Venture capital’s great reset starts now - London Business School looks ahead to a year in tech

Gary Dushnitsky, Associate Professor Strategy and Entrepreneurship at LBS, says 2023 is a reset - not a collapse - in the fortunes of the tech sector.

"The impact being felt across technology and venture largely represents a reset, after years of swollen valuations, blockbuster deals and hype. It does not represent a drop in demand or society’s need for innovation." 

"Technology still holds the key to tackling some of the world’s biggest challenges – from climate change to financial inequality, ageing populations and healthcare – and these challenges are only set to get worse, not better in the coming years. This will require an even more concerted effort, coupled with the passion for purpose that today’s younger generations are fuelled by. We expect this to make tech and venture an even more attractive career for MBA students in 2023 and beyond."

More VCs will look beyond their usual hunting grounds

Dushnitsky says that one of the most exciting developments in VC recently has been the migration of venture capital beyond the USA.

"Today, we see an active VC landscape in almost every continent. Investors, eg LocalGlobe in London, are looking beyond early stage to support dozens of innovative entrepreneurs based within a 4-hour train ride from London throughout their full life-cycle."

"This migration will continue and become more ingrained across key and emerging tech hubs throughout 2023, and there will be a greater focus on establishing new hubs by tapping into the talent coming from universities worldwide."

Entrepreneurship will become even more vital

John Mullins, Associate Professor of Management Practice at LBS said: "I’d expect entrepreneurship to become even more attractive for people as the economic downturn continues. There is a long history of companies being born out of downturns and recessions and we expect history to repeat itself again, this time around on an even greater scale."

"Not only has technology itself advanced further than where it was during previous downturns, the mass layoffs across the tech sector and a freeze on promotions or pay rises will be the impetus needed by today’s best talent to go out on their own; to turn passion projects into startups. This shift will also see people and resources become available at a lower cost than before, too, making it easier and more financially viable to take the leap."

A focus on ESG will become the norm for VCs in 2023 

Ioannis Ioannou, Associate Professor of Strategy and Entrepreneurship, says: "2022 was the year ESG cemented itself in the vocabulary of startups and VCs and, according to a report published in September by the World Economic Forum (WEF), most startups today (68%) integrate ESG into their business strategy from day one."

"This suggests ESG has already become the norm for many, and has done so in spite of the ESG backlash seen in the US from the political right. 2023 will mark the evolution of ESG’s normalcy – defining and refining how the benchmarks are used, applied and viewed."

Venture capital orthodoxies are being rethought

Dushnitsky adds: “A number of celebrated VCs are already rethinking whether VC orthodoxies are fit to fund the next generation of innovative entrepreneurs. For example, Andreessen Horowitz adopted a new structure in an effort to back and benefit from crypto startups, and Sequoia now aims to be part of the entrepreneurial journey well after a company has gone public."

"In 2023, venture capital will remain synonymous with entrepreneurship and innovation yet what investors do and how their funds are structured is set to evolve and adapt in line with the entrepreneurial ventures they support, rather than the economic downturn itself."

Entrepreneurs also need to think about real-world problems

Rupert Merson, Adjunct Professor of Strategy and Entrepreneurship, says: "In the last few years, easy money has encouraged excitement about business ideas that have generated more froth than fizz. This is always true when times are good. The fact that, historically, businesses founded in economic downturns are more likely to survive than businesses founded in upturns reinforces this."

"Blockchain is a good example of hype: going forward I predict that entrepreneurs will now be more inclined to take advantage of the real-world-enhancing capabilities that distributed ledger technologies have been promising and less inclined to create frothy products built around the metaverse and NFTs."

Corporate venturing will come to the fore 

Finally, Gary Dushnitsky predicts that the global CVC market will be more buoyant and prolific in the years to come.

"The number and value of CVC deals will rise ahead of those seen in VC generally. In fact, given the nature and scope of CV scouting and their ability to spot innovation trends early, corporate venture may be the key driver of which sectors emerge over the coming year. And thus will influence VC trends, rather than the other way round."

"The way startups have to respond to the downturn makes them more attractive to CVCs. With a greater focus on profitability, the networks CVCs can offer alongside capital are attractive to startups. Partnering with a CVC builds credibility and can act as a stamp of approval for all would-be customers. Not to mention the real-world, on-hand experience and support."

"Due diligence is even more important during times of turbulence, and corporations are structured to putting due diligence practices at their core.  Finally, CVCs typically have sharp strategic focus which can both attract founders, and help them determine their own growth strategies. For all these reasons, we anticipate that 2023 will be the year in which CVC thrives."