Predictions from the previous year concerning higher startup valuations, increased investment tickets and influx of funds from abroad differ greatly from those of 2023, as the economic climate is expected to take a downturn and consequently affect the market outlook for the foreseeable future. As a result, investments number and volume are anticipated to significantly decrease as investors will be more cautious with their decisions despite massive dry powder on the market.
Thus, the fundraising process is going to become much more challenging for startups. Is winter coming? Which industries will attract VC funds attention? We have asked investors from the leading VC funds to share their perspective about the trends that will shape the VC and startup scene in 2023, among them: Ewa Chronowska, CEO at Vestbee and General Partner at Next Road Ventures; Marcin Hejka, General Partner at OTB Ventures; Bakhrom Ibragimov, Partner at Molten Ventures; Jan Habermann, Partner at Credo Ventures; Özge Öz, Partner at QNBEYOND Ventures; Paweł Maj, Investment Director at Warsaw Equity Group; Magdalena Pawłowska, Partner at Level2 Ventures; Daniel Tomov, Founding Partner at Eleven Ventures; Artur Banach, Managing Partner at Movens Capital.
Economic Slowdown
Reflecting on last year's predictions it seems that the VC and startup world has made a 180-degree turn during 2022. While a year ago VCs from all over the world were chasing Central European startups, valuations were at all time peaks and mentioning blockchain in fundraising deck guaranteed investors lined up, it seems today that VC market is taking a break for 2023 as in times of high uncertainty the default state of investors gravitates to wait and see - comments Jan Habermann, Partner at Credo Ventures.
Ewa Chronowska, CEO at Vestbee and General Partner at Next Road Ventures, also see the significant change on the market: After the record-breaking 2021, VC investments and late-stage tech valuations have decreased throughout most of 2022, but early-stage investment activity remains relatively strong in the CEE region despite volatile macroeconomic conditions. However, in 2023 we should see a moderate cool down even at early stages, resulting in more reasonable valuations, more thorough due diligence, and decreased deal velocity.
Marcin Hejka, General Partner at OTB Ventures, spots the similarities between the current situation on the market and the one from 22 years ago. Is 2023 = 2001? Nobody is immune to macroeconomic cycles, and 2022 was the year ending the most extended positive economic cycle since WWII, which lasted since 2010. Winter is coming, or in fact it has already arrived. VC activity has been plunging in 2022. According to Crunchbase, Global VC investments amounted to $22 billion in November 2022 vs $70 billion in November 2021. Almost 70% YoY decline. We experienced similar declines only once, during the 2000-2002 internet bubble burst. In that period, VC investments dropped by 85% from $120B in 2000 to $16B in 2002. And then, the market needed 16 years to return to investment volume from 2000. History rarely repeats itself verbatim. We can hope the technology market is more mature now and technology consumption is much more mainstream and essential to businesses and consumers. But regardless, 2023 is going to be a year of belt tightening for most startups. And not everyone will survive. Fundraising is going to be much more challenging as VCs are going to be more cautious, and many opportunistic investors will disappear - claims Marcin Hejka. However, I am sure - he continues - that the best Founders and startups will survive. Good VCs will keep investing. OTB will be at least as active as in previous years. All crises have one thing in common. They end. And companies that survive the tough macroeconomic period will be in a great position to thrive in the new good time that will follow!
Paweł Maj, Investment Director at Warsaw Equity Group backs the above statement: 2022 was the year of the great VC pullback after the 2020-2021 boom. According to the CB Insights report, global venture funding reached $74.5B in Q3’22 (lowest in 9 quarters), which represents a 34% drop quarter-over-quarter (the largest quarterly percentage drop in a decade) and a 55% decline year-over-year. I expect the decline to continue in the first half of 2023 (as valuations of publicly traded SaaS companies still decline) and stabilization in the second half of the year.
