This past year was tumultuous for venture investors, to say the least. The ecosystem watched as startup funding dried up, held its breath as a $32 billion venture-backed company evaporated almost overnight and witnessed one of the largest startup acquisitions of all time.
Did you hear anyone yell “bingo?” Probably not. It’s unlikely that many investors came close to predicting what would play out in 2022. But, hey, there’s always next year.
It seems we’re entering yet another interesting and tumultuous year: The crypto market is hanging on by a thread; everyone is watching with popcorn in hand to see which unicorn will be the next to tumble; and the hype around AI continues to swell.
Some think 2023 will just be the start of a venture winter and overall economic recession, while others think we could see some stabilization as things head back to normal by midyear. But who is to say?
To find out how investors are thinking about the year ahead and what they’re planning, we asked more than 35 investors to share their thoughts. Here is a selection of their answers lightly edited for clarity.
How is the current economic climate impacting your deployment strategy for the next year?
U.S.-based early-stage investor: My goal is to deploy the same amount every year, but the climate has led to far less interesting companies/founders raising rounds, so I will probably deploy 20%-30% of what I want to.
Bruce Hamilton, founder, Mech Ventures: We are contemplating decreasing our check size so we can double our number of investments from 75 to 140.
Damien Steel, managing partner, OMERS Ventures: We believe there will be incredible investment opportunities available over the coming years and are excited to continue the same pace of deployment we have had in the past. I would expect international funding into Europe to slow over the coming year as GPs are put under pressure. We view this as a great opportunity to lean in.
California-based VC: New deployments have halted for us, and remaining funds are being directed to follow-on rounds for our existing portfolio.
Ba Minuzzi, founder and general partner, UMANA House of Funds: The current economic climate has had a massive positive impact on our deployment strategy. I’m excited for Q1 2023 and the entire year of 2023 for the opportunities coming to us. The end of 2022 has been a great awakening for founders. It’s time to be disciplined with burn and very creative with growth. Times of scarcity create the best founders.
Dave DeWalt, founder, MD and CEO, NightDragon: We won’t be changing our deployment strategy much despite macro conditions. This is for a few reasons, most of which are rooted in the continued importance and investment in our core market category of cybersecurity, safety, security and privacy.
We see a massive market opportunity in this space, which has an estimated TAM of $400 billion. This opportunity has remained strong and expanded, even as the larger economy struggles, because cyber budgets have remained highly resilient despite company cutbacks in other budget areas. For instance, in a recent survey of CISOs in our Advisor community, 66% said they expect their cyber budgets to increase in 2023.
Innovation is also still in demand above and beyond what is available today as the threat environment worsens globally. Each of these factors gives us confidence in continued investment and delivering outcomes for our LPs.
Ben Miller, co-founder, Fundrise: The economic climate will get worse before it gets better. Although the financial economy has already been repriced, with multiples moving back to historical norms, the real economy will be the next to turn downward. That will cut back growth rates or even reduce revenue, magnifying valuation compression even more than what we’ve already seen so far.
We’re responding to these circumstances with a new solution: offering uncapped SAFEs to the most promising mid- and late-stage companies. While SAFEs are traditionally used for early-stage companies, we think founders will be very receptive to extending their runways with the fastest, lowest friction investment solution available in the market.
Dave Zilberman, general partner, Norwest Venture Partners: Ignoring the macro economic climate would be reckless. As such, given that we’re multistage investors, we see the current market as an opportunity to overweight early-stage investments at the seed and Series A stages.
Economic headwinds won’t impede the need for more developer solutions; developers support the basis of competition in a digital world. As developer productivity and efficiency will be of even greater importance, solutions with a clear ROI will excel.
What percentage of unicorns are not actually worth $1 billion right now? How many of them do you think will fail in 2023?
Kirby Winfield, founding general partner, Ascend VC: Gotta be like 80% no longer worth $1 billion if you’re using public market comps. I think maybe 5%-10% will fail in 2023, but maybe 40% by 2025.
Ba Minuzzi, founder and general partner, UMANA House of Funds: We kicked off 2022 with five portfolio companies that had “unicorn status” and two of those have already lost that status. I believe this data is indicative of the overall theme — that two out of every five unicorns will lose, or have lost, their $1 billion valuation. I do see this trend continuing in 2023.
Harley Miller, founder and managing partner, Left Lane Capital: Up to one-third, I would say, are decidedly worth less than that, especially for the companies whose paper valuations are between $1 billion and $2 billion. Companies with high burn rates and structurally unsound unit economics will suffer the most (e.g., quick commerce delivery). It’s not just about whether they’ll still command “unicorn status,” but rather whether they will be fundable, at any value, period.
