2022 saw the deepest slump in the value of new VC deals ever recorded. It is perhaps unsurprising, then, that the overarching narrative at the beginning of 2023 was one of ongoing pessimism, with many investors, journalists and academics predicting it to be the worst funding period for decades.
In the face of widespread negativity it is perhaps unsurprising that many funds erred on the side of caution. Yet, despite taking steps to shield themselves from the predicted downturn, many have faced a challenging period.
Some are insuring against uncertainty by taking lower equity stakes, doubling down on due diligence and exercising extreme discipline - a far cry from the gamification that accompanied the staggering pre-money valuations of years gone by.
Round pricing has been a topic of conversation at many industry events this year, and I’ve heard multiple examples of disagreements amongst investment committees on whether a valuation is appropriate given market conditions.
Undoubtedly, some investors are taking a more cautious approach, especially those with fewer opportunities in their pipelines. Yet, despite talk of increased competition, I’ve seen no shortage of cross-fund collaboration. And before we write 2023 off, it’s important to acknowledge the opportunities that more niche players have recognised, and in many cases capitalised on.
Corporate venture capitalising on calm
Fast-paced funding environments are somewhat chaotic. They lead to unrealistic valuations and push funds towards market trends. The result is an unsophisticated numbers game played by investors in the hope that one quick fire investment leads to monumental returns.
In today’s more cautious environment, informed decisions and deep-sector knowledge are the order of the day. This recalibration has offered Corporate Venturing arms (CVCs) and funds with strict sector focus and narrower scopes the opportunity to identify, qualify and compete for the very best opportunities.
There’s a growing sense that startups are actively seeking investors with relevant expertise, and founders have much to gain from an approach that sees cap tables populated by shareholders with genuine domain knowledge. CVCs are one such shareholder with the power to supercharge portfolio growth, particularly in tough macroeconomic conditions.
In the case of InMotion Ventures, we’re able to draw on our operational backgrounds to advise our founders in areas such as go-to-market and product strategy. We also have access to thousands of subject matter experts within Jaguar Land Rover who help validate technologies and unlock commercial opportunities within the business. These highly valuable revenue streams demonstrate product market fit and help pave the way to future fundraising rounds.
Whether it's capital, commercial opportunities or domain expertise, startups can rely on a corporate investor to provide the support they need, today more than ever. This year has been one of our busiest to date, both in terms of investments and partnerships, and we’re actively looking to deploy more capital. In today’s market CVC investment could be the key to scaling efficiently as founders look to navigate an uncertain future.
An inevitable bounce-back
The strength of the European startup ecosystem is undeniable. Over the years, the UK has built a strong early-stage ecosystem and the rest of the continent is following suit, with France recently launching its own EIS. Fundamentally, successful later-stage companies simply cannot happen without the conditions for them to grow at an early stage. And there are plenty of new growth opportunities to explore across the continent.
Over the past decade, a sharp increase in data-driven practices and the migration from on-premise to cloud has led to the emergence of exciting new companies across the data stack. We’re now seeing an investment rebound in this space, driven by new breakthroughs in AI algorithms and access to powerful computers.
Unsurprisingly the US is seeing the highest level of activity, but Europe is coming out stronger than expected, especially in AI where new developments are only accelerating the aforementioned trend.
Businesses across all sectors are increasingly seeking to leverage advances in automation and AI by using data as easily as possible, across all forms, in a machine readable way. Increasingly there is a focus on the governance and cost optimisation of data practices, and as the enterprise environment becomes more complex and teams become more specialised, the number of developers and tools in use proliferates.
All these point towards an accelerated interest in and adoption of practices to help manage new levels of complexity in a compliant way.
Unsurprisingly the increased automation of infrastructure management is driving investor interest. We’re seeing increases in devops practices such as IAC (infrastructure as code) as enterprises look to manage and process tasks in the same manner as software. We’re also closely monitoring the booming AI driven enterprise application layer: evaluating companies building defensibility around customer value - be that tackling and ingraining into complex workflows, building strong network effects or developing specialised applications using data advantage.
When venture activity does bounce back, likely in early 2024, we’ll see investors flocking to the predictable revenue streams, low-growth costs and widespread excitement around the business models associated with these technologies.
While funding in these sectors is unlikely to match the scale of crypto investment of years gone by, a positive change (no matter how small) in wider macroeconomic conditions will lead to fresh capital and innovation in these promising sectors.
2023 in a nutshell
A year ago, it was widely predicted that 2023 would be something approaching a tech apocalypse. For many investors, however, this year hasn’t been nearly as bad as first feared. New opportunities are beginning to present themselves, and while no one has a crystal ball, more innovation and investment across AI and data infrastructure seems inevitable. Founders and funds alike should have their eyes firmly on these sectors for more immediate growth gains.
Lead image: Photo by Carlos Torres