Will the year 2023 be as sluggish as 2022 in regard to startup investments?

Will the year 2023 be as sluggish as 2022 in regard to startup investments?

Many experts seem to think that way and it does indeed make sense to tread carefully with remarks predicting that this year will present an upswing for companies looking for money. 

However, there are a few companies that have already managed to secure significant funding from VCs. How they did it? The old fashioned way: realistic goals and viable products.

PASQAL has shown that institutional funds are willing to invest as long as the product is promising. Maybe that will be the difference in 2023 as opposed to the years before: while 2021 was a party, and 2022 was the hangover, 2023 may just be the year where everything returns to normal, in a sense that the money (that is obviously there) will be invested – but this time more carefully. On top of that, there are a few markets opening up, markets like defence tech that were considered taboo before the global political situation are being seen as an, albeit risky, investment opportunity. 

So in this article I will focus on said companies and also will offer a general overview of the VC environment in the West and in Africa. As always, I invite you to read, respond and/or discuss any of the below topics. 

General Overview of the Current Venture Capital Environment

Rolling in the Deep Tech

The opinions on how deep tech made it through the 2022 slump differ just as much as the predictions of how investments in the sector will continue this year. On the one hand, high interest rates and the high amount of capital necessary for deep tech investments deterred many VCs from signing deals in 2022, leading to a drop of annual investments to $17 billion – around $5 billion less than the year before. On the other hand, the decrease is still a remarkable upswing from the years before 2021, where deeptech investments settled at $11.6 billion (2019) and $11.1 billion (2020).

Some niches in the deep tech sector have received notable recognition. Quantum computing saw three startups go public last year and another just recently closed a $100 million Series B funding round (more info on PASCAL’s deal below).

This shows to prove that VCs are indeed sitting on a lot of money they didn’t spend in 2022 and are now looking to deploy it on deep tech companies that are, firstly, realistic regarding their valuation and, secondly, are creating products that hold what they promise.

A positive sign for deep tech founders looking for money in 2023 is that the numbers show that, opposed to what contradicting voices may have said in the past, the capital and requirements that deep tech startups need to thrive are the same as other sectors. According to TechCrunch, the median deep tech startup takes about $115 million and 5.2 years to become a unicorn.

Investment in Defence Tech Is No Longer Taboo … Kind Of

The war in the Ukraine has been pushing VCs to reconsider their stance when it comes to funding defence tech startups. Before last year, investing in defence tech was a border no VC fund would cross, mainly due to ethical implications. This is now changing not only in VC, but also in the banking and private equity sector. To a certain degree that is.

There is an important distinction to be made between offensive and dual-use defence tech. Offensive products being those that are manufactured for the sole purpose of being used on the battlefield (so basically … offensive tech?) and dual-use products being those that have multiple purposes, not necessarily being military. As was the case before, startups specialised in only offensive products are not being touched by investors. A good example for dual use tech are reconnaissance drones that can also be used for sea search and recovery missions. 

That being said, it is very difficult for defence tech startups to raise money when they can’t communicate to potential investors where their focus lies. It is a different story, however, once they have already broken through with a defence product and are now working on ways to make this product more suitable for civilian purposes.  

Other challenges the sector faces are the long VC fund cycles (10 years until exit is too short for the defence tech) and a lack of later-stage investors.

Investing in defence tech is still very nichey, but it is happening nonetheless and also with significant amounts. Spotify founder Daniel Ek is a prime example, whose investment Fund Prima Materia dropped $100 million in a defence tech startup named Helsing.

African Startups Growth Continues

By surpassing the $4-5 billion mark for the first time this year, it is safe to say that African startups were not as heavily affected by the slow environment as the rest of the world. While it was predicted that African Startups would raise more than $6 billion this year, investments halted at $4.8-$5.4 billion. The reason why the amount of $6 billion was predicted was because more than half of this amount was raised in the first half of 2022. 

With South Africa, Nigeria, Egypt and Kenya bagging 75 % of the venture capital, further influential countries in the African startup scene are Ghana, Algeria, Tunisia and Senegal. 

The most funded sector in Africa is fintech (45%), followed by cleantech (18%), e/m/s commerce (13%), enterprise (11%) and mobility (4%) completing the top-five list. Big names in African fintech are Paystack, Flutterwave and M-Pesa.

While this is all around good news for Africa’s startup community, it is now up to the companies to invest that money effectively in order to keep the VC funds loose-pocketed. Moreover, we still have to see more investments stemming from African institutions. Most of the money provided comes from overseas, making African startups dependent on American and European money and investors that are not Africa-focused.

Business Excerpts

Stripe Wants to Go Public in the next 12 Months

The hottest news in fintech this month is how Stripe (when is the hottest news in fintech not about Stripe these days?) set itself a 12 month deadline to go public. This is an ambitious goal, even for a startup that is currently valued at $55 -  $60 billion. Stripe intends to go public either through direct listing or by pursuing a transaction on the private market.

That is however not the only thing that is keeping the payment startup in the centre of attention. It is rumoured that the company approached investors for a $2 billion funding round, which is supposedly intended to pay tax bills – not normally the pitch that gets investors to open their wallets. 

What’s more is that the valuation of the company sank by 30% since March 2021, but then again, name one company whose valuation didn’t sink last year. Especially in fintech, lows in valuation are currently commonplace and IPOs are far from sight, which makes Stripe’s announcement all the more intriguing. 

PASQAL Lands $100 Million Funding From International Investors 

The quantum computing startup founded by George Reymond and Alain Aspect recently raised one of Europe’s highest investment rounds ever. 

Led by Temasek, an institutional investor from Singapore, the series B funding round that clocked in at $100 million also saw participation from previous investors Quantonation, the Defense Innovation Fund, Daphni and Eni Next. New investors are the European Innovation Council Fund, Wa’ed Ventures and Bpifrance.

For those who are unfamiliar with the topic, quantum computing is like regular computing but with quantum processing technology. What happens exactly is that the processors in computers are not equipped with silicon as a superconducting material, but rather use single atoms that function as containers of quantum information, or qubits. The atoms are cooled down and held in place by lasers in order to be used as said containers, technology that was created by PASQAL founder Alain Aspect and which made him a nobel prize laureate.  

PASQAL is certainly not the first on the quantum computing market. IBM, as an example, released a 127-qubit processor last year but have failed to demonstrate anything with it PASQAL on the other hand have already run an algorithm for a customer using 70 qubits. 

The tech startup will use the money to double their headcount in order to increase the number of working qubits to 1000 from the previously mentioned 70. The current roadmap foresees two main products: a cloud-based “quantum-as-a-service” solution, and selling processors to companies.  

Welcome to the Jungle Lands $54 Million for Expansion

While we are on the topic of disruptive startups that are closing big deals, we can’t leave out Welcome to the Jungle. The French recruiting startup recently landed $54 million in Series C funding.  

Welcome to the Jungle sets up highly detailed profiles of the companies that are looking for employees, thereby making the companies more attractive to potential talent. The highly detailed page is then uploaded to Welcome to the Jungle’s board and can be browsed by people looking for jobs.

Since its founding in 2015, the company has grown substantially, with 3 million unique monthly visitors, 3000 clients and EUR 30 million in annual recurring revenue. Impressive numbers given the economic and political climate we have seen in the past seven years. 

The investors consist of new and old firms. Revaia, XAnge and Bpifrance’s Digital Ventures’ fund are three already existing investors, while blisce, Cipio Partners, Groupe