, it marked an unpleasant change as several key players cut back or curtailed investments altogether.
Ford and Volkswagen stopped work on Argo.ai in October, and Ford CEO Jim Farley said that profitable, fully autonomous vehicles nationwide are a long way off. Instead, Ford is focusing its efforts on advanced driver-assistance systems in which humans stay in the loop.
As for the supply chain vertical, analysts see the potential for investors in the direction of remote control systems to overcome some technical challenges while providing many customer benefits.
Last fall, Amazon shut down Scout, a home delivery robot, and FedEx announced it was winding down the development of Roxo, an autonomous delivery system. These two industry leaders obviously see the promise of autonomous delivery, but their actions underscore that it has yet to be finalized.
Technology Trends in 2023 according to CB Insights
An alternative viewpoint on 11 topics investors should pay attention to.
Immortality as a service. Companies approach longevity from different angles, including changing cellular processes, regenerating body parts, developing drugs, and anti-aging supplements (not cosmetic).
Super Apps. These are applications that resemble a Swiss knife: all in one. For example, the search function (social networks), transactions and authentication (payments, messaging, digital identifiers), and delivery.
Fintech. This sector is considered one of the most active. At its peak in 2021, it accounted for $1 out of every $4 invested in the venture capital market. However, today's harsh economic conditions threaten to turn the current fintech landscape upside down. To survive, startups are already moving in two key directions: expansion into new business lines and product functions (including non-financial) and a greater focus on corporate buyers.
Home robots. The current focus is on robots that can help with simple household tasks, such as cleaning or carrying items from room to room.
Virtual power plants. These decentralized control systems combine energy from different sources – such as household solar panels, high-capacity batteries, wind farms, and more. Using a cloud-based system and applying artificial intelligence tools to manage what goes where, these systems can increase the resilience of power systems by constantly reconfiguring to draw power from whatever source is available, even if demand fluctuates.
Passive Health Monitoring. These solutions rely on a wide range of sensors to collect data related to patient health in order to offer less intrusive, more proactive diagnosis and treatment.
Digital Scent. Digitizing smells is a complex process, but the technology is making significant progress, which could affect industries such as food processing, retail, healthcare, and others in the coming year.
Femtech. Menopause, a market that will grow to $16 billion by 2025, is a prime example.
Bio-based materials. Such materials are made from organisms like fungi and seaweed. They can be quite strong and stable. With this combination of qualities, bio-based materials are attracting more and more attention from CPGs, fashion brands, and government agencies pursuing sustainability goals.
India. The country is projected to become the world's third-largest economy by 2030. In 2022, such giants as Sequoia Capital ($2 billion), Accel together with Lightspeed ($500 million each), and Fireside Ventures ($225 million) have entered the local market. Tiger Global Management is also reportedly putting together a $6 billion venture capital fund with India as its main focus.
Regenerative agtech. As consumers demand sustainable products, major brands and retailers are setting goals to reduce emissions and adopt less harmful environmental practices when purchasing basic agricultural products such as cotton and grain.
One solution that is rapidly gaining momentum is regenerative agriculture. This approach restores soil health and prevents erosion through practices such as planting trees among crops, minimal plowing, avoiding synthetic fertilizers and pesticides, and rotational grazing.
Non-VC-related, but informative and even funny
For those who want to try something unexplored in the new year, Dazed has prepared a selection of the best K-Pop tracks in 2022. I love the band TWICE.
Two psychology professors decided to find out why we tend to judge a person by his face. The results were published by a specialized portal, Psyche. Write your variants against stereotypes in the comments. Don't suggest getting acquainted with bags on your heads.
Continuing the theme of science, recently discovered a new hardest material on Earth, reports Phys.org. And no, it's not mithril.
In case you missed last year's fusion breakthrough hype, here's a popular breakdown from Inverse.
Interesting article from Wired about the benefits of storytelling in terms of human physiology.
Influencers are going crazy and slowly losing their power, Women's Health reports in a great article.
And to conclude, Elle's selection of 2023 health, beauty, and wellness trends.
Useful Data, that can come in handy
Sales of VR headsets are falling steadily. Will the metaverses come to the rescue? Anyway, the only VR game I liked was Half-Life Alyx.
Intriguing statistics about the NFT. More than half of the sales volume turned out to be wash trading. That’s when people ‘selling’ to themselves to pump the price. One more bubble in the market.
According to the European Central Bank, in the EU, 59% of all transactions are made in cash. Most people have not yet learned how to use bank cards, what to say about cryptocurrencies?
A B2B SaaS startup would need about 10 years for an exit.
From the Editor
In December, CB Insights conducted a Twitter poll among readers to pick the potential winners and losers of 2023. The winners were Generative AI, Enterprise SaaS (ironic, given the paragraph above), and YouTube. The losers were metaverses with Coinbase (why am I not surprised?) and China. We shall see.
