What awaits the VC and Startup landscape in 2024? Here are our predictions.
1. Rethinking Success Metrics in 2024: Eyes On the Prize
When it comes to VC funds, we will see a market where the narrative is more focused on exits and distribution, as opposed to investment round valuations as a measure of success. The valuation that really matters is the one at exit – the rest are just artificial milestones to get there. But achieving good exits isn’t easy in this current climate, as many are currently discovering; 2023 may go down as one of the most challenging years for exit values. Investors must consider new and alternative exit paths including Private Equity acquisitions, which are becoming more common for VC-backed companies.
As investors need to embrace more pro-active exit strategies, this should also mean shorter times to exit, to the great relief of angel investors, who will hopefully see some liquidity back from early investments and will be able to return to higher levels of activity than seen in 2023. Angels play a fundamental role in a startup’s journey, backing entrepreneurs with little to go on, and driving exits as an industry is, we believe, key to maintaining this vital part of our funding ecosystem.
On the startup side, we predict the great return of the “Exit Slide” in pitch decks. Investors will expect entrepreneurs to have thought through their best suited funding path as well as potential exit scenarios, even at an early stage. After having seen timelines to exit stretch in the past 10 years, and the promise of a “secondary market” never really materialising, this will be a new must for investors when assessing deals.
2. AI's Reality Check: Moving Past the Peak Hype
2023 has undeniably been dominated by the hype surrounding AI, particularly generative AI. However, the route to AI transforming the global economy is filled with roadblocks, and next year AI is in for a reality check. Legal and ethical challenges (including EU’s upcoming AI regulation) accompanied by the server costs of running LLMs, is set to pose challenges for the startup landscape. Requirements around training data and transparency will add extra pressure and a compliance burden. Big players like Google may navigate this smoothly, but it's a potential challenge for startups with small cash buffers and typically very low legal and compliance budgets.
As gen AI becomes commoditised, we expect to see more companies creating value based on uniqueness/accessibility of data sets or ownership of the customer base or application forum. But what we are really excited about is how the savviest founders will harness the transformative power of AI within their business models and daily operations. Recognising the immense value of incorporating AI operationally, businesses can enhance efficiency exponentially and unlock new avenues for innovation within their existing activities, products and services. At the end of the day, startups are all about getting to product/market fit faster and cheaper than any competitor, whilst building a moat - and AI offers immense potential here. (Spoiler alert: this is what our portfolio work will be focused on and also what we will be looking for in our dealflow).
3. Next-Gen Family Office Leadership
The family office landscape has undergone substantial growth, evolving into a crucial capital source for founders and fund managers amidst the current market downturn. At the same time, we’re in the middle of the greatest intergenerational wealth transfer in history. This upcoming wave of next-gen family office leadership, particularly the value-driven millennials influenced by tech innovation, is poised to champion alternative investments. However, they will face the challenges of both serving the more traditional interests of the family, based typically on the origins of the wealth (i.e. industry, real estate etc.) and of convincing a more risk averse generation to participate in this asset class. We predict that these next-gen leaders will look for investment opportunities that can reconcile these intersecting interests, allocating funds to investment strategies focused on managing risk early, and most likely to specific verticals and industries.
4. Diversification in Funding Sources
Most founders dream of raising venture capital. The truth is that it can sometimes do more harm than good. In 2024 tech companies will be funded by a bigger mixture of capital sources, where VC will only be one of many. And raising VC funding should not be the goal, or celebrated as the achievement, despite what the headlines might have you believe. Building a successful business is the goal, and most founders are better off staying away from VC. In 2024 we hope to see founders educating themselves and actively seeking and leveraging alternative sources of capital. Those are the founders who stand to succeed long term.
5. The Return of the Savvy Business Builder
Finally, the tough economic and funding climate of 2023 has sparked a shift in the kind of entrepreneurs who will thrive, and this change will become even more apparent as 2024 progresses. It will be the end of the “lifestyle entrepreneur” era and the return of the savvy business builder, full of grit and resilience, coupled with commercial skills and market understanding. VC funding or not, these founders are on their own journeys and, undeterred by the 100 nos and tight purse strings, they will be the ones to build the businesses of tomorrow.
However an uncertain macro-climate also means that those with lower financial security or family wealth are less likely to start businesses, and this poses a real threat to the diversity and representation within new founders. If we don’t double down on our efforts to invest more in diverse founders, the industry could experience a major setback, after already a pretty flat development during 2023.
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With these predictions in mind, we cannot wait for the new year to start and the work to begin! We wish everyone a restful and relaxing time ahead, before what's sure to be another eventful year full of surprises.
/ Jessica Rameau & Evelina Anttila