Simon Wu, partner, Cathay Innovation: We do not believe there will be as many “unicorn failings” as many are predicting in 2023. There are plenty of investors right now providing follow-on/bridge financing to help keep these companies upright. There is also a growing number of structured equity rounds being completed that will keep them as “unicorns.”
However, should the CEO take a down round or structured equity? It depends on their situation. Eventually, some of these companies will be able to fully grow into their latest valuation, or they’ll have to correct course. Valuation is a point in time and it can go up or down. What matters is the underlying business trajectory.
Are VCs still interested in web3?
Eric Bahn, co-founder and general partner, Hustle Fund: Yeah, I think so. The great thing about these bust cycles in web3 is that it pushes out all the tourists, leaving only serious builders in the game. There is still a lot of talent building in web3, and decentralization presents a lot of powerful opportunities. The interesting thing about web3 is that the boom/bust cycles seem faster than the rest of the macro market. I think there could be some recovery starting next year there.
Jambu Palaniappan, managing partner, OMERS Ventures: The underlying value of decentralization hasn’t changed, although there is a need for web3 to prove its value in critical applications. Our belief in web3 is that we’ll see a wave of companies that take advantage of that gap but with a higher degree of scrutiny on the value they provide. We’ll also see a very clear push for regulation in the sector.
California-based VC: Yes, but I think we’ll see a huge chunk of “tourist” investors leaving web3. Those who understand the space know there’s a lucrative future that’s still in its earliest days. Those who don’t understand the space also know that but will be more hesitant to deploy without a fundamental grasp of the real-world applications.
Almost none of the purported benefits of web3 (decentralization, pseudonymous identities, zero-knowledge proofs, etc.) have been realized in full yet. It’s like the era of the internet when every web page was simple HTML with ridiculous graphics and archaic capabilities.
Lisa Lambert, founder and president, National Grid Partners: In the broader sense of web3, we absolutely see decentralization as an ongoing and important theme — it’s one of the three main investment themes we focus on.
As energy grids become more decentralized and more sources of clean energy come onto the grid, like solar arrays, wind farms and home EV chargers, there’s a critical engineering challenge to make sure all these new resources are integrated into the transmission and distribution networks so clean energy gets from where it’s generated to where it’s needed most.
If you look farther out, we can see a future where decentralized blockchains make the market for power purchase agreements more efficient or even enable peer-to-peer energy transactions. That kind of disruption has implications for a wide range of industries — supply chain, heavy equipment, transportation and so forth.
What will happen to crypto in 2023?
J. Tyler Griffin, managing partner, Restive Ventures: Crypto is a massive, paradigm-shifting technology that also attracted a lot of silly use cases and prospecting; the same thing happened with the web at the end of the last century.
Centralized crypto (always a bit of a philosophical stretch) will struggle greatly. Self-custody, though, is too complex for the average user today, so watch for some serious innovation in key management. For a preview of what it’ll probably look like, see Apple’s recent announcement around how they’re managing iCloud backup private keys.
Leslie Feinzaig, founder and managing director, Graham & Walker: It depends what you mean by crypto. Web3 as we knew it in 2021-2022 is over — the use cases may not be, but the branding is going to have to change because so much trust was lost. More established cryptocurrencies will continue to store some value and will be fine in the long term. Blockchain itself, as a technology, I think still has great use cases to explore.
Don Butler, managing director, Thomvest Ventures: We think that we will continue to see fallout from the blast radius of FTX and that more companies in the category are likely to fail as a result.
One of the more interesting debates that we are watching is about the regulation of crypto itself and whether it should be regulated as a financial services industry or as a form of gambling, in which the game itself is a simulation of finance.
We think the former is more likely, but the debate itself highlights the degree to which the essence of crypto and the regulatory norms around it are still being examined in light of the losses that consumers are experiencing.
Chuckie Reddy, partner, QED Investors: I think the sentiment exiting 2022 will persist in 2023. I think prices will continue to drift lower. Stablecoins will come front and center as a growing store of value.
What will valuations look like next year?
Eric Tarczynski, founder and managing partner, Contrary Capital: We’re still in the sliding knife phase of the market. Series B+ continues to be largely dead. Series A activity is down about 50% (with valuations down from about $100 million post-money to $40 million-$50 million), and seed is still relatively active (about 80% as active, with prices down from about $25 million-$30 million post-money last year to $10 million-$20 million). I expect more consolidation next year, but we’re never going back to 2016-18 valuations. Higher prices are here to stay.
