My reflection of 2023 in Fundraising
2023 is wrapping up and it's my turn to share my reflection on fundraising. This year we witnessed that the market sentiment remained complex. Efforts to get inflation under control, with interest rates playing a pivotal role and signs of a "soft landing" on the horizon. What does it mean? While we still get some negativism in the near future, I'm very confidence that positivism will be here with the first cuts in interest rates (Q3/Q4 2024).
I decided to reflect in 4 different areas for 2023:
- VC Overall Activity: picturing a primary indicator of the health and direction of innovation and startup ecosystems;
- Investment Challenges: offering a practical insights into navigating the fundraising landscape, which is crucial for the success and sustainability of startups.
- IPO Markets: important indicator (a key one imo) of liquidity and investor sentiment in public markets for companies coming from private equity;
- Fintech Startups: Technology and financial services, two critical components of the modern economy. The developments in this sector can often signal broader trends in technology adoption, regulatory shifts, and consumer behavior
VC Overall Activity
VC's overall investment activity in 2023 confirmed that what we saw in 2021 is not expected for the foreseeable future. Even though we saw investments in Q3 2023 staying flat compared to Q2 2023, the overall 2023 is poised to align with its predecessor. This reflects ongoing economic uncertainty and a saturated market from previous investment rounds. Many VC investors need to be faster in making deals, choosing to be more selective and cautious with investments at this point. Despite this, sectors like generative AI drove so much funding that it indicates a focus on core infrastructure as LLMs, personalization, and innovation in fields like healthcare, finance, and customer service and emerging technologies were reigning the attention.
Nevertheless, Venture Capital remains the most preferred form of fundraising, and the deal pipeline sourcing was never this full. That's good news to investors, as showing rejection metrics also paints confidence on LPs side. However, that's bad news for entrepreneurs who go a traditional fundraising route for obvious reasons.
Investment Challenges
The early-stage market showed more resilience and success in fundraising compared to later stages than what initially was forecasted. This situation was partly attributed to the economic uncertainty and an overhang from the abundance of funds previously injected into the market.
In 2023, companies were only capable of raising proper funding rounds with robust tracking of their financial multiples to prove traction. Investors are more interested in long-term viability than just rapid growth, which is fantastic! Startups had to present more robust financial planning and paths to profitability. Monitoring and responding to key performance indicators (KPIs) such as CAC, LTV/CLV, and burn rate tend to be very illustrative on how to navigate uncertain markets more effectively. This data-centric approach can guide strategic decisions and attract discerning investors, showing that startups are being run with total focus on maximising their value.
Finally, there was a noticeable rise in alternative funding sources during this year, when traditional venture capital was more cautious. Early-stage startups tapped more into different venues such as crowdfunding, angel investing, and government grants.
IPO Markets
The number of IPOs on US exchanges and the proceeds raised in 2023 significantly surpassed the levels of 2022. Just in Q3 (of 2023), Instacart, Klaviyo, and Arm dominated the headlines, each raising over $500 million. Overall, the market was very selective, with Instacart and Klaviyo listed at discounts to their last valuations.
Global IPO volumes in 2023 fell by 8%, with proceeds down by 33% compared to 2022, indicating a recovering market. The year ended with 1,298 IPOs, raising US$123.2 billion.
Why is this relevant? IPO and M&A are the games that any VC is at. The activity level is an indication of exit probabilities on an investment risk assessment. Every time this market is down, VC's appetite for risk also decreases, resulting in more diligent investments or more liquid assets.
Fintech Startups
Despite a general decline in fintech funding in the early half of 2022, the sector continued to represent a significant portion of the unicorn companies, demonstrating resilience and potential for growth. Notably, 57% of VC-backed fintech companies are reported to have more than a year of cash reserves. Given the overall venture capital slowdown, this amazes me, suggesting that fintechs have been more successful than other tech sectors in extending their financial runway. I am trying to figure out what leads us here. However, some people attributed credit to these companies' significant fundraising success during the 2021 runup and their strategic cost-cutting measures.
It's interesting to watch the industry, that sees perhaps the biggest evaluation multiples, is building pressure in their runways. Managing cash flow is always challenging, but the overall industry continues to be resilient. Historically, these companies have learned that growth at any cost is unsustainable. Focusing on unit economics, profitability, and sustainable growth is crucial, especially in a tight funding environment.
This approach can be a role model for other sectors as they have managed to sustain and grow even more in tough market conditions.
As 2023 comes to a close, it's evident that the year has been marked by cautious pessimism amidst ongoing challenges. While not reaching the heights of 2021, the venture capital landscape showed resilience with steady investments in Q3 and a focus on emerging technologies like AI. I'm encouraged by the moves GPs take into their strategies to protect their portfolios and LPs. However, 2024 will be challenging for everyone in the markets, especially entrepreneurs.
Founders are increasingly educated on the importance of pivoting multiple fundraising strategies to navigate the unpredictability of current market dynamics. Looking into what I shared above, 2024 will continue to look deeper for new fundraising strategies to stand out or to be more creative. But about 2024, next week!