2024. Insights & Predictions

We are definitely in the depths of winter right now. But winters don't last forever and as long as you can still see the path through the snow you will make it through to spring.

It has been one of the toughest years to raise capital, and to realise returns on past investments in living memory. Money was expensive in most of the world, pandemic recovery has been slow and those who have money chose to sit on it and let the interest work its magic, rather than sacrificing it on the altar of another unicorn.

If you are on either side of Private Markets, i.e. raising capital or investing, you are most likely happy to be kissing 2023 away. Here are some of my insights and predictions, on navigating this winter, and into 2024.

1/ The merger everyone missed

2/ Expensive money

3/ Survival of the Fittest

4/ Who will Invest in Europe

5/ Bull Run & the Death of Fiat

6/ War

The Merger Everyone Missed

There used to be 3 major risks associated with early-stage investing; 1. Ideation Risk, 2. Build Risk, 3. Go-to-Market Risk. These Risks defined the type of investors and rounds of venture investing;

Ideation Risk (Pre-Seed) - Is the idea solid? is the team strong enough? are the problem and solution obvious and significant enough? This is what I call a PowerPoint investing, or in its professional name: Pre-Seed. Pre-seed investors would back founders with little else than a good idea, and the notion they can execute it.

Build Risk (Seed)- Are we building the right technical solution? can the team overcome the technical challenges, do we have a clear roadmap and skills set to build? This would typically be a Seed investment risk. e.g. the idea has been validated, and now we need to invest in the solution.

Go-to-Market Risk (Series A)- Can we take our solution to market? How? Is the market adopting our solution? Our price point? This is typically a Series A risk for investors that are looking for validated, and built solutions that are ready to go to market and require capital to deepen the bridgehead.

What has happened in 2023 was the unnoticed merger between Seed and Series-A. While a pre-seed investor knows they are backing an idea at the very earliest of stages and bearing the maximum risk, the follow-on investors now want the business to be both substantially built, and in the market before putting more funds in. This meant many founders going for a classic Seed or Series A rounds often heard "it's too early for us" or "you need to be further along your roadmap". Early-stage investors now seek both a technical and a commercial validation before following up. And that creates problems.

The reality is that founders in 2024 need to make sure they are raising enough capital (be it in pre-seed or seed context) to take them through build and G2M before they can raise again.

This also means valuations at seed and Series A were lower than what founders got used to in the 2015-2020 run when money was cheap and unicorns were abundant.

Expensive Money

The relation between the "price" of money and the volumes of venture investing is something I addressed in another post earlier in the year, and is summarised in the chart below.

It takes a whole lecture in economics to explain the cost of money but let's focus on what every founder and investor must know;

An investment always has an alternative cost, sometimes referred to as opportunity cost. Meaning, it doesn't only need to yield a good return, but this return has to be better than other potential returns (compared with investing in other asset classes, or not investing at all).

While there is a fierce debate about the actual average return from investing in Venture Capital Funds it's safe to say it is somewhere between 5%-15% per year, on average, after 10 years. And the word average here is key. Because while some VC's return 15%, other return 5% and others don't return at all.

Now, when the Fed bank's interest is at 5.5% and in Europe it's about the same you get over 5% on your money just by waking up in the morning - rendering most venture investments obsolete. So, as long as money remains expensive, there will be low investor appetite in venture as an asset class.

Money is predicted to remain above 5% at least until Q4 2024 so we are up for another uphill fight of the fittest.

Survival of the Fittest

True, Herbert Spencer coined this phrase nearly 200 years ago - but it is of a special relevance for the venture space in 2024. Survival of the Fittest is a concept that relies on 2 prerequisite conditions;

1. Scarcity - There is a limited supply of a needed resource. Scarcity means demand outstrips supply and some players will not get enough to survive.

2. Competition - There are multiple players competing for the same, scarce resource. These players each have different strengths, weaknesses, talents and handicaps.

So, who is the fittest? The fittest is the player that is both lean and resourceful. A player that is both strong and knows how to conserve energy. What does it mean in venture? 3 things;

1. Lean - keep whatever cash you have for as long as you can

2. Aggressive - spend your money in a way that gets results

3. Attractive - if you can be lean, and still get results - talk about it and use media to impress and attract partners, clients and investors

Capital will remain in scarce supply in 2024, regardless of what people may say (bull run). We are looking at another lean year, at least until the autumn. In hostile environments it is often not the best, most needed, smartest or prettiest that survives - it is almost always the fittest. The fittest companies will raise in 2024.

Stay fit.

Who will Invest in Europe?

Europe is being left out. Years of conflicting and incongruent political and economic policies; liberal openness on the one hand combined with a dictator-fetish on the other left Europe cold, poor, isolated and unattractive.

