Hey Insiders! I hope everyone is having a wonderful holiday season. Jigney, Courtney, and I recapped the 10 biggest startup stories for 2022 in Wednesday's issue. In today's issue, we have highlighted our predictions for 2023. We want to thank the readers for their continued support and wish everyone a Happy New Year! | |  Karan | |
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Investors will likely hold back on their investments in 2023 and wait for the market to stabilize and inflation to return to normal levels before resuming their normal pace of investing. The fundraising slump could possibly last until 2024. Optimistic estimates point to a recovery from the second half of 2023. Despite raising record levels of dry powder in 2022, venture capitalists are in no rush to deploy capital, given the macroeconomic volatility. More: - Venture firms are likely to step in and offer funding to portfolio startups to prevent them from going under and maintain their equity percentage in the most promising ones.
- However, startups, especially late-stage ones, will have to settle for lower valuations.
- Payments platform Klarna’s valuation dropped from $46B to $6.7B this year.
- Instacart slashed its valuation from its peak of $39B to $10B.
- The fundraising pullback of 2022 affected late-stage startups the most, with funding dropping by 63% YoY.
- Due to the contagion from the fallout of crypto platforms this year, including FTX and Three Arrows Capital, funding for crypto firms will be limited going into 2023.
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The startup sector is primed for M&A activity, which is expected to see an uptick in transactions next year. Startups could avoid being acquired this year, as many had built cash reserves last year when venture capitalists were investing freely in startups. However, the tide turned this year, forcing startups to make tough decisions to bring cash burn rates down and ensure the sustainability of their firms. This spells an opportunity for cash-rich startups to acquire other startups or competitors at significantly lower valuations, which will likely increase going into 2023. More: - Investors believe startups will start running low on cash and face the prospect of shutting down operations or getting acquired at a discounted valuation.
- Delivery startup Getir was able to acquire rival Gorillas for $1.2B, a 60% discount over its peak valuation of $3B.
- Venture-backed and profitable startups will be eyeing smaller startups to expand their product portfolio or gain access to new customers.
Zoom out: - This year, venture-backed startups acquired 1,291 startups by mid-December, matching last year’s tally of 1,292.
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Venture funding in crypto startups will continue to fall amid the "crypto winter." Crypto startups saw their collective funding fall by 37% YoY in Q3 to $4.4B as VCs have become reluctant to back high-risk asset classes. More: - The crypto market cap is $792.51B, down from its peak of $3T in Nov. 2021.
- Some VCs have also become more reluctant to back crypto startups due to the downfall of cryptocurrency exchange FTX.
- In November, Sequoia wrote down its $210M investment in FTX to zero.
- Telstra Ventures general partner Yash Patel told Crunchbase crypto startups will have to secure debt and lower their burn rate to ensure they don't have to shut down next year.
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After major tech companies like Netflix, Meta and Twitter laid off large portions of their workforce; startups are beginning to follow suit. In 2022, several startups began hemorrhaging staff; for example, Flowhub cut its staff by 15%, and Truelayer laid off 10% of its employees. In 2023, this trend will likely continue. More: - The outlook for 2023 isn't all bad. Some startups have been able to take advantage of big tech's layoff spree, using the opportunity to grow their own talent pool.
- Some startups will fare better than others when it comes to mass layoffs.
- For instance, in 2022, edtech startups comprised 44% of all startup layoffs.
- In 2022, a total of 17,989 startup workers were laid off.
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Startups will continue to raise venture debt to avoid down rounds during a tight fundraising environment in 2023. Startups had raised $22.4B in venture debt during the first nine months of 2022 and were on track to raise $30B for the full year, roughly the same as in previous years. More: - PitchBook senior analyst Kyle Sanford told the WSJ that venture debt could serve as an "insurance policy" so startups can achieve the metrics they set during their latest equity round.
- When fundraising conditions are poor, venture debt enables startups to extend their runway until the situation improves.
- As the Federal Reserve raises interest rates, lenders have become incentivized to offer loans to startups.
- In August, The Information said that private equity firms Blackstone and KKR were looking to provide venture debt in the next few years.
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Next year, new governmental policies aimed at encouraging small business growth could help startups flourish. In the U.S., for example, the U.S. Treasury Department approved the "State Small Business Credit Initiative," granting small businesses across nine states access to a $1.5B fund. More: - The SSBCI initiative is part of the American Rescue Plan Act, which has so far offered $10B worth of funds.
