2023 outlook for start-up and early stage investments

The outlook for start-ups and early stage investments in 2023 is expected to be impacted by the ongoing geopolitical tensions and economic challenges of 2022. This year saw the invasion of Ukraine by Russia and a rise in energy prices that led to high levels of inflation. As a result, central banks raised interest rates multiple times, leading to a 20% drop in the S&P 500 and pushing it into bear market territory. The number of initial public offerings (IPOs) also decreased significantly, falling by 45%, and the amount of money raised through these offerings dropped by 61% compared to 2021.

This challenging economic environment has affected private companies, with the availability of cheap money impacting their market as well. According to Crunchbase, venture and growth investors slowed their pace of investment as the decline in the public market continued into the third quarter of 2022. Valuations have suffered, VCs have become more selective, and sophisticated investors are more risk averse.

Looking ahead to 2023, it is expected that central banks will continue to raise interest rates in an effort to curb inflation, potentially resulting in a global recession. This pressure on financial markets is likely to create further volatility and uncertainty, making investors nervous about predicting the future value of their investments. With future inflation affecting the present value of a company's future cash flows, investors may be less likely to invest in companies at the same valuations as they would in a lower inflationary period.

As a result, start-ups have already begun raising new capital at lower valuations than in their previous financing rounds, and this trend is expected to continue in 2023. Many of these companies have committed to reducing their cash burn rate, allowing them to extend their financial runway further into the future. However, with less capital available for start-ups, there may be less aggressive growth, as companies need to focus on capital-efficient growth instead. Failing to do so may make it difficult for them to raise capital in the future.

Late and early stage investments are also expected to decline, with investments in venture-backed companies down 63% and 39% year on year, respectively. While seed stage investments also saw a decline, it was the least affected in the current funding environment, and this trend is likely to continue into 2023.

Investors are returning to more thorough diligence and are valuing companies that can demonstrate an ability to achieve growth with limited resources. Founders will need to focus on their products and create solutions for problems that people are willing to pay for, spending only on what is necessary.

Despite these challenges, it is important to note that some of the most successful and financially rewarding start-ups have emerged during economic downturns, such as the last recession in 2008. Entrepreneurs undeterred by macro conditions will continue to build companies for the future.

PGA's sectors to watch in 2023 include cleantech, AI, fintech, and health tech.