The outlook for 2023: A founder’s perspective
The outlook for 2023: A founder’s perspective
Words Simon Lovick
January 10th 2023 / 8 min read
As 2022 came to a close, many were taking stock of the year that just passed—what may go down as one of the most challenging years on record in tech.
2023 remains equally hard to predict. For founders, this year presents both uncertainty and opportunity: no doubt a continuation of market chaos and fundraising drought, while also creating new and interesting opportunities to build and innovate.
While making predictions can be a futile enterprise, we have a good understanding of what the current landscape means for venture building. Speaking to a combination of founders (early stage to Series A) and our Operations team, here’s an overview of what we think will be some of 2023’s biggest challenges and opportunities for founders.
Confronting a cost of living crisis
Cost of living sky-rocketed over the latter half of 2022, creating an uncomfortable outlook for many in 2023. Customers are feeling the full force of the global economic crisis.
Certain founders may go out and create solutions to ease the financial squeeze on consumers; existing startups have an opportunity to innovate existing solutions to increase affordability and accessibility.
Richard Dana, founder of Tembo, is conscious of the impact of the rising cost of living. Tembo offers innovative new approaches to mortgages, helping home buyers to increase their borrowing budget in various ways. One of the biggest changes Richard saw in 2022 was a huge collapse in consumer confidence in the housing market.
Rather than viewing this as a challenge to their business model in 2023, Richard sees an opportunity to restore this confidence. People who could traditionally buy on their own now need more support, while schemes like Help To Buy have now ended: underlining the demand for additional lending support.
“We need to educate people that buying a home is a long term investment: it’s not like day trading. If you own a house for five years or more, you’re likely to make money; or at the very least, not lose it,” Richard says.
Furbnow founder Becky Lane sees a similar challenge around her business, which is creating a marketplace to connect renovators and people looking to retrofit their homes. Fundamentally, retrofitting is a costly endeavour, and has forced Becky to evaluate which market segment they are focused on. On the horizon, she’ll be looking at ways to integrate a financing product into the platform, to help them move into new, lower income markets.
Fundraising amid uncertainty
The fundraising landscape dried up towards the end of 2022. Going into 2023, startups looking to raise capital face a somewhat mixed outlook.
Given that many funds didn’t deploy much (if any) capital in the last quarter, there is a lot more dry powder than usual: over 2023, most funds will have a lot more capital to invest than usual. However, many startups delayed fundraising over the last few months, meaning a much larger number will be going out to raise this year. In sum—there’s a lot more capital, but a lot more competition.
One of the key challenges founders will have to face is a considerable knock to valuations. Just as we saw a number of large companies raising ‘down rounds’ in 2022, VCs will continue to take advantage of the market conditions to write cheques in exchange for larger chunks of equity. Camila Zattar, venture portfolio associate at Founders Factory, believes founders need to be far more flexible when thinking about funding this year.
Founders will know that they’re going to be excessively diluted if they raise a large round, so will therefore be drawn towards taking smaller rounds (likely driven by alternate funding sources) until they can raise at higher valuations again. Other founders will have to accept funding at far lower valuations.
“This creates a fundraising chasm: either you go for a large round and face excessive dilution, or you roll-up small VC investments with other different sources of funding to reach a lower level of financing,” Camila says.
Flexibility is key. Founders unwilling to see their stake excessively diluted should consider what is the minimum level of funding they need to help them hit certain milestones (e.g. if you need a product building, how much will it cost you to hire a CTO). Beyond this, they might create certain ‘stretch goals’— “If I raise more, then this is what I can do”.
Founders should also broaden the type of investors they are speaking to. Make sure you are networking well in advance of your raise, building relationships and rapport with investors before you need to ask them for money. Micro VCs will play a much bigger role here, as will angel investors. The latter in particular are much more relationship driven.
At the same time, tap up your existing investors. Most VCs will have follow-on funding in reserve for their portfolio: they already have skin in the game, so are more likely to support you. You might also want to speak to your current clients, who have first-hand validation of your business model and are therefore more likely to write you a cheque.
