2023 VC predictions: Finding an exit from the ‘messy middle’

To predict what 2023 will look like for venture capital, we need to start by understanding where we are now. We’re entering a messy middle where prices continue to drop and the “2021” deal, industry slang for an investment made at an exorbitant price, is long gone.

Companies can no longer raise $5 million to $10 million seed rounds with nothing but a deck and the assumption that revenue multiples will skyrocket beyond historical norms. The VC landscape has started to bifurcate, and it will continue to do so during 2023 both for fundraising and investments.

Fundraising: A tale of two worlds

Even though the best vintages originate during downturns, it’s difficult to allocate to something you’re already substantially overexposed to.

In 2023, we will see two worlds emerge. The companies with the best talent, products and positioning will command capital at normalized market prices, and everyone else will experience a depressed market.

Due to the Fed’s rate hikes and geopolitical tensions, the macro environment has slowed and inflation hit record levels. Investor confidence is down across the board and growth rounds are largely dead on arrival, with both seed and Series A valuations down by 30%-50%. It’s now questionable to pump money into a company that doesn’t have the traction to back up its worth.

But this doesn’t mean all deals are off. Venture firms still have tens of billions of dollars to deploy, but they’re more hesitant about doing so now — growth, in particular, is experiencing a hanging-around-the-hoop effect that is likely to linger as the overall macro environment stays depressed.