Melody Koh, partner, NextView Ventures: Best case is we are going back to 2018 pricing. Downside case is we are going back to 2012 pricing.
Latif Peracha, general partner, M13: The fallout has not been fully felt, and 2023 will show a continued downward trend in valuations across all stages. The later-stage rounds will continue to feel this most acutely.
Don Butler, managing director, Thomvest Ventures: With the reset of valuations that is underway, we think that median pre-money valuations overall will drop 25%-30% from their peaks in 2021. However, we think the “flight to quality” that we see in downturns will mean a wider dispersion of valuations among the top and bottom quartiles of companies.
Our analysis of how venture valuations fluctuated after the Global Financial Crisis in 2009 implies that the best companies will continue to be priced at elevated levels — closer to the averages of 2021 or early 2022 — while the bottom quartile of companies will see significantly lower valuations (perhaps 30%-40% lower than the highs of recent years).
The result will be that overall valuations will drop, but the spread in valuations among companies receiving funding in 2023 will increase significantly.
Dave Zilberman, general partner, Norwest Venture Partners: Premium assets will always be able to raise at premium valuations. Companies with mediocre growth and/or high burn multiples will struggle to raise. However, broad-based valuation corrections in 2023 won’t be as extreme as some expect simply because there will be far fewer companies raising. The well-capitalized cohort of companies that raised big rounds in 2021 will employ cash preservation strategies, so they’ll avoid raising in 2023, and therefore valuations won’t adjust en masse.
Simon Wu, partner, Cathay Innovation: We believe that the first half of 2023 will look similar to 2022 but expect valuations to return to normal in the second half of the year.
Will VCs still overpay for hype in 2023?
Bruce Hamilton, founder, Mech Ventures: VCs will sadly always overpay for hype. Especially VCs whose only interaction to culture is through Twitter.
Matt Cohen, founder and managing partner, Ripple Ventures: Yes, but VCs will slow their pace of deployment because LP capital is being reorganized. While institutional-grade firms will still get capital, the in-between firms that over-invested in the hype and had a strategy drift will be in a tougher spot when they are trying to go back and raise money.
Ba Minuzzi, founder and general partner, UMANA House of Funds: I think so, but I don’t think that’s overpaying. It’s part of the job of a great VC to think ahead of our time, to be bold and bet on companies that most of the time don’t seem to make sense in terms of valuation compared to revenue or future revenue.
Normally when we “overpay,” it is only overpaying until the company excels to the extreme, and everyone else then regrets the thinking that a $40 million Series A was too high, and suddenly the company is priced at a billion-plus Series B with a fascinating product-market fit that defines or creates a category.
Alison Ryu, partner, Able Partners: We do not anticipate seeing the same FOMO-driven valuations that we have in the past, but the one caveat would be the introduction of structure. We have heard of later-stage rounds that were priced at high headline valuations, but in order to avoid a down round, had significant structure in place, which is not publicly disclosed. There will be interesting implications from these structured rounds in the next few years.
Sam Clayman, partner, Asymmetric Capital Partners: It is perhaps our highest-conviction belief that some will. In general, though, we believe 2023 will see a generally healthy continued march toward sensible, utility-creating business models and approaches after drifting away over the last half decade. Folks tend to retreat to the core in times of fear.
What’s the next big bubble?
Matt Cohen, founder and managing partner, Ripple Ventures: We will see a huge rush toward AI. ESG is continuing to see capital that isn’t built on real underlying businesses. Amazon’s roll-up strategy of third-party marketplaces is another place I’m expecting to see toppling.
California-based VC: Obviously generative AI, but you’ll hear this from everyone. Less likely to be talked about as a bubble is climate tech, since it has such a positive spin — who doesn’t want solutions to climate when you compare it to everyone worrying about AI taking over the world?.
Still, purely based on the number and size of climate-only funds, you’re going to see insane amounts of cash poured into tech that doesn’t make a meaningful difference, all while funds pay premium valuations to get into rounds.
Logan Allin, managing partner and founder, Fin Capital: B2C alternative investment platforms that sell complex, illiquid and overvalued assets to accredited investors are going to blow up from a performance and regulatory perspective.
U.S.-based fintech investor: I tend to think that a couple of bubbles have popped even if the full dimensions of the popping haven’t been realized yet. I think we’ve passed the peak for challenger banks and many of those will disappear over the next couple of quarters. I think businesses predicated on selling services to those challenger banks and other fintechs are also going to struggle.