Pay particular attention to how you are selling your business too. It may be that you have to pivot your pitch: Web3 startups will have a particular challenge in emphasising the long term, stabilising benefits of crypto and blockchain technology. It’s been hammered home before, but showing your path to profitability is key. This doesn’t mean having an exact date when you’ll break even, but rather showing that profitability factors into your business model.
Hiring in a landscape of layoffs
2022 saw widespread layoffs in tech, with huge redundancies made at a number of the world’s biggest tech companies. These are highly likely to continue well into 2023.
Many startups will be looking to extend their runway longer than expected, and therefore may not be in a position to hire. For these companies, the lean startup mindset is key, understanding what is key to deliver your MVP, to start to get traction, so that you can raise.
For those who are in a position to hire, 2023 is promising. Larger tech companies might have once attracted top level talent with job security and top salaries: but with this incentive largely diminished, startups have an opportunity to attract brilliant talent. Raluca Ciobancan, head of talent at Founders Factory, has seen the talent pool widen, with those in it having a greater risk appetite than before.
A good place for founders to start is targeting layoff lists: these are databases of redundant employees from large tech companies, where talent has consented to their information being shared. Structured in terms of role, location, etc, founders can easily search people for specific roles and target them for new positions.
Founders should be aware of a number of things when reaching out to talent this year. While risk appetite may be higher, talent will be doing far more due diligence with regards to the type of company they’re going to work at: after all, they want reassurance of how reliable the role and the future of the company is. Founders or hiring managers should seek to assuage these fears.
And while top talent may need less convincing to join a startup than previously, it’s still a big leap. “Founders should sell the unique exposure that you offer new employees,” Raluca says. Things like the opportunities to reach far beyond your job description, or to see the real impact of your contribution at work.
Navigating new policy and regulation
Government activity can have a huge impact on the success of startups: navigating this is crucial for founders. Policy and regulation has a variety of impacts, from building public confidence to incentivising activity and investment.
One area that will see enhanced regulation in 2023 is crypto. The collapse of crypto exchange FTX was a huge impetus for regulation, with action needed to install stability and security in a market rocked by controversy. For many, this is controversial: crypto’s unregulated nature is part of the appeal of investing.
For Timur Csilik, founder of NFT valuation platform Nabu, regulation is overwhelmingly a good thing, restoring confidence for mainstream investors into crypto assets. “We’re going to accountancy firms, regulated entities, educating them why they need companies like us who can provide transparency into the NFT space,” Timur says.
Viroshan Naicker, who is currently building DeFi insurance startup Lime, agrees. “We’re not afraid of being regulated. We want to make things more transparent: FTX was the opposite of this.”
Meanwhile, the climate sector is struggling from a lack of regulation and policy to incentivise sufficient activity. Becky from Furbnow believes much more action is required in the UK to trigger the retrofitting revolution needed to meet emission targets. Current legislation lacks targets and delivery mechanisms; funding has little oversight, meaning capital is often going unspent; grant pots are constantly changing, creating confusion as to which homeowners, and for how much, are eligible.
Is 2023 a good year to build a startup?
2023 will come with a wave of fresh challenges for founders. The grim reality is that many will struggle to raise and burn through their runway, and ultimately fail. In a sense, this will underline which companies are built on firm foundations.
“The only companies that will survive are those that have a place in the world. It’s not enough to be good, you have to be the best,” says Timur.
In the face of a rising cost of living, there will be a much lower risk appetite to start a business. Founders (especially first time founders) will question how long they can survive on a founder’s salary, and may therefore prioritise higher, more stable income to ride out the next few years.
For those who are able and willing to take the risk of starting a business now, this is an opportunity to seize an advantage. “If you’re in that minority group who is willing to take on that risk when the majority aren't, you’ll come out the other side when investment goes up again with an MVP delivered, much lower competition, and a much better chance of raising.”
Those founders who do take the risk, and are able to navigate the storm of the next 12 to 18 months, will be reassured that the business they have built answers a real problem and offers a valuable solution.
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