After a difficult 2022, tech founders around the country are hoping the start of a new year will bring a brighter economic climate.
Inflation, the war in Ukraine and other macroeconomic factors created economic anxiety for many in 2022, but the tech sector was particularly affected by market corrections and reduced access to venture capital. VC funding was down more than 30 percent last year, according to a recent report from Pitchbook-NVCA Venture Monitor.
Will VC funding see a resurgence in 2023, or should the tech industry brace itself for a more constrained funding environment? Built In asked three VC firms to provide their predictions about what lies ahead in 2023. Keep reading for predictions from Kyle Doherty, a managing director at General Catalyst; Martin Mignot, a partner at Index Ventures; and several partners from Antler.
The following responses have been edited for length and clarity.
Do you think VC funding for tech companies will increase or decrease in 2023?
Doherty: I believe VC funding will decrease relative to the past number of years. Much of the activity right now is at the pre-seed or seed stages. For companies raising a growth round, they need to demonstrate a strong product-market fit and show that they are exceeding their plan. But more importantly, they need to be open to a different valuation environment than we saw the past two years.
Mignot: The reality on the ground is we have already seen a substantial decrease in activity over the past year and that trend is sticking for now. Growth has been the most affected, but early-stage has slowed down as well, mostly because “tourist” investors and entrepreneurs who got lured by the prospect of making a quick buck in a booming market have now gone. But long-term investors and missionary entrepreneurs are still there and generational companies are built in bad times as much as in good, which is why at Index we don’t try to time markets and keep a steady pace. With a new office in NYC and a $300 million seed fund we just raised, we feel like we have the reach and resources to best support this new generation of entrepreneurs.
Which tech sectors are best positioned for growth?
Doherty: I believe the areas best positioned for growth include large language models (LLM)/generative artificial intelligence and crypto. LMM/AI capabilities have grown exponentially, and I look forward to seeing a rise in new types of applications. While 2022 was a year of corrections for crypto, I believe there is still an opportunity for growth, especially for platform companies like Circle, which is a global fintech company enabling businesses to leverage stablecoins and seeking to drive a more stable future for crypto.
Mignot: Everybody is excited about AI and the application of transformer models, and it’s certainly going to be the most active sector in 2023. But let’s not forget many industries are still operating with very antiquated workflows and tech stacks and need to be migrated to modern marketplaces or vertical software, where we continue to see many opportunities.
Do you have any other predictions as to how the tech industry will change in 2023?
Doherty: I predict venture capital will continue to experience a deal volume contraction, but there is still quite a bit of “dry powder” out there for investment. Valuations will likely continue to come down to reflect the end market reality and deal sizes will shrink. However, activity will continue, particularly for early-stage rounds. Those founders should seek to partner with venture capital firms like GC that have experience and ability to help them with building the foundation of their business — hiring, infrastructure, growth, marketing, etc.
Mignot: NYC will continue to rise as a major tech hub globally.
Jeff Becker, a general partner at Antler’s NYC office: We’re already seeing two massive shifts that have not yet fully taken form. First, the contraction of companies that raised in the heights of the past two years will start running low on cash, which will drive bridge rounds and down rounds, subsuming investor cash on deals that don’t die completely. Some funds will focus on new deals — buying low and reinvesting in the next cycle — but will be far more discerning despite the over-reported narrative that now is the best time in history to invest. Second, the TikTok generation is maturing. Sub-$50 million businesses will explode. The advertising landscape has been leveled. Much of this generation grew up coding, and they are far more self-sufficient in generating income. This will create an onslaught of new businesses, brands, services and technologies outside of [Silicon] Valley and educational institutions.
Antler founder and CEO Magnus Grimeland: Tech companies are laying off workers faster than at any point during the pandemic; 150,000 jobs were cut in tech in 2022. Simultaneously, these tech layoffs are already spawning a new wave of startups. At Antler, we received about 65,000 applications in 2022 [for our six-week startup generator program], which is a strong upwards trend. The application rate of Q4 was about double the rate of Q1. The companies that will rule our future are being created in these days, months and weeks all around the world; I am putting my money and time into backing the world’s most driven founders from day zero.