What is the Silver Lining for 2023 Venture Capital?

Last year, “plummeting” is probably the verb that was used the most to describe stocks, investments, morale, you name it. In short, 2022 has definitely not been kind to the tech industry.?

There has been talk of the toughest economic environment since the global financial crisis and venture capital has certainly felt this – 2022, investments in Europe amounted to just under $85 billion which is 18 percent less than the peak of around $104 billion in 2021.?

Nonetheless, taking into account current political circumstances and all the financial misgivings they entail, it is not completely groundless to argue that the situation, particularly in Europe as the epicenter of political unrest, may have one or the other silver lining once one takes a more optimistic approach in regard to what opportunities can be borne of this situation and also looks more closely at the startup developments happening despite the harsh environment.

In this article I aim to depict the situation with a few excerpts of the industry on an international scale and to show it as it is: very slow, but certainly not with a hopeless outlook – quite the opposite actually.?

General Outlook

German Startup Environment Hit Hard in 2022

In Europe, the industry environment cost at least 14,000 people their jobs at European tech firms, wiping out more than $400 billion in valuation. The German market felt the crisis harder than most, with investments falling from just under €19 billion last year to around €11.9 billion this year. Apart from the general unfavorables conditions for VC, the exorbitant amounts raked in during the previous year and the continuous – often FOMO driven and lavish – investing since 2015, in a way, led to the sober numbers the German tech scene is witnessing at the moment.?

It is true that German startups boomed during the pandemic. They also benefited a lot from the direly needed nationwide boost in digitisation the lockdown brought with it – prime examples being solutions in the areas of financial transactions, online shopping and food delivery. Investors were flush with cash thanks to low interest rates, which led to numerous lavish rounds of financing. But with the war in Ukraine, the weakening economy and the rise in interest rates, the market turned around eventually. Investors held back. Valuations of major startups plummeted, and companies who hadn’t even become profitable yet started cutting jobs in big numbers.

Moreover, the number of large financing rounds in Europe plummeted by more than $100 million. German unicorns also saw a sharp decline: While there were 105 new unicorns on the European market in 2021, there were only 31 this year by the end of October, including four German ones: tax startup Taxfix, sports app OneFootball, electronics rental company Grover and the gastronomy app Choco. Whether DeepL will reach unicorn status will be seen in 2023.

Southeast Asian VC is Flush but Reserved

Southeast Asian startups, like their other international counterparts, were enjoying the bubbly, loose pocket investment environment in 2021. However, the “era of easy money,” as Yinglan Tan, CEO and founding managing partner at Singapore-based Insignia Ventures Partners puts it, is now over for Southeast Asian startups as well.

Fact is, however, that there is money to invest. Southeast Asian VCs raised $151 billion in funds in the first three quarters of 2022. It is only that now VCs are looking more closely at where this money is to be deployed. The sluggish past year but also specific events factored into this decision.?

At the beginning of 2022, tech stocks tumbled due to bad earnings and rising interest rates. Moreover, the valuations of Southeast Asian tech giants have dropped drastically, with Grab dropping by 69% (formerly set at a $40 billion valuation) GoTo dropping by 75% (formerly $28 billion) and Sea Group now being valued at $30 billion (formerly $200 billion).

Events such as these in particular have led Southeast Asian venture capital investments to decrease by 25 - 30%.

With valuations dropping and companies like HappyFresh or Bananas announcing the end of operations either partially or fully, VC funds are now waiting it out to see which companies can weather this challenging environment unscathed before they invest more money in 2023.?

Companies Look to Alternative Funding

With VC funds drying up or not deploying the funds they have at their disposal, companies whose runway is slowly but surely becoming shorter are looking for alternatives. In cases like these it makes sense to look for funds outside the VC spectrum, such as bridge loans, structured equity, convertible notes and participating bonds.?

As an example, Gopuff, an American consumer goods and food delivery company has raised around $2.5 billion in convertible notes in the past two years?

For many companies this is a good move, especially taking into account that all the signs until now indicate that the current environment will remain the same for a bigger part of 2023, maybe longer.

What is the Silver Lining for 2023?

The sentence that comes to mind exists in many different variants: “Tough times create tough people,” “Discontinuity leads to opportunity,” or also (hold on to your seats) “Diamonds are formed under pressure.” While the last variant sounds like a Facebook post by that one motivated friend from high school who feels the need to inform everyone that he has taken up going to the gym twice a week, we feel it also applies well to the current state of venture capital.?

Why is that? Recession forces companies to be creative and to come up with solutions that can weather harsh environments. Especially companies that are being founded now, under circumstances where it is very difficult to amass funds, will learn to operate and thrive under very unfavourable macro-conditions (a Corona-plagued China, war in Europe, global supply chain issues, no funding).??

Current circumstances have scared away so-called “VC tourists.” This for one means that there is less money in circulation, but it also means that the existing money is flowing into highly operational companies, which is good news for the investors that remain, because it is easier to identify which companies put their money to good use.

All in all, the hope that many experts put into the current situation is the emergence of more strategic leadership and more robustness in newly formed companies but also existing companies.?

Business Excerpts?

DeepL to hit $1 Billion Valuation

Despite the tough environment, there are still companies making waves and raking in funds. Well-known, Cologne-based AI translation startup DeepL is closing in on a $100 million funding round led by Institutional Venture Partners from Silicon Valley. Should the deal go through, the company is rumored to hit a valuation north of $1 billion and would thereby become the first unicorn in its area.?

Further backers of the financing round – besides IVP – are Bessemer as well as European venture capitalist Atomico, as was reported by Business Insider. How many shares the companies will take over initially remained unclear. DeepL has not responded to any enquiries yet.

DeepL was launched in Cologne in 2017 and now employs around 400 people. The website deepl.com with its translation service is one of the hundred most frequently accessed sites worldwide. DeepL says it has achieved exceptional machine translation quality with improvements in neural network mathematics and methodology, and is up to six times more accurate than other providers.

Anyone who has ever used the service to translate a text will attest to the high level of quality. The only shortcoming of the tool is that it translates into “only” 29 languages. However, this might change with the new round of funding.

Getir Takeover of Gorilla Finalized

When it comes to embattled industries, the food and grocery delivery service is one of the hardest. The rise and fall of delivery service Gorillas has shown that well. The startup that was being called “One of Germany’s most sexy startups” a year and a half ago has now been bought by Getir, a rival company based in Turkey.?

The newly merged company is now said to be worth $7 billion. Getir sees the acquisition as an opportunity to gain a stronger presence in Europe.

To make the acquisition, Gorillas' owners will be paid primarily with Getir shares.

Delivery services boomed during the Corona-era lockdowns; Gorillas and other competitors also quickly achieved Unicorn status - but did not yet turn a profit. The industry remains highly competitive. Rising prices, high personnel costs and discount promotions are causing problems for providers and are repeatedly squeezing individual companies out of the market.

Getir was founded in 2015 and has also been active in Germany since 2021, although not primarily. Through the acquisition of Gorillas, the group is looking to gain a better foothold on the German market.

Why Are There No Unicorns on Amazon?

As we all know, a unicorn is a private startup that reaches a value of $ 1 billion before going public. So far, there is not a single one in the Amazon ecosystem worldwide. Could that change soon??

The online platform Shopify, under whose ecosystem six companies thus far have managed to achieve this remarkably high valuation, proves that the concept, first of all, exists but also works well. The companies in question are normally those that offer delivery services, advertising or consultancy to sellers that sell on the platform.

This case has not yet occurred with Amazon. Amazon startups have been rather unattractive to investors to date, due in part to Amazon itself, whose API created a rigid framework that limited the creativity of these startups.

The Amazon ecosystem is much more characterized by self-funded startups - often founded by experienced sellers - and a handful of companies that raised equity on their own. However, this came nowhere near US $1 billion.

That could soon change. Especially if you watch the development in Amazon Advertising and the growth of Amazon aggregators like Pattern and Assembly. Both companies have already surpassed the billion dollar mark by acquiring several successful brands and scaling them.

What does this development mean for consumers and for people selling on Amazon? On the one hand, Amazon sellers as well as their businesses could benefit from investments. For example, more funding would lead to more room for experimentation and expansion of tools as a result.?

On the other hand, the question arises whether so much investment is needed in this area at all? The focus of the companies in question, which up to now has been 100 percent on the sellers, would naturally also be directed toward the investors, who do not always necessarily act in the interest of the sellers.

Financing Round for Fashion Cloud

With $500 billion in annual sales, the fashion industry in Europe is going strong. Wholesalers – individuals or companies that resell already existing brands – account for 40 % of that revenue. However, the fashion industry in Europe is fragmented into many local and regional markets with a highly multifaceted supply chain that is already complicated to manage when it’s not being disrupted by war and pandemics.??

It is no wonder that companies like Fashion Cloud whose aim is to digitise this and simplify the supply chain are doing well in that environment. Fashion Cloud offers software solutions for product data management and order management for customers from the fashion wholesale sector.

Recently, the company closed a €25 million funding led by Verdane, funds they will use to further target their goals of “improving collaboration between retailers and brands around the world,” according to their company statement.

More specifically, the company intends to use the fresh capital to further develop the software it already offers. Above all, Fashion Cloud wants to focus on automated reorder recommendations. This will enable the connected retailers to fill their warehouses more efficiently.

Fashion Cloud was founded in 2015 and has now acquired more than 20,000 retailers and 600 brands as their customers.

Final Thoughts

Has 2022 been a miserable year for VC funding? Yes, there is no other way to describe it. Was it brought upon itself by an industry that, in the previous year, lavishly invested money left and right, without vetting the companies and their products in a manner that would have been appropriate? Possibly. Are there going to be positive learnings from all this? Yes, in fact, the learnings have already started.??

This can be seen by companies looking for alternative funding on their mission to prolong their runway, or in Southeast Asian VCs holding back their dry powder in order to see which companies weather Q1 2023 appropriately.?

Moreover, it is important to see that even though the situation is sluggish, it is not completely lost. Companies are still able to pull significant funding provided their product is performing. DeepL and Fashion Cloud are just two recent examples that show that investments will be deployed for products that perform well.?

It is also safe to assume that companies founded in this tough environment will be more strategic and robust in regard to their roadmap and their business in general.?