After a record-breaking 2021, the past six months have been eventful for the venture capital industry. From FOMO-driven check issuance, we’ve entered a parallel world of startups fighting for investor attention, rapid valuation resets, and runways.
Given the uncertainty plaguing the global economy, not to mention the lack of a crystal ball on my desk, trying to predict what will happen in 2023 seems reckless. may be regarded.
But given that Techstars is very early on, investing in hundreds of companies a year (about 600 in 2022 alone) and across nearly every industry imaginable, it is ahead of other markets. It is considered that the trend is grasped by With that in mind, here are seven predictions we believe will shape the year ahead.
The VC industry will shrink
Over the last decade, the number of VC firms has exploded. All signs now suggest that significant consolidation is underway. Presumably, more than 50% of his existing VC firms, especially those with less than $100 million in assets under management, will cease to exist functionally in the next few years, many of whom manage investments but are unable to raise substantial capital. It will be a “zombie fund”. fresh capital.
62% of the capital raised so far in 2022 went to just 6% of VC funds. As the recession deepens, fund performance declines, and fewer billion-plus companies are being founded, more VCs will struggle to raise their next fund and may close. In fact, many of Techstars’ known small, boutique VC firms have already said they have no plans to raise another round of funding.
A wave of startups fail sadly
In 2023, many startups will run out of runways. Much of the pain will be focused on growth stage companies whose valuations have plummeted. Many founders will either be unable to raise capital or will only be able to raise capital on predatory terms as investors double into their existing portfolio companies.
These are mostly companies born in the last few years that have known only the good times, prioritizing growth over business rigors. How many of them will successfully transition to a financially sustainable business model is an open question.
Early-stage startups are relatively immune to market turmoil
Most of the pre-seed and seed valuations have avoided growth stage market bubbles and remain realistic.
Against the backdrop of the storm, investing in pre-seeds continues to look like a relatively safe bet. When runways are short and resources are tight, early stage startups are better positioned to do what it takes to survive. As a result, many startups emerge from recessions in a more resilient and healthier financial position.
“Dragon” kills “Unicorn”
Only 25 new “unicorns” (private companies with valuations over $1 billion) were born in the most recent quarter (Q3 2022), the lowest number since Q1 2020. This is not necessarily a bad thing. In the harsh light of day, many so-called unicorns turned out to be nothing more than trick ponies dressed up and flattered with outlandish valuations in the hope that venture capitalists would mistake them for unicorns. Did. exit.
The $1 billion valuation is just an arbitrary milestone, but chasing it leads to some pretty negative behaviors, especially the “grow whatever it takes” mentality that many founders and VCs have pursued. and often with devastating consequences.
This is why when Techstars entrepreneurs tell me they’re building unicorns, I often tell them that dragons are better instead. Different, independent, tenacious, yet agile, and nearly invincible. In many ways, 2023 may be the year of the dragon.
IPO market remains flat
In 2022, the tech IPO market stagnated. It is very likely that this will not change until next year at the earliest. With the poor performance of most tech companies going public in 2021 and 2022, the underlying factors have not changed.
As we have seen, there will be some M&A activity, but most likely will be face-saving M&A: large companies buying start-ups at a fraction of their former market value. When you buy, you often have an added bonus – you choose your assets.
Technician layoffs lead to waves of innovation
From Google to Microsoft, from Twitter to Meta, from Stripe to Snap, from SalesForce to Shopify, from Coinbase to Klarna, from Robinhood to Peloton, and many lesser-known companies, tens of thousands of tech workers have lost their jobs in recent months. I was.
Many of them will find another role, but a significant minority will take matters into their own hands rather than wait for a job offer.
So far, most of the supporting evidence is anecdotal, but I believe that in 2023 there will be a sharp increase in the number of workers laid off from Meta and Twitter, and the rest will become entrepreneurs.
The pandemic has led to an entrepreneurship boom in the United States. We expect this recession and the accompanying layoffs to lead to a similar explosion of startups and innovation.
Entrepreneurs tackle bigger social issues
I’m a big believer in older, more experienced entrepreneurs, but most tech entrepreneurs tend to be younger. It takes the fearlessness, idealism, and naivety of youth to tackle problems that seem insurmountable to those with more life experience. This is especially true for the latest generation, who grew up in a flurry of information about social issues, climate and sustainability, and are increasingly starting companies to tackle some of the planet’s biggest problems.
Founders are growing in fields such as renewable energy, nuclear fusion, green hydrogen, biofuels, food and agricultural technology. The pandemic and the disruption it has wrought on his global supply chain, exacerbated by the war in Ukraine, has clearly highlighted that food security cannot be taken for granted.
2023 will undoubtedly be the toughest year for VCs since the dot-com bubble burst. But I’m cautiously optimistic. One of the joys of investing early in a startup’s journey is seeing unstoppable founders all over the world chasing intractable problems, huge markets, and non-trivial ideas. I am constantly amazed by the ingenuity and resilience of these entrepreneurs in a time of economic slowdown and growing problems.
Maelle Gavet is CEO of Techstars.
Opinions expressed in commentary articles on Fortune.com are solely those of the authors and do not necessarily reflect the opinions or beliefs of the authors. luck.