A few predictions for the year ahead in the startup space (with an Australian perspective). Some bold and some not so…
Fundraising will be hard
This isn’t a particularly bold prediction. The market for technology and growth companies has shifted markedly in the last 9 months and some have even called this a “tech winter”, which I believe is an exaggeration given the amount of activity still happening in the space. The declines in public market technology company valuation have flowed into private markets – 20x ARR is no longer market standard, and we are back to 6-10x ARR depending on a number of factors. VC-tourists have left the market. While there remains a mountain of “dry powder” in venture capital funds, I suspect much of it is earmarked to support existing portfolio companies. It will likely take 3 years to understand whether these funds are being put to good work, using asymmetric information that an incumbent shareholder naturally has, or whether this is good money after bad.
As a result of a) valuation mismatches between founders and investors and, b) equity previously raised at lofty valuations, we will likely see an increase in the number of SAFEs / Convertible Notes, deferring the decision about an equity valuation today.
We will also likely see downrounds being normalised: “better to raise capital to give companies a chance of performing then to shut up shop”.
We’ve already started to see some investor-friendly terms (as opposed to founder-friendly terms) creep in to term sheets, e.g., multiple times liquidity preference. I can understand this, to an extent, but venture is an asset class for taking risk and receiving outsized returns by backing founders and aligning incentives. The best founders flourish when they are well supported not when they need to worry about their incentives versus investors’.
The best founders / businesses will still receive capital – this has always been the case. The bar has just been raised for who / what constitutes “the best”.
“Eco Growth” mode will be normalised
As a result of the tough fundraising market, the term “Eco Growth” will come into the common vernacular. Companies will seek growth, but not at all costs, conserving capital and aiming for breakeven prior to the next raise to give them optionality as to when to raise and leverage if they decide to raise.
Consequently, there may be some redundancies in later stage companies and some unwinding of a very tight labour market in the tech space. However, I suspect great talent won’t find it difficult to find a role, especially as many corporates are seeking to bolster their tech activities (see point 5 re M&A).
As a further consequence, we won’t see as many failures as the market may expect. There will, however, be some well publicised failures that will make people think the environment is bleaker than it actually is.
I do believe we will see more failures in 2024-25 instead of 2023. A consequence of a) some “good money after bad” from investors and b) companies not being able to raise again after not being able to execute in eco growth mode (not reaching breakeven). This will likely lead to a wash out in the venture capital manager space much like we saw in 10-15 years ago in the small-medium buyout fund space in Australia. The best managers will cement their place and the underperforming managers will go into zombie mode.
Generational defining companies will be started
As with every tech downturn, there will be some generational defining companies started in the next 2-3 years.
Its well known that companies like AirBnB, Uber, Whatsapp, Dropbox, Venmo and Zendesk were all founded during / immediately after the Global Financial Crisis in 2008.
We’ve already seen interesting innovation in the logistics / supply chain sector following the mass disruption experienced in the sector over the last 2 years and I expect to see more innovation in this sector this year.
It would be remiss of me not to mention the step change in AI that is already in market and will only get better as it is applied in more sectors and trained with more data. We will likely see many companies using the underlying open source technology to solve specific problems in various sectors. Tech won’t be the moat (as it isn’t in most cases), the founders insight into the problem and unique angle into the sector likely will be.
As such, in-spite of points 1 and 2 above, it may be the best time in the cycle to be investing in new companies.
Crypto will make a comeback with innovation
I’m not a crypto / web-3 sycophant and I’ve mainly been observing the space from the sidelines for the last few years. However, I believe this may be the moment for crypto to innovate, improve its value proposition for the common user and scale. I’m scant on ideas / details as to how this will happen as I’m not close enough to the space, but I do believe there is utility in the blockchain and with inflation a global problem, there is a room for a decentralised currency to be added to the monetary mix.
Tech M&A / consolidation will increase
We started to see this trend towards the end of last year and it makes sense. Tech company valuations have declined, and debt is relatively cheap (by historical standards). We saw this in Australian public markets last year, particularly with private equity funds investing in the space, and it’s a trend that’s likely to filter into the private markets with acquirers, likely corporates as opposed to private equity, seeking companies that a) have a unique piece of technology or b) have found product-market fit and could benefit from cheaper distribution / customer acquisition.