Ewa Chronowska also underlines the recent changes on the VC market in CEE. According to the Vestbee’s VC Funding in CEE Report- 3Q 2022, at the start of 2022, venture capital investments were on the rise (over 1.6B EUR in 1Q, over 2B EUR in 2Q preceded by over 1.45B EUR in 4Q 2021). This trend, however, has shifted in 3Q reaching a noticeable drop in deal value due to numerous economic factors such as the war in Ukraine, an energy crisis, high inflation, and the risk of a recession. We are currently facing the economic downturn, which is likely to deepen the cutdown in investments but with so many question marks it’s hard to predict now its scope and influence on early stage startups and VCs in the long term.
2023 will be a true test for the CEE startup ecosystem. Faced with globally rising inflation and interest rates, a retreat of capital to safer instruments, and an economic slowdown, startups will be forced to face difficulties in both building growth and raising financing - adds Magdalena Pawłowska, Partner at Level2 Ventures.
Fundraising Process
A lot of companies postponed their fundraisings to 2023 - noticed Bakhrom Ibragimov, Partner at Molten Ventures. A good number of them will have to try to raise financing then. Given the demand for funding, the private VC funding market will catch-up with the public market in valuation adjustment. A lot of companies not delivering on fundamentals – clear customer value and route to a sustainable business - will be filtered out. While still being challenged as others, CEE companies historical focus on capital efficiency and product will have its limelight in those circumstances.
Magdalena Pawłowska also has no doubts that the winter is coming: The downward trend in the startups valuation initiated in 2022, especially those at later stages, will continue. Companies in the pre-seed and seed stages less affected by this decline, will face less capital availability. We also expect the investment process itself to lengthen due to investors conducting more thorough due - diligence. There will be 3 elements extremely important for founders for 2023: focus on core-business development and securing solid traction on a core-value for the customer, securing a runway for a minimum of 18 months with a possible rapid achievement of BEP, and continuous risk analysis, as the current macroeconomic situation may significantly delay execution of sales and development plans.
The critical trend for most tech companies in 2023 will be the search for a balance between cash burn and growth - claims Artur Banach, Managing Partner at Movens Capital. My advice to founders - extend the runway (even at the expense of new fundraising under suboptimal conditions), but remember that if you want to think about VC funding in the future, you need to stay on the growth path.
A decline in CAC should favor this, but at the same time, some companies may have bigger challenges with churn. We will see companies' emergence (as during all other downturns) often much more robust than those built during prosperity and easy access to capital - adds Artur Banach.
2022 was a year many founders aren’t sad to see go - economic downturn, weathering the storm, tough decisions to be made - comments Daniel Tomov, Founding Partner at Eleven Ventures. All of this also made investors a little more cautious and diligent about their investment decisions. But in my opinion, the current uncertain times will help us make wise investment decisions and healthily grow our ecosystem in 2023.
There has been a significant change in the investors attitude to startups evaluation in the area of traction and business model - agrees Magdalena Pawłowska. Nowadays, VC funds expect solid traction confirming product-market-fit from the seed stage and look for unit economics providing an attractive business model enabling high growth and quick profitability.
Investment Focus
According to Özge Öz, Partner at QNBEYOND Ventures, there are a few trends that have been gaining momentum recently and may continue to have an impact in 2023:
> Focus on sustainability and social impact; as consumers and investors increasingly demand companies to be more socially responsible.
> Rise of alternative funding sources; as the VCs are more cautious and slower in deploying capital now, startups and entrepreneurs seek out new ways to fund their business.
> Focus on diversity and inclusion; as the recognition of the importance of diversity and inclusion is increasing, startups and VC firms that prioritize this will be better able to attract top talent and serve a wider range of audience.
Paweł Maj would add to this list climate tech:
As initial data for 2022 suggests that climate tech (meaning investments into technologies that actually reduce the emission of greenhouse gases) sector was among the few that actually had seen an increase in VC investments compared to 2021, I expect this trend to continue in 2023. New research from PwC shows that climate tech funding in 2022 already accounted for more than 25% of all venture spending and investments, and this percentage could further increase as we see more and more teams fundraise their new funds focusing on climate tech investments.