Europe wrote strict human-rights laws and policies (data protection, money laundering and employment to name a few) that have made it increasingly hard for domestic companies to flourish. But at the same time, Europe was happily buying from and trading with rising giants that cared little for these same sake ideologies. Economies that are not subject to the laws of democracy, fair competition, fair employment and money traceability can grow faster than ones that do, but isolated they will soon reach capacity and begin to fail (like the USSR did). Giants like Russia, China, the Arabic-peninsula kingdoms and Iran have all openly rejected the liberal, human-centric ideas of Europe and this enabled them to grow rapidly, while European companies struggled.

The problem Europe now face is that it allowed competing ideologies to grow and expand and at the same time, failed to isolate them

The problem Europe now face is that it allowed competing ideologies to grow and expand and at the same time, failed to isolate them. Creating a clear lose-win imbalance. Not only were they not isolated, they were being rewarded. Major international events like FIFA's world cup, Formula 1 races and others were taken there, further boosting their economies at the expense of Europe.

However, there was one small upside to this Eastwardly openness - it allowed capital to flow back into Europe creating the impression that things aren't as bad as they are. In reality, Capital raised from non-capitalist, non-democratic sources is bad capital and will come back to bite. Now, major European banks and other social, political, cultural institutions are owned by non-European, non-democratic stakeholders and to make things worse - these very same stakeholders seem to lose appetite in Europe altogether. Did somebody say dump?

To the West, America is facing many of the same challenges but with a far stronger domestic economy, and with the renewed interest in both fossil fuels and the business of war, America will have sufficient capital to look after its own domestic issues and will seek to do so as a priority - before investing abroad.

Warning: European (UK included) startups will find it increasingly hard to raise capital in 2024, as more Middle East and Asian investors look to invest in their own domestic regions and America too, focused on domestic recovery.

Bull Run & the Death of Fiat

Crypto Bull Run predictions are rife in the media, from the usual suspects like CoinDesk and Cointelegraph through to more established outlets like 彭博资讯 (https://www.bloomberg.com/news/videos/2023-12-19/bitcoin-will-go-on-bull-run-in-2024-saylor-says-video ) it seems to be the talk of the town. But is a bull-run always a good thing?

Sure, for it's investor it is. At least in the short-term. However a Crypto bull-run is an indicator for Fiat instability and an overall economic decline so news may not be so good after all.

To-date, Crypto value was driven by exotic speculants and people / institutions with an ideology of turning the current state of affairs on its head. As more regulation comes in the less exotic Crypto will be, and the more traditional investors it will attract. However, as always the last to join will be the heaviest players - the insurance and pension funds, government and local authorities and social services.

As Fiat currencies languish and Crypto strengthens there may be a chasm of illiquidity for those who need it most. How our society-essential services like education, transportation, welfare, health-care and others will operate in a world that has all but gone Web3, leaving Fiat money unavailable, or worthless?

The most vulnerable of our society, and the most critical of our services are not ready to go Web3, and may not be for a decade, so how we manage this staged-adoption will define how our society emerges if it ever does, from this 4th revolution.

War

War is a Racket, is the title of a famous book by US General Smedley Butler that positions war, at least economically speaking, as a parasite on society; sucking vital resources out, and leaving nothing but a trail of destruction and poison in its wake.

We do have a lot of it though. The war in Ukraine is said to have depleted NATO's armament's and ammunition reserves, and the War in Israel is doing the same to the US's arsenal of artillery shells, aircraft munition and even standard 0.56 bullets.

The threat of further conflicts in Lebanon, Iran, and the far east adds more demand to these strained supplies and so replenishing war supplies is going to be, for better or worse, a major driver of economic prosperity in the coming year, and possibly the next decade.

War may be a racket, with typically far few winners than losers but in the process it will create tens of thousands of jobs from manufacturing to shipping, technology to defence contracts and may just be that thing that keeps the west in the economic game for stability and democracy.

Prediction: Defence-tech and manufacturing will raise a lot of capital in 2024.

Summary

I believe anyone looking to invest or raise equity-capital in the coming year, will face a lot of the same we have seen in 2023, with a mixture of newer challenges and opportunities created by new, emerging circumstances, in particular;

1. The requirement to go from pre-seed to post-revenue in a singe raise
2. Interest rates remain high (>5%) for most of the year
3. Emerging markets slowing down, inbound capital declines
4. European markets will see increasing illiquidity
5. Crypto Bull Run may leave key stakeholders out-of-pocket
6. War will drive majority of economic growth

In 12 months or so, I will either be vindicated, or forced to eat my own hat. Surely, I will get some of these predictions wrong, but on the whole this is my best advice / warnings for the coming year.

We are not out of the winter yet, so stay warm, and protect your pantries!

Merry Christmas,

Barak. Managing Partner at DR-Ventures