Startup 2023: Clarity, caution and conviction will drive startup investing in 2023

The world of entrepreneurship is a wonderful place – full of surprises every day. Some that match our predictions further our beliefs and others that are totally unexpected make us wiser about how much we don’t know.

2022 was a year of renewed normality as the world began to recover from the worst pandemic in recent memory. Pandemic-related restrictions led to mass adoption of remote working, which in turn led to unprecedented technology adoption and fueled a meteoric rise in tech company valuations. This created a great deal of global liquidity, which coupled with the fact that most entrepreneur-investor meetings were virtually held, meant that the deal reached an absolute breakneck pace.

2023, on the other hand, starts with a gloomier economic climate. While the worst of the pandemic is (hopefully) behind us, the fact that people are back out of the home has caused technology usage to fall from its peak during the pandemic. This, combined with the impact of higher interest rates and a relatively lackluster performance from tech stocks, has led to a so-called funding winter.

Venture investing occurs across a trellis of stages and spaces, ranging from early to late stage and early to delayed monetization. Let’s draw it along this grid for simplicity:

Here are some trends I predict for 2023 in these stages and areas of venture investing:

Early timing – These are the most unsafe but also the most innovative waters to swim in. While the abundance and ease of fundraising in recent years has seen a large number of people turn to entrepreneurship, I personally believe this trend will continue strongly in 2023. Thanks to the many success stories we have shared in India, entrepreneurship is now as widespread a career choice as it gets. Entrepreneurs only get smarter and smarter over time, and the serious ones who are starting for the right reason will continue to do so, even when the macro fundraising environment is perceived as difficult. Investing at this stage is driven more by conviction and less by the plentiful availability of capital. It is the ability to envision a better future and the courage to support ideas and people when no one else is doing it that is the cornerstone of this phase of investing. This is the stage at which Titan Capital invests in companies and we continue to be as optimistic about the future as ever.

Intermediate level – While I expect activity to continue even in this venture investment phase, the criterion may evolve in line with a challenging economic climate. In addition to product market fit and usage metrics, companies must also demonstrate strong revenue traction as well as unit economics. The high level of liquidity in recent years prompted many investors to postpone such talks to a later date. These will again be the focus for companies looking to scale up their Series B, C and beyond.

late stage – Late-stage venture capital investments have traditionally focused on helping companies delay their IPOs so they can continue to invest more behind near-term growth at the expense of profitability. The capital involved at this stage is significant and investors tend to overlap in both public and private markets at this stage. As public markets correct, particularly in the western world and in the technology space, later-stage investors who have the requisite capital can seriously evaluate their options of investing in a relatively illiquid private company or buying a more liquid public holding at a corrected valuation. I expect this market to be challenging in 2023 compared to the last few years. Late-stage companies need to show real profitability or prove their close proximity to attract capital.

Early monetization – Some rooms lend themselves naturally to early monetization. A non-exhaustive list includes areas such as B2C and B2B commerce, SaaS, credit-oriented fintech. Given their ability to show sales growth early in their journey, I believe funding activity here will continue, albeit with a greater degree of caution compared to recent years.

Delayed monetization – Some areas inherently require businesses to build usage and customer loyalty for a while before they can make money. Some examples include areas such as content, social media, some types of fintech (get users now and make money later), Web3, etc. The leap of faith required here is two-fold, as companies must first build user traction and then follow it with their ability to monetize the platform profitably. Given the economic climate and the fact that many of the companies that have raised capital in recent years are still at the stage where they are proving their monetization viability, I expect there will be more for these areas in the coming year will be relatively more difficult to raise capital.

The spirit of entrepreneurship has the wonderful quality of going through ups and downs. I am extremely optimistic that in the coming times, even in the difficult years, we will see the birth of excellent companies.

The author is co-founder of Titan Capital

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