I also think that we’ll see a long period of decline in the relative value of commercial real estate. We learned many things in the pandemic, and one of those was that people don’t all need to travel into cramped downtown corridors to be productive. I don’t think we’re going to unlearn that lesson.
Sophie Bakalar, partner, Collaborative Fund: Climate bubbles will burst. Some corners of the climate ecosystem are starting to look like bubbles, particularly the most capital-intensive ones, where companies are years away from revenue but are still raising capital at undisciplined valuations.
There’s a strange psychological dimension to this, where even though those companies are farther from the start line, investors can more easily suspend disbelief when there’s no revenue to point to at all.
However, luckily for these companies, they’re usually substituting commercial risk for technical risk, so if they’re able to achieve their technical milestones and put forth a high-performing, cost-effective product, the commercial demand will be there.
The TAMs for their industries — energy, chemicals, food and agriculture, and materials — are often denominated in the trillions. So while some corners of the climate ecosystem may broadly look like bubbles today, the winners will look dramatically underpriced in hindsight.
Russ Wilcox, partner, Pillar VC: The current bubble is large language models. Guesses for the next bubble are wide-area federalization of data, re-industrialization of the West, and next-generation social media. My most contrarian guess is that with high interest rates, the SaaS model will drop in popularity, and we will see a heavier emphasis on pricing software upfront.
What questions are you getting from LPs right now?
U.S.-based early-stage investor: Most don’t know which questions to ask. I wish I got more so I could educate them. Most don’t want to ask the questions because they’ll learn how much money they’ve lost on paper in the last few years.
Eric Tarczynski, founder and managing partner, Contrary Capital: The most frequently asked question I’ve had from LPs: When will the dominoes begin to fall?
They’re looking at 6/30 and 9/30 marks and seeing very little markdowns from their GPs. Per my comment from above, it won’t start until around midyear but will continue well into 2024.
Tyler Griffin, co-founder and managing partner, Restive Ventures: “Do you hold any FTT” was a pretty common question for us fintech funds for a few weeks! Mainly, the questions are around how much runway the portfolio companies have and whether certain (mostly lending-based) business models can withstand an environment in which money isn’t free anymore.
Are there any misconceptions about dry powder?
Eric Tarczynski, founder and managing partner, Contrary Capital: Yes, huge ones. People wrote about the $200 billion of dry powder a few months back, but the reality is, combining that with a protracted deployment pace given GP anxiety about ability to raise next vehicles (flat is the new up) and GPs supporting existing portcos, there’s very little net new deployment outside of seed at the moment. Expect 2023 to continue being a very frosty environment.
Stephanie Palmeri, partner, Nextview Ventures: The biggest misconception about dry powder at the earliest stages is the availability of capital from angels. The last few years, we saw founders raising capital at the company formation stage from individual angels writing six-figure checks. This personal capital was catalyzing pre-seed/seed rounds and it wasn’t uncommon for founders to start pitching to institutional seed investors with half or more of their round already committed (or even wired on a SAFE).
Angel money is pulling back and will continue to retreat in 2023 for several reasons. A bear market in public stocks and crypto, plus the IPO window closing for late-state private companies, has impacted personal liquidity. Later-stage founders are also focusing on their own businesses, and angel investing is a distraction at the moment.
Additionally, with layoffs (existing and likely more to come), non-professional angels are becoming more conservative with cash. The impact of angels pulling back is a swing back to pre-seed/seed rounds being catalyzed by more institutional early-stage investors (with angels filling out rounds rather than starting them). It will also mean founders will use the signal of “advisers” rather than early angels for market validation (and intros) when approaching institutional investors.
Larry Aschebrook, managing partner, G Squared: Absolutely. LPs are struggling with the denominator effect. As we have seen with every recession, tenured funds will have an easier time raising capital. Newer funds that were not disciplined will have a harder time raising.
Dave DeWalt, founder and managing director, NightDragon: There are discussions around dry powder in the M&A market, particularly in the cybersecurity space. Perhaps one misconception here is that it will drive blind M&A without consideration or due diligence. This will not be a shopping spree without thought to what is being bought. Companies will still want to buy the best companies — they are just more equipped with the capital to do so at a time that valuations are also dropping. M&A will likely be expanded with the dry powder we see across the market, but it will still be as considered and careful as we have seen in other cycles.
Matt Murphy, partner, Menlo Ventures: Probably that dry powder must be put to work and therefore it will come off the sidelines. There is some truth there, but for the most part, VCs feel little pressure to put money to work, and LPs certainly do not want us to feel that right now. Slow into a rest and recovery is better.