(by Claire Houry, Tero Mennander, Stephan Wirries, Audrey Soussan, Jean Bourcereau)
While the global economic slowdown will continue, we are optimistic about the long-term venture capital market and the unwavering ability of European tech startups to innovate and reclaim their space, especially digital and climate-related ones. In 2023, companies will have to be more accountable for their impact on the environment.
If you ask any venture capital player, it’s never been harder to make predictions for a new year. So we asked our Partners to humbly share their views on 2023 in this double-paced world.
PART 1: VENTURE CAPITAL GENERAL OUTLOOK 2023
The State of Startups and VC in Europe
First taste with some key data:
- Venture funding for the third quarter of 2022 totaled $81 billion, down by $90 billion (53%) year over year and by $40 billion (33%) quarter over quarter, according to a Crunchbase News analysis. While funding for the most recent quarter will increase a little in the coming months as stealth investments are announced, this is a huge drop in funding compared to prior quarters. (Crunchbase)
- More than one-quarter of all venture capital funding is going to climate technology, with increased focus on technologies that have the most potential to cut emissions (pwc)
Europe is and will be facing macroeconomic uncertainties throughout the year. There is no denying it. But the continent has proven its potential as an emerging VC hub after Silicon Valley. Since 2013, the European asset class has grown from €60bn assets under management to over €300bn in 2022.
A wind of prioritizing local industries and delivering Tech “made in Europe” is blowing. But for the top-notch European startups or scale-ups, it’s now real-time to step out of the crowd and win big: while others are struggling with cash, those who perform well should seize the opportunities to develop consider internationally and fight for talents.
The trends we’ll see among startups:
- More use of debt: companies seeking additional funding through the use of debt financing like Revolving Credit Facilities (RCF), venture debt and convertible loans with current investors to extend their runway,
- More consolidation among startups of equal size could also happen more often to overcome the challenge of too many small startups competing in the same market due to the 2018–2021 overfunding period. Meaning that there will be an increase in M&A activity among startups as a means of achieving critical mass, in addition to organic growth.
- More mixed business models: with both software & hardware involved, OR with both biotech & SaaS involved;
- Finally, we expect further innovation waves within a shorter period of time.
What we expect from the VC market: patience and resilience
- We will see a stable amount in raised rounds, but a lower number of transactions.
- Early-stage and seed investing will continue to do as it is. Growth-stage investors, however, will turn very cautious and invest at a slower pace.
- International heavy hitters funds like KKR or Temasek will pay more attention in Europe where they see a lot of potential, which is great for the ecosystem.
- The notion of TRUST gains more importance than ever. LPs will manage their money with greater caution and are more likely to invest their money where VCs already have an impressive track record.
- Reasonably, 1st-time VC funds’ launching will face difficulties raising their funds
- Due to the current inflation and the decline in demand for consumer products, there will automatically be more B2B investments than in B2C.
- More private debt funds will be launched; and we will see the pursuit of the verticalization of fund managers, especially in deeptech & climate tech areas.
- Large corporate funds will look for more business partnerships.
PART 2: THE SECTORIAL TRENDS IN EUROPE
Most of the capital-intensive business models will see a big wave of consolidation. And most businesses that begin with “quick” or “fast” (like fast fashion, and quick commerce) will suffer strongly.
In general, crowded sectors will see far fewer newcomers:
- Insurtech for example is packed with companies offering very similar or even identical propositions. They need a totally disruptive technology or value proposition to be able to find their place.
- Consumer businesses follow the same logic. For instance, the circular economy models like secondhand marketplace are already taken by notable giant players like Vestiaire Collective and BackMarket.
- The foodtech and last-mile delivery industries will continue to suffer until only a handful of players survives on a global scale.
- Impact is big: Technology will be used to lower carbon footprint and to accelerate circular economy (end of fast fashion); new startups that can access, process, and benchmark internal and external data will be founded in order to help companies track scope 1, 2 and 3 carbon emissions.
- HRTech: for 5 years we have seen many startups emerging to help companies attract and retain candidates (more than $31 billion of investment between 2016 and 2020). We will now see more tools that will help adapt to a company-driven market (as opposed to candidates-driven) as well as more productivity or reskilling tools, and tools to measure the performance and the engagement level of employees. The goal is to fight the “Hidden Resignation”. Therefore, the latter is of great importance. In the “State of the Global Workplace in 2022 Report”, we observe that Europe is the region with the lowest percentage of engaged employees (only 14%). Moreover, France is itself at the bottom of the European table with 6%.
