State of Venture: 2023
A good time to start companies. A good time to invest in companies.
The economy continues to remain under pressure. Inflation is sticky in the United States at 7.1%, and the Fed continues to increase interest rates, albeit at a slightly tapered rate. And while the International Monetary Fund slashed global growth forecast to 2.7% for 2023, a steep decline from the 6.0% growth of 2021, the next 2 years will continue to be a good time to invest in and start technology companies.
- Less Frothy Valuations: Higher cost of capital and a sharp pullback in high-growth technology stocks have distinctly impacted valuations of privately held, late-stage technology companies. The birth of unicorns — companies valued at $1.0 Bn or more — is one metric to gauge hype surrounding late-stage valuations. There are 1,192 unicorns in the world today: 136 were birthed in Q3 ’21. The number declined to 25 in Q3 ’22. (1) This could partially be attributed to smaller round sizes, as indicated below, but the bigger picture is clear: companies need to earn their markups.
- Fewer Financings: We are moving from an era where capital was plenty and diligence was absent. Total capital deployed in venture was $300 Bn in 2020, $630 Bn in 2021, and is projected to be $439 Bn in 2022. (2) The 2023 numbers might reflect a greater reversion to the mean mapping to the pre-pandemic era. That’s a good thing for serious entrepreneurs and career venture capital investors.
- Companies Focus on Value: Fred Wilson said it best when he wrote that as an industry both founders and VCs alike were plagued by the “valuation obsession.” In many instances, the company’s most recent valuation became an ego play, the raison d’etre for the company — it dictated where the company went versus the other way around. Moving forward, the focus will be on the basics: building great and innovative products, delivering the highest value for customers, and creating a great company culture. Expect more job satisfaction across the board.
- Companies that Focus on Value Face Less Competition: Moving a company away from this valuation obsession, in a less-frothy market where financings are fewer is going to be challenging. Candidly, many won’t make it. For the ones that do, the playing field will be less crowded, with opportunities to grow inorganically.
- Technology’s March Forward: Seismic shifts in technology cannot be unwound or simply rolled back. Advancements in artificial intelligence, the continued rise of the creator economy, and realizing the true promise of the blockchain will move society forward. Similarly, solving some of our most pressing problems in climate change and sustainability, and in health and wellness, will require entrepreneurial talent and venture capital to come together. For many stakeholders in these spaces, 2023–2024 represents both a unique opportunity and a critical juncture in technology’s arch.
Some of the most valuable technology companies in the past were founded in times of economic distress. Electronic Arts raised its first venture round at the peak of the ‘81–82 recession; Cisco was founded in the middle of the Savings and Loan crisis; PayPal scaled in spite of the dotcom crash of 2000; and more recently, Stripe emerged after the global financial crisis. Tough economic environments naturally self-select the best entrepreneurs who work on the most compelling opportunities in the world. 2023–2024 will be no different.
(1) CB Insights, State of Venture, Q3 2022
(2) ibid.