- Businesses headquartered in Connecticut, Pennsylvania, Alabama, South Carolina, Maine, Indiana, New Hampshire, South Dakota, or Vermont are eligible to apply.
- In Spain, lawmakers passed new policies to help startups flourish.
- Entrepreneurs, remote workers, and digital nomads can benefit from Spain's recent laws, which offer these workers tax incentives and other advantages for living and working in Spain.
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Startups, especially the cash-strapped ones, will start offering sweat equity options to service providers. The option will enable startups to conserve cash in the short term as they look to weather the funding slump. More: - The concept of sweat equity refers to businesses offering services to a startup for future equity at discounted prices without receiving upfront payments.
- An Austin, Texas-based startup, Lynx emerged from stealth earlier this year with a platform that provides startups with legal, marketing, public relations, product development, and financial services in return for sweat equity arrangements, called SWEAT Notes.
- Founders will be able to entice employees to work for rates below market averages in lieu of a higher ESOPs share or sweat equity.
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African startups will raise between $9B-$10B in 2023. African startups saw their total funding rise by 133% YoY in H1 2022 to $3.5B, according to a report by the African Private Equity and Venture Capital Association (AVCA). More: - The AVCA expects African startups to raise $7B in 2022, up from $5.2B in 2021.
- 33% of venture funding in H1 went to startups based in West Africa, compared to 22% for East Africa.
- Startups in North, Southern, and Central Africa made up 20%, 14%, and 1% of venture funding in the continent, respectively.
- Fintech startups made up 32% of funding, the most of any sector.
- African fintech startup Flutterwave's valuation surpassed $3B after it raised $250M in February.
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Many investors will make it a priority to support minority startup founders going into 2023. From 2015 to 2020, Black and Latinx founders only received 2.4% of all venture capital raised in the U.S. Investors are looking to change this disparity and will likely back more diverse founders. More: - Steve Ballmer has invested $400M in fund-of-funds that aims to back Black-owned businesses.
- Amazon committed $150M in venture funds, accelerators, and incubators that back Black, Latino, women, LGBTQIA+, and Indigenous founders, through its Amazon Catalytic Capital initiative.
- American basketball team Brooklyn Nets’ co-founder, Clara Wu Tsai, announced a new accelerator for BIPOC founders called BK-X, which aims to invest $500,000 in each startup.
- Ada Ventures held the first close of its second fund at £36M, with the firm aiming for a £60M final close. The firm will invest in underrepresented groups.
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In 2023, expect a renewed focus on founder mental health. Founders can benefit from new programs from companies like Brex, which, in 2022, launched Catharsis, a program on startup founders' mental health. More: - According to the National Institute of Mental Health, 72% of startup founders face mental health issues.
- With 25% of startups already using Brex services, the Catharsis program will connect these founders to therapists and psychologists equipped to address their specific mental health needs.
- Users can pay for the sessions using Brex points.
- Brex hopes to prevent burnout by helping founders reach their "full potential."
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Upcoming Events: - January 05 - AMA with Gun.io - Building and managing software development teams w/ Deividi Silva (Watch On Demand)
- January 06 - AMA with LinearB - Improving workflow for developers w/ Ori Keren (Watch On Demand)
- January 10 - Inside Startups Coffee Break (Register Here)
- January 17 - Inside Marketing Coffee Break (Register Here)
- January 31 - Growth Summit 2023 (Register Here)
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 |  | Karan Chafekar is a Management Consultant, Business enthusiast, and Licensed Pilot.
Jigney Pathak is a Business Researcher at Inside who loves technology, finance & sports. He has a Bachelor of Business Administration with a finance specialization & has previously worked at Salesforce.
Courtney Rawlings is an Inside Research Analyst living in Los Angeles, California. She has returned to her hometown of LA after spending several years working at Emory University in Atlanta, Georgia, where she is completing a Ph.D. in Art and Architectural History.
| | | | Editor | Vibha Chapparike is a Freelance Writer & Editor at Inside.com. With her post-graduation in Management and Finance completed, Vibha is expanding her knowledge in venture capital, business, startups, and technology. She has had a career in public relations and communications. An ardent reader and writer currently residing in Singapore, you can follow Vibha on Twitter @VChapparike. | |
