Written by: Fred Wilson, Founder, Union Square Ventures
Compiled by: Mary Liu, BitpushNews
I wanted to focus this post on the big picture of technology, startups, web3, and climate because that’s where I’m thinking right now.
I believe that at some point in the first half of 2023, as inflation continues to slow and economies continue to cool, central banks around the world will begin to unwind from the tightening policies they have been undertaking. Interest rates will level off in the first half of 2023, and I think a "soft landing" or very mild recession in 2023 is very likely.
Given this macro backdrop, what does this mean for technology, startups, and web3?
Tech giants will emerge from this downturn with leaner, more profitable businesses but with slower growth. They will be mature businesses but behave like the blue chips they once were. I think these companies, like Apple, Amazon (and possibly Google), will lead the way in seeing their stocks regain favor in the tech space. I'm hedging against Google because I believe the massive advances in AI/ML (artificial intelligence/machine learning) we're seeing now could threaten their core search business.
Startups are going to have a tough year in 2023. While many startups' cash burn rates have dropped significantly, most are still losing money and need to continue raising capital.
With most companies shying away from raising capital in the 2022 bear market, the market in 2023 will see a flood of startups seeking funding, and while there is a lot of venture capital sitting on the sidelines waiting to be deployed, VCs will be more selective and not as likely to Spending a lot of money on all the ideas like I did in years past.
Outstanding companies with product-market fit, positive unit economics and strong leadership teams will attract VCs, even though they will be in the "new normal" in terms of valuations. I believe the "new normal" is more or less where we were in 2015, when seed rounds were around $10 million, Series A rounds were around $15 million to $25 million, and Series B rounds were around $25 million to $5,000. Ten thousand US dollars, the upper limit of the growth round is 10 times the revenue. This new normal is going to result in a lot of flat or discount rounds, etc., which are all bad, but the worst ones are rounds with a lot of structure. I think founders, CEOs, and boards are likely to be pained by the new structural valuations (flat, discount, etc.).
But there are a large number of startups that haven’t truly found product market fit, haven’t created positive unit economics, and have unresolved issues within their founding and leadership teams. These startups will struggle to raise money at any valuation, and most will fail. This is already starting to happen, but with enough funding raised in 2021 and early 2022, these companies can survive for a while, but I think we will see a lot of these startups fail or be sold off in the first half of 2023.
While all of this sounds depressing and scary, I do think the startup sector will end the year off to a much better start. Good companies will get funded, bad companies will fail, and VCs will be back to competing with each other to win deals, which is exactly what founders have always wanted VCs to do.
I think web3 will behave similarly in some ways but different in others.
I think the large cap stocks in web3 (mainly BTC and ETH) will start to attract more investor interest and should do well in 2023. I personally am more optimistic about ETH because it has the best basic economic model among all web3 assets.
Like the broader startup world, web3 will experience various classifications in 2023. Projects and protocols that find product-market fit, have real token economics, and roll out new features quickly will attract new interest and increase valuations. But many web3 projects have yet to find product market fit, have weak or no token economics, and perform poorly, and I think the market will see many projects continue to struggle and fail in 2023.
There is currently greater suspense surrounding web3 than the broader startup and tech industry. Some entities are already insolvent but have not yet restructured. Some funds are currently in dire straits and may be forced into liquidation. These things will create continued selling pressure on web3 tokens through at least the first quarter of 2023 and possibly beyond.
While there is compelling value in web3, I don't believe it's safe to get into it now unless you have very strong funds and can afford to wait a long time.
USV has been actively investing in the climate sector over the past three years and now has two funds investing exclusively in the sector, but has largely been spared the carnage that has hit other parts of USV's portfolio. There's a lot of good news for the industry with the Inflation Reduction Act (IRA) of 2022, which will inject billions of dollars into the industry over the next decade. Many leading venture capital firms now have dedicated climate funds, and we are seeing significant funding available for climate startups with strong teams and novel approaches.
Last year I predicted that 2022 would be a big year for carbon credits, and while we saw a lot of growth in the market for these credits, especially among large tech companies, I was overly optimistic about the pace of market growth. That said, I think 2023 will bring more growth to this market, providing potential business models for the many new climate startups that VCs are currently funding.
We’re also seeing a steady stream of tech and entrepreneurial talent entering the climate space to find new problems to solve, make their jobs more meaningful, and find more job openings. I think 2023 is going to be a big year for this talent migration.
The pattern here is that 2023 will be a tough year for most, but those players that weather it should find themselves in a good position with leaner cost structures and less competition, The employer/employee dynamic is healthier, and those that survive will thrive in 2023.
So, to everyone reading this, happy 2023. Buckle up, hang in there, and keep your wits about you.
