2023: The Crucible Year
Recently, the panel I was on at TechBBQ in Copenhagen was asked what the next 18 months hold. The question gave me a chance to organize my thoughts, and I wanted to share them here.
A three-year adjustment cycle. My perspective is that we are about halfway through a three-year period of adjustment in the tech markets. By the end of 2021, it was clear that a slowdown was going to take place. The most sophisticated investors and founders were already making adjustments to their plans by the end of that year, but by the beginning of 2022, almost everyone knew something was about to happen.
2022: where we were. This was the year of slowdown, of slamming on the breaks. At the beginning of the year, the scale and impact of the slowdown was uncertain, but by the end of the year, they were well understood. This was the first year sales performance was heavily impacted by reduced buyer willingness to purchase or by churn of accounts due to budget reviews or company shutdowns. In hindsight, the impact of 2022 was both material and psychological. Up rounds nearly ceased as flat bridge rounds dominated the landscape. Sales forecasts and then targets were brought down in turn. Burn rates were cut. These types of material changes to performance and plans intertwined with psychological realizations that we were in for a tough slog. No one left 2022 with unrealistic expectations.
2023: where we are now. The current year, 2023, is — in my estimation — likely to be the long slow grind along the bottom. Founders, companies, and investors entered that year with a pretty sober understanding of where they stood. There would be limited or no additional capital. Burn rates had, for the most part, already been cut. There would be no new hires for a while. There would be no company offsite. Instead, the relentless daily work of engineering, product, and sales to exit the year with as much revenue (and, therefore, as much runway) as possible. The bridge rounds and the burn rate cuts of 2022 set many companies up with enough runway to get through the year — and so the crucial question has become in what condition will we exit the year? Will growth be impressive enough to attract investment? Will runway be long enough to reach breakeven in 2024 or will a round be necessary? Investors — especially Series A investors — seem for the most part to be unwilling to price risk. This has resulted in a complete lockup of new capital, but we’ve been ready for that since last year. For founders, if 2022 was a year of realization, 2023 is a year of execution in a new and very challenging reality. It is no surprise that we are seeing founder breakups at an increasing rate. These are the times that try our souls and test our partnerships. Not every founder or executive really signed up for this in their heart of hearts. Not every founder or executive was cut out for this. On the other hand, the achievements of 2023 are the ones that will write the history of your enterprise. Sales growth in this climate is an achievement to be celebrated. It means a great deal — much more than in years past. Keep at it. 2023 is the crucible year.
2024: where we are going. In 2024, I expect we are going to start to see the clouds lift a bit. Customer budgets may start to recover which may make it easier to grow revenues. Some optimism will inevitably return to the hearts of investors. IPOs, slightly lower interest rates, and perhaps an end to the war in Ukraine may contribute to a more optimistic vibe. For the majority of companies that limped across the finish line of 2023, the 2024 fundraising climate may not be forgiving if burn rates remain too high or revenue growth too sluggish. But for many, strong execution under adversity in 2023, reduced burn rates, and overall better execution learned through bitter experience will combine to create the conditions that will enable fundraising and sales. This is the darkest of nights, but next year may see the dawn break. It will not be roses and unicorns, but we are likely to return to a much more functional market in which customers are willing to buy and investors are willing to price risk.
When I look at the markets, at my fellow investors, and at our portfolio — whose struggles I know well — the sense I get is that we are on the bottom. We are not out of the woods yet, but we are making our way through them. My guess — if I had to guess — is that we are about halfway through. Hang in there.
