What Venture Capital investment and innovation trends are coming up in 2023?
Ever since 2021’s bumper year for Venture Capital, we’ve all been hoping good fortunes will continue forever more. However, we must not forget that difficulties are the training grounds for innovative breakthroughs, setting those with the right can-do attitude up for even greater successes. Well, here we are!
2022 was a year of mixed fates for many out there still fundraising and/or looking to deploy the dry powder accumulated. The Russian invasion of Ukraine in February that year brought about economic headwinds exacerbating an already existing energy crisis, adding to inflationary pressures, and leading to significant interest rate rises that have since marked the end of cheap money.
Any of these issues are likely to last well into 2023 and beyond and will impact the VC and startup industries, with Silicon Valley Bank being the latest element to add more volatility. According to the Economist, VC firms will have to stretch their focus to ensure financial health of their existing portfolio, as well as hunting down attractive investment opportunities. Entrepreneurs will be faced with a more complex business environment, where operating cost rises will cut into profits likely leading to a cost-cutting and efficiency drive to avoid being strapped for cash in a difficult fundraising environment.
Still, outperforming startups will continue to get funded, albeit at lower valuations than in the recent past, and they will continue to provide attractive returns to investors in the years to come. In this article we want to dive into some of the clear trends that have emerged from our research and that seem well positioned to attract the interest of investors this year, demonstrating to you how this might be the case via our own portfolio companies…
Innovation trends will reflect these external pressures in 2023
Sustainability and Social Impact: The increasing awareness of the impact of climate change and social inequality has led to a shift in consumer focus towards sustainability and social impact. Startups that prioritize environmental, social, and governance (ESG) factors and can demonstrate a positive impact on the environment and society are likely to receive higher valuations and have a competitive edge and attract investors and customers alike in 2023. The company Sepiia, a sustainable clothing brand with stain repellent technology, is a brilliant example of a business model that is “walking the walk”. Their raw materials are sustainably sourced, 100% recyclable and locally produced in Spain. The company is also a certified BCorp member since 2022 attesting to having met the highest standards of social and environmental accountability for their brand. However, this phenomenon is not isolated to the consumer market and the trend is reflected in the increasing number of venture capital firms that are also committing to these ESG investing conditions.
Artificial Intelligence: Many will have seen the news about Microsoft’s investment in OpenAI earlier this year that kicked off a storm of news articles discussing the benefits and potential dangers of Artificial intelligence (AI) and machine learning (ML). Regardless of individual opinion on the matter, many will no longer be able to dispute that both AI and ML have now become popular fixtures across all industries. Startups that create/use AI and ML will be able to solve complex problems, improve efficiency by automating laborious tasks and likely disrupt existing sectors of the economy with new products and service proposals. Particularly startups that use AI and ML in healthcare, finance, and logistics are likely to be in high demand given that solutions in these sectors respond to the economic realities of many users. The Berlin headquartered startup, Tucan.ai, has created an AI-based transcription and summary software that integrates with videoconferencing tools to fully automate meeting notes and actionable items without any human intervention.
Both AI and ML innovations respond directly to customisation and personalisation trends that many customers increasingly demand. As technology becomes intrinsically intertwined in our daily lives, it needs to respond to numerous different needs for a single user. Startups that use data analytics and machine learning to understand customer preferences and create personalized products or services are likely to be in high demand. Coinscrap Finance, has been able to read the market with their white label financial planning platform for banks and insurance companies that integrates seamlessly into their own platforms perfectly. By creating a service offering that allows banking clients, of entities such as Santander, to implement their personalised saving goals, the company’s AI-powered categorization engine turns raw information into financial insights and enables its corporate clients to deliver hyper-personalized digital experiences to its customers.
The discussion about the “Future of work” has been topical before the COVID-19 pandemic and remote working and corporate collaboration tools have since gained further significance as rising office space costs continue to impact negatively on business’ bottom line. Startups that create collaboration tools or platforms for remote teams, such as Semana, are very well positioned to respond to the many different needs that remote working raises. The pandemic has accelerated companies’ digitalisation drive including processes such as employee onboarding and remote working experience, the introduction of hybrid working conditions and ensuring its effective and efficient integration.
Wrapping up…
Venture capital and startups have been at the forefront of technological innovation and economic growth in recent years. With each passing year, new trends and developments emerge across industries blowing previous advances out of the water, and 2023 is set to be no exception. With our 10+ year experience investing in startups, we believe that the trials and tribulations of 2023 will be but a mere steppingstone for those startups with a long-term vision for value creation that solves the most urgent needs of consumers at different phases in the product/service’s economic life cycle. As for us, the Venture Capital firms of the world, it’s our responsibility to sniff out the great projects out there and help them grow and create this value.
Media sources: Funds People (opinion editorial written by Gonzalo Tradacete Gallart, CFA, member of the Alternatives Comité of the CFA Society as part of the vision of a fund as seen from the vantage of a CFA professional) (Spanish only!)