- The Health Tech sector is strong and on the rise. On one hand, developed countries are increasing public expenditure in the healthcare sector. On the other hand, predictive health tech are becoming more and more trendy in the Nordics. For instance, preventive health tech with individual live wellness data capturing with preventive health indicator warnings.
- B2B software startups tackling data operations, cybersecurity, impact, and marketing to improve customer journeys will embrace constant growth.
Are boring sectors coming back? (again)
- B2B software with long sales cycles (IT, Procurement, Legal and Security teams involved…as opposed to freemium models) and large ACV (Average Contract Value) that require a large and experienced sales team are back in the game.
- The new generation of document management is also booming with data used as a way to increase productivity. It will prove useful to industries such as the supply chain (to include the sustainability criteria, and geopolitical risk), or marketing (with e-privacy and, personalized customer experience).
- Agritech will see its growth.
Let’s take a closer look at the German market
Interest in issues pertaining to energy, defense, environment, digitization, and supply chains are top of the line in Germany.
- The German automotive sector, which has come under fire for being tardy to market-release electric vehicles and has been trailing in digitization, is making significant efforts to catch up.
- A leadership transition is taking place among the German “Mittelstand” businesses, which are small and medium-sized businesses that are important to the nation’s economy. These businesses are now more and more being managed by the next generation, and this change is expected to accelerate the overdue digitization process.
- The country now places considerably higher importance on national strategic matters like defense and energy as a result of the prolonged crisis in Ukraine. We see an opportunity for additional investment and innovation in these fields in order to boost energy security.
PART 3: SUGGESTIONS FOR STARTUPS TO NAVIGATE 2023
It’s not back to black, but back to the basics
“Opportunities come in different shades in more difficult market conditions. Startups that do well have an enormous opportunity to win over talents that were until recently unattainable due to the competition from ‘big tech’. We may witness more startup falling stories in 2023. My hope is that many startuppers transform into founders of a generation of new startups which are created in harder times, and will endure better through times with lessons learned.”
– Stephan Wirries, Partner at Ventech (Germany)
Capital efficiency + Smart growth
“Cash is king! The flavor of 2023 is to manage the startups wisely in terms of expenditure. For most startups, prioritize a small team of very talented people rather than recruiting large organizations. Investors will demand tech companies to focus more on generating positive cash flow.” said Tero Mennander, Partner at Ventech (Finland).
Startups will have to manage their priorities and refocus on their core business, which will require (sometimes) cutting non-core unprofitable initiatives, even if they could be interesting in the long term. During the crisis, big enterprises will reduce their number of vendors, entrepreneurs will need to reach the critical mass required to remain on their vendors’ list. The pace of investment in marketing will be totally synchronized with the interest rate, so it’s still going to be slow in 2023.
Stability and growth: Keep your talents and supporters close
- Protecting employer branding and the motivation of your (remaining) team could become huge challenges in 2023 when Tech layoffs are becoming the new normal.
- Prove to your investors that your offering and business are sustainable.
- Reach profitability: focus on the level of ARR and employee structure to reach profitability
- Stay close to your investors: internal rounds of financing will grow.
- Work on your Product Market Fit before thinking of scaling
- Keep a close eye on European policy changes: policymakers have sent the tense of foreign talent attraction and retention. Finland, for example, is facing a talent shortage domestically. And there’s a thirst for foreign talents, especially the high-educated tech innovators, to smooth their administrative process.
What about new job positions?
“We’ll see a wave of ‘Chief of Staff’, ‘Chief of Happiness’, ‘Chief Digital Officer’, ‘Chief Knowledge Officer’ fading soon. These jobs were created to adapt to the bullish market and to the war of talent (jobs dedicated to retaining employees such as chief of happiness offices, chief of knowledge officer).” predicts Audrey Soussan, Partner at Ventech. “These jobs might be the first one to be cut in a time of recession and rationalization as they will be less relevant in a bearish market when profitability becomes more important than growth at all costs.”
In addition to looking closely at market potential and technology, the VCs that will succeed in 2023 will be those that understand how to identify strong corporate cultures and know that core interests are based on shared values, not just happy-washed terms.