How many of my ten predictions, for VC in 2022, came true?

There are several things at the beginning of 2022 that no one would have quite predicted; a war breaking out, or the UK being on its third Prime Minister of the year, would have got you some long odds at the bookies.

I started the year making 10 predictions in VC and whilst it's fun to predict what's in store for the year ahead, it's always good to look back and analyse what came true, and what didn't. So here goes for me.. (link to 2022 predictions )

1) ?? Previously overlooked geographies will continue to rise sharply, just look at what happened in LATAM in 2021

It is not surprising that every region across the globe has not risen in 2022. It is, however, important to focus on the areas that have declined at the slowest rate, as this is where funds are deploying with more ascertain.

The data (PitchBook) shows the Middle East and Africa are declining at the slowest rate in 2022 from 2021 and are therefore geographies of interest. Africa's journey is particularly interesting, where funding tripled in 2021 and has not really seen a material drop off in 2022. A special shout out needs to go to the Central American region. Although its funding has nearly halved this year, it is showing a 571% increase in 2022 from 2020, which is the fastest growing region over the two year period.

? 2022 has shown a continued rise in previously overlooked Geographies.

2)??LPs getting involved in VC will diversify further - expect more pension funds and hedge funds, bringing more mega rounds and continued high valuations with it

It may come as no surprise that this in fact was an incorrect prediction. The number of investors into Venture Capital funds has fallen 45%, since its bubbly highs of 2021. VC is a risky asset class for LPs, and generally a 10-25% allocation is taken for private market portfolios. With other asset classes, such as the public markets, heavily down this year, LPs have hit pause on new funds, whilst assessing portfolio distribution.

I do believe, however, that early stage VC funds have the foundations to bring some of the best returns for LPs in the next decade.

? The number of LPs in VC funds have almost halved in 2022.

3) ?? More funding will be deployed in VC than ever before - 2021 was a record year for VC funding globally, but 2022 will top it as a result of the LP diversification

We have already established that every region has had lower funding in 2022 and therefore the VC market has not reached the (rather ridiculous) heights of 2021. In times like this, investors are reducing activity due to market uncertainty, which is understandable after the Russian invasion of Ukraine, sudden and high inflation in the world's largest economies, and the recovery following COVID-19.

However, this year has surpassed every other year on record and with the long term nature of Venture Capital investing and the volume of dry powder available at GP's disposal, VC will continue to be a significant asset class going forward.

? 2022 was the second highest year on record, but did not top the 2021 bubble.

4)??The rise of the?#DAO ?- DAO VCs will bring access to a wider group of people to investing in Venture Capital

The crypto winter is upon us, but some actual Blockchain use cases are beginning to form. A DAO (Decentralised Autonomous Organisation) is a structure where each member owns a stake and vote on every decision the organisation makes. DAOs effectively remove the need for centralised control, making decision-making decentralised and autonomous.?

2022 saw the launch of the first DAO VC , a $25m fund to invest in Web 3.0. The fund has over 150 voting members, all of whom are VCs and are rewarded on an individual basis, dependent on input and value added to the fund. The fund taps into an expansive network of expertise, while relying on decentralised technology and processes to govern its investment pipeline, diligence, and portfolio support functions.

This may seem like a lot of jargon and it is. But it's an interesting shake up of the structure of VC funds, which in the future could reduce the asset class' opaqueness and allow for more transparent access.

? The first DAO VC was launched in 2022.

5) ?? Customer and user experience will become the KPIs of focus, in a mindset switch by investors from quantity to quality?

The world of startups has changed significantly this year. In today’s world, it is not about scaling a startup as quickly as possible, at all costs, but scaling in a sustainable manner.

Startups of the last decade were focused on having a ‘growth at all costs’ attitude, in a bid to obtain market share as quickly as possible. Figuring out profitability always came later down the road, a mindset that involved a lot of investment upfront to acquire customers. This always resulted in a high CAC (Customer Acquisition Cost), which created difficulties in building a profitable company longer term.?

Investors want startups to focus on a path to profitability and this is driven by a business focusing on its Net Dollar Retention (NDR) and the quality of its customers, instead of Annual Recurring Revenue (ARR) and the quantity.

? VCs are now focusing on profitability and NDR.

6) ?? Emotional shake up of investing will occur, sectors such as climate, energy and sustainability will lead the way, ahead of more recent heavy hitters such as FinTech (BNPL) and last mile delivery

Climate investing is now not a choice - we are the first generation to really feel the effects of climate change, and the last generation that can do anything about it. PwC's State of Climate Tech 2022 report confirmed that more than one quarter of all VC funding is going to climate technology, with increased focus on technologies that have the most potential to cut emissions.

On the other hand, higher borrowing costs and slowing economies are putting 'buy now, pay later' (BNPL) services to the test. 2022 has shaken the BNPL market, with industry leaders such as Klarna having to take an 85% hit to its valuation. 2023 could see a significant increase in payment defaults, as the cost of living effects ramp up on consumers.

It seems investors and startups are still fighting to get our groceries delivered in seven minutes vs eight. The latest activity comes from Gorillas, as the company was acquired last week for $1.2bn, after raising more than $1.3bn since its inception two years ago and once being valued at $3bn.

? Climate is on the up, whilst BNPL and last mile delivery startups have suffered.

7) ?? More hardware companies will be backed, but with valuations impacted by their logistics abilities

There are certain parts to hardware investing that have seen activity increase in 2022, which are working against the 'downturn' narrative. To see material climate and impact changes, the World needs new hardware. A transition to newer, cleaner technologies, and climate hardware presents a range of interesting investment opportunities as a result.

Whilst market conditions remain tough, hardware investing in the climate and impact sector is smart business. It goes without saying that climate startups have advantages when it comes to attracting talent, customers and, as PwC's report outlines above, also capital. When focusing on the hardware segment, there is huge potential to back companies with lower ‘demand risk’, and this makes investment opportunities more ‘future proof’ than alternative segments in VC.

? Investors are adapting to hardware requiring more capital upfront and taking longer to realise returns, with the climate segment leading the way.

8) ?? TikTok will become the most utilised social advertising platform for D2C consumer brands, overtaking Facebook and Google

I am someone who gladly admits to not having a TikTok account. However, the numbers are frightening to what this app has achieved in a short space of time. This year, TikTok surpassed Google as the most popular website on the planet , with the app now having more than one billion users Worldwide. Just think of all that data.. and you wonder how that algorithm is so good?

Part of what makes TikTok better for businesses is that it?holds user attention . In the U.S., TikTok users spend an average of 95 minutes (1.5 hours) on the app EVERY day, compared to 35 minutes for Twitter, 31 minutes for Facebook, 30 minutes for Snapchat, and 29 minutes for Instagram.

In July, eMarketer released data that TikTok had surpassed Facebook, in terms of influencer marketing spend. The company has predicted that it will surpass YouTube within the next twelve months.

? TikTok is fast becoming the best ROI on advertising spend for businesses. It is not the most utilised yet, but it will be soon.

9) ?? Marketplaces will thrive! More vertical integration in the world of marketplaces will see greater ownership of the value chain and more enablement with other sectors

Marketplaces and the eCommerce ecosystem are becoming increasingly connected. As marketplaces evolve, 2022 trends have been to remove friction and unlock new markets in this ‘on–demand’ world we live in. In doing so, marketplaces are becoming a ‘full-stack’, vertically integrating, from shop front and transaction, to delivery and aftercare.

? Marketplace opportunities have come as a result of consolidating down the value chain.

10) ?? With $30bn invested globally into crypto in 2021, 2022 will see us identify the early significant players in the Web 3.0 space, but the sector overall will take longer to develop and catch on than first assumed

The winter eventually came for crypto and Web 3.0 in 2022, but for a while it was the only sector resisting. Though still in its infancy, Web 3.0 is rapidly gaining traction and there are certain companies that are developing the infrastructure required for the sector to rise.

Emergen Research has pulled the ten (above) fastest growing Web 3.0 companies, assessing businesses on revenue generation. According to the latest report published by the firm, the global?Web 3.0 market ?is expected to reach $82bn by 2030 and register a significant CAGR of 43.7%.?

? Web 3.0 will take a decade to be proven out but the infrastructure is coming.

If you're still reading by this point, I'm pretty impressed, or you must have a lot of free time on your hands. I would have taken seven out of ten at the start of the year, not bad when it comes to predictions. As mentioned at the beginning, there are a few things that not many would have predicted happening in 2022 and these have almost certainly had knock on effects to the activity we thought may happen.

There are a few areas in VC that I am particularly optimistic for in 2023 and a few that breathe a new light of uncertainty. Stay tuned over the next couple of weeks as I announce my top 10 predictions for VC in 2023!