What can we expect in venture capital in 2023?

From growth in the number of cheques, to startups with stronger economics and more specialised VCs: What can we expect in venture capital in 2023?

With a new year ahead of us, the industry is rife with speculation for what the next 12 months hold for venture capital and the startup scene. The drop in valuations in 2022, alongside prolonged economic volatility, had led many to conclude that this will be something of a fallow year. Though we are unlikely to see the “gold rush” madness of 2021 any time soon, I disagree that 2023 will be a year of doom and gloom for the venture industry. Quite the opposite… There is strong evidence to support the view that both 2023 and 2024 will be years remembered for exciting start-ups and landmark VC deals. 

Late last year we surveyed LPs in the UK including institutional investors, family offices, asset managers and brokers on their plans for this year. One standout finding is that 56% plan to increase their VC allocation in 2023 - 20% significantly so. What’s more, 62% plan to increase their average VC investment cheque size in 2023, with 23% overall saying they are planning significant increases. 

Is this surprising? It shouldn’t be, understanding two simple axioms. Firstly, buy low. Investors seek out lower prices. Secondly, innovation is driven by challenging environments. The need for genuinely inventive solutions only increases during a downturn. The Dot Com boom created the internet. The sharing economy was born from the global financial crisis of 2008. What will 2023 and 2024 bring? It is likely we will see the emergence of truly embedded solutions, the practical application of AI and regulated blockchain/Web3 solutions with real-world benefits, across the sectors of finance and marketing.

Entering into another global recession, the need for standout startups will spike, to help us navigate the turmoil ahead. Thankfully, there is no shortage of capital to invest in them. 

Back to basics: The revival of early stage collaboration

2020 and 2021 were years marked by mega valuation rounds. Conversely, in 2022 we saw renewed appetite for early stage investing, which shows no sign of abating. In fact, over half (54%) of the investors we surveyed told us they plan to be mostly early-stage in 2023. But early stage investing requires unique expertise. With later stage investing, a great proportion of capital is devoted to growth marketing.To be successful in the early stages, deep product, industry and tech knowledge are all essential in order to add value. Also despite the smaller sums invested, a lot of senior people’s time needs to be set aside.

Investors are beginning to recognise the nuances of early stage investing and are looking to collaboration as the solution. One in three LPs (32%) say they plan more co-investments with VC funds in 2023. We have seen examples of new partnerships and deals sprouting, in which industry specialist early stage funds work with traditional growth and private equity funds, often through fund of funds programmes or tailored partnerships models.

From a geographical perspective the survey shows that despite economic turbulence, the US and the UK remain the most popular destinations for UK LPs. An interesting development  is that three-in-ten (30%) UK LPs told us they are eyeing 2023 investment opportunities in the MENA region. This is an exciting part of the world to pay close attention to next year, particularly when eyeing early stage opportunities. 

2023 and 2024 are set to become strong venture vintages

There are a number of exciting and significant developments happening around the application of AI, Web3 technology, B2B financial infrastructure, and marketing and enriched transaction data. Startups and commercially viable use cases in these areas are maturing, with the underlying technologies approaching the point where they are ready to be fully commercialised, perhaps within 2-4 years. With that in mind, in 2023 and 2024 we’re likely to see opportunities arrive at the right time and at the right price, meaning both this year and next are set to become very strong vintages.