Many VCs and startups will be happy to see the back of 2023; a year of uncertainty, rising interest rates, and slow or non-existent growth, which have dampened investor confidence. VC and startup funding has dropped from the highs of 2021 and 2022 and that has meant a nervous time for many founders, for whom the runway is shortening and valuations are falling. It has been possible to raise for strong businesses in the right sectors, but it has taken much longer than in previous years, with a greater focus on due diligence, demonstrating product-market fit, growth, and a clear path toward profitability.
But you can’t be a VC without an optimistic outlook, and there is a bigger, more positive picture to be found. Funding figures this year are still the third highest ever after ’21 and ’22, and lower valuations combined with higher standards mean this could prove to be an excellent vintage. I’ve personally been busy raising Concentric’s second fund and have been encouraged by the positivity towards the European ecosystem. Despite the current headwinds, Europe is now firmly on the radar for LPs and VCs around the world. So, the long-term view is strong.
Now, to 2024, what will the coming year have in store for us? Here are my predictions.
1. Wash Out Of Legacy Growth Deals
A recovery for VC and start-up funding will come, but it is more likely to happen in 2025. Slow growth and global instability look set to remain for the next 12 months, which will continue to impact valuations and investor confidence. It is also an election year in the UK and US, which could spell further disruption and uncertainty.
A lot of companies that haven’t raised this year will have to raise in 2024. That will bring a lot of repricing, along with some write-offs, as business model issues come to light, particularly among the Series B cohort of 2020 to 2022. In my estimation, probably around 2,000 US growth stage businesses will reprice next year, and it will have a knock-on impact on the entire global venture sector, bringing pain for many founders as well as venture funds.
For the ecosystem, the quicker this happens the better, as it wipes the slate clean and brings valuations back down to reality, ahead of future growth and investment. Many investors have already mentally written off the losses and moved on. Venture is risky and there are always going to be less successful vintages, but over 20 years you will still make a good return. The US economy has performed stronger than was expected a year ago, which is enabling some investor activity to hold up. That is giving many investors the confidence that VC will bounce back in 2025.
One bright spot is Bitcoin, which looks poised for another bull run next year, and who knows where the price will end up this time. The first Bitcoin ETF approval is expected to come in early 2024, making it easier for traditional investors to get exposure to the digital currency. This could enhance liquidity by as much as 10 times and reduce the influence of bitcoin whales on the market, potentially leading to less price volatility.
It will also open the way for banks and insurance companies to hold Bitcoin to plug the holes that currently exist on their balance sheet, following a tumble in bond prices. This could bring significant opportunities for a sub-sector of bitcoin startups that are developing solutions to support and facilitate the financialization of bitcoin, through insurance, trading, or security solutions. Promising examples include Anchorwatch, a combined insurance and enterprise-grade custody solution, which allows corporates to put insured BTC on the balance sheet in a way that mitigates the risk of it being stolen or a private key being lost. Another is Chainalysis, a blockchain data platform that enables corporates to engage with Bitcoin, by enabling compliance controls and audit practices.
3. AI Hype Gives Way To Viable Use Cases
When it comes to hype, 2023 has been all about artificial intelligence (AI), specifically generative AI and large language models (LLMs) such as ChatGPT, which launched at the end of 2022. More than one in four dollars invested in American startups this year went to AI companies, according to Crunchbase, more than double the previous year. This was largely driven by a few mega-deals such as a $10bn investment from MicrosoftMSFT -0.7% into OpenAI, and $4bn from AmazonAMZN -1.1% into Anthropic, which is developing the AI-powered chatbot, Claude.
Thousands of words have been written about how AI tools are going to enhance efficiency, drive massive automation, and potentially replace human workers. But, as with past hype around blockchain and crypto, ‘peak hype’ for AI may well be over. Innovations in the VC funding model, namely GPU debt funds, mean 100m equity pre-seed rounds for companies like Mistral.ai are no longer seen, where capital is primarily used to pay for computing power. Next year, we could see a reality check for AI, as the costs of running LLMs start to mount up, along with lawsuits and regulations around their ethical and responsible use vis-à-vis data privacy and protection, intellectual property, and other issues.