He also claims that 2023 will be the year of generative AI:
The release of ChatGPT-3 and DALL-E 2 to the general public at the end of 2022 demonstrated on a large scale the potential of generative AI in instantly generating great quality content (text and images) becoming one of the biggest tech news of 2022. I expect in 2023 an explosion of possible business applications of generative AI such as content creation (blog posts, articles, digital art, etc), product development (for example rapid generation of product visualizations, using generative AI for coding lowering the barriers of entry for non-technical employees/users into programming, and first attempts of entering generative AI solutions into the workplace (assisting or even replacing humans, starting with simple repetitive tasks such as customer support). But I also expect in 2023 a large public debate regarding limitations of generative AI, legal responsibilities and moral/social dilemmas (especially how to manage the possibility of generative AI taking over creative jobs).
Magdalena Pawłowska definitely agrees with the preceding comments:
With the popularity of solutions such as GPT, businesses are able to see the benefits of AI and its possible application in daily operations. Therefore, deep tech solutions based on artificial intelligence and machine learning will be of growing interest to venture capital funds. In parallel, sustainability and carbon footprint reduction solutions are steadily gaining importance, riding the wave of both environmental awareness and climate policy. Startups that fit into these trends, developing good projects have a strong chance of succeeding despite the unfavorable economy.
Artur Banach also see a lot of potential in the AI sector:
In 2023 we will see Mainstream AI Adoption. Large Language Models (like Chat-GPT3/4) and recent advancements of generative AI in speech-to-text, text-to-images, or images-to-video will significantly influence the development of many SaaS companies and marketplaces. AI-focused founders will naturally gain an advantage here. This will create space for increasing the volume of data exchange between organizations - cloud, cybersecurity, and DaaS (Data-as-a-Service) companies will be the beneficiaries here.
Additionally, further verticalization will occur in marketplaces, while the biggest innovations are expected in B2B.
Ewa Chronowska agrees with her colleagues highlighting also that crypto and web3 are not going to rise in popularity, quite the opposite:
In recent years, many industries have undergone a major digital transformation, accelerated by the COVID-19 pandemic. I expect to see further technology adoption and transformation across sectors. One of the hot sectors will be deeptech, generative AI disrupting existing industries, and cleantech transforming how energy is produced, stored, distributed and consumed, solutions for supply chains, and fintech. No doubt the biggest winner will be AI that will become increasingly integrated into businesses of all kinds.
Due to concerns about fraudulent activities, crypto and web3 are expected to suffer the most in 2023, as it will take a long time to regain people's trust. In addition, crypto will likely face stricter regulations.
Relations in VC & Startup Ecosystem
Despite the constantly advancing digitalisation and AI revolution that is predicted to impact even more the startup and VC ecosystem in 2023, there is always a human element involved that no matter the circumstances all parties should foster.
In this "new world" I am still happy to reiterate my statement about more emphasis on in-person meetings and importance of startup-VC relationships - highlights Jan Habermann. Having reliable partners pays-off even more during turbulent times. It won't be the best time to raise later stage rounds for startups at least in the first few months of 2023 but seed activity in CEE will no doubt continue to strive with all the recently announced funds.
Cooperation is key to improve the condition of the ecosystem and increase the amount of successful investments. Thinking twice before investing in a deal and connecting with other regional investors would help us take the ecosystem to the next level. This way, we have a mature community of founders and investors ready to support tomorrow’s success stories. We might have to wait a few years until new unicorns enter the market, but I think it’s just a temporary phase - highlights Daniel Tomov, Founding Partner at Eleven Ventures.
Related Posts:
New VC Funds Investing in Europe - 4Q 2022 (by Ilya Mikhalchyk-Kananenka, Community Builder, Vestbee)
Outlook Of The CEE Startup and VC Ecosystem In 2023 (by Katarzyna Groszkowska, Editor, Vestbee)
EdTech Trends To Watch In 2023 (by Clifford Cullens, Vestbee Contributor)