At the same time, while 2023 has brought a lot of talk about AI, we will start to see more specific, albeit simple, use cases come through in 2024. For example, in healthcare diagnosis, treatment optimization, and patient management; in finance for fraud detection, algorithmic trading, and credit scoring; in manufacturing for predictive maintenance and quality control; and in addressing environmental challenges, from energy efficiency to wildlife conservation. The big issue will be navigating the data challenge; how to access sufficient data and comply with regulations in a way that makes these use cases viable.
4. Smart, Data-Driven Manufacturing
There is a quiet revolution happening in the manufacturing sector, traditionally a laggard for digital transformation. With manufacturers under pressure to cut costs, improve sustainability, and speed up supply chains, sophisticated, low-maintenance solutions are coming to the fore, to give manufacturers a real-time view of their operations. Companies like Thingtrax and greyparrot.ai are combining IoT devices with computer vision, AI, and the edge, to avoid the need for any cumbersome IT infrastructure. This approach democratizes access to business intelligence, to increase efficiency, improve decision-making, and reduce waste, through real-time tracking and demand forecasting.
Innovations such as these and the potential addressable market mean manufacturing technology is an increasingly attractive target for VCs, recording a 46% increase in funding in the 12 months to September 2023. Governments also see the huge potential, for example, UK Prime Minister, Rishi Sunak, recently announced the Advanced Manufacturing Plan to drive investment in UK manufacturing, including £4.5 billion of funding to support strategic sectors, including technology, and digital infrastructure. It looks set to be a bright spot for innovation in 2024.
5. Solving Hard Problems With Hardtech
VC is famous for investing in software, but there is growing interest in the potential of hardtech, referring to “engineering or scientific breakthroughs in the physical world”, according to HAX. Developing innovative hardtech is often seen as too risky due to materials costs and long development cycles, but a new wave of investors and founders believe that software can only go so far in solving the biggest challenges, particularly climate and the energy transition. The US has dedicated hardtech funds such as Lux Capital, DCVC, and Eclipse VC, but the trend is now coming to Europe with VCs such as HCVC, which launched its second fund in 2023, focused on technologies like ultra-precise sensors, next-generation semiconductors or new satellite designs.
6. Data Developments In Digital Health
Healthcare has taken longer to digitise than many other sectors, due to its complexity, structural, and regulatory challenges. And while digitization accelerated during the pandemic, many of the biggest innovations such as teleconsultations and workplace wellness, have now gone off the boil.
Yet, healthcare challenges continue, and the aging global population continues to focus minds on catering to increasing demands. A whole host of technology is now available with the potential to revolutionize care, including therapeutics software, AI, and predictive analytics to aid early intervention and provide diagnostic and treatment recommendations. Yet, uptake is always hampered by the ongoing balancing act between tech implementation and cost savings, along with implementation and integration challenges, and making use of the huge volumes of data, given data privacy regulations such as GDPR.
Next year could be a turning point, as federated data platforms rise in adoption, allowing the sharing of patient datasets across siloes and leading to a boom in collaborative research and personalized medicine. Improvements in underlying data systems and harmonization of datasets will lead to vastly superior multi-modal AI models, with initial traction emerging in low-risk, back-office use cases, such as transcription, pre-authorization, and medical coding.
7. B2B And Cross-Border Payments
Payments have been a huge area of growth in the last few years, as cash usage has declined, and fintechs have developed innovative new ways of moving money. But there is more to be done, particularly in B2B and cross-border payments, which for many businesses are still slow, cumbersome, and expensive. Plus, with the current economic challenges, swift and cheap payments are more important than ever to help manage cash flow and drive growth.
Numerous emerging startups are exploring new and innovative ways of speeding up the process, by using blockchain, digital wallets, stablecoins, and other borderless technologies. This is likely to remain a resilient area in the coming 12 months and we are also likely to see the integration of AI, as a way of maximizing payments insights to create further efficiencies, serve customers better, and reduce fraud.
8. Rise Of The Frugal Entrepreneur
Finally, the tough economic and funding climate of 2023 has sparked a shift in the kind of entrepreneurs who will thrive, and this change will become even more apparent as 2024 progresses. Whereas in the boom years, the most successful founders were those who could pitch, charm investors, win over the media, and raise impressive funding rounds, now an altogether different skillset is coming to the fore. The shortage of funding available means the most successful startups will be those who are most meticulous about how they spend (and save) money. Often bootstrapped, these founders strive to innovate at the lowest possible cost and look for sustainable growth and a path to profitability over ‘growth at all costs.’ The era of the ‘frugal entrepreneur’ is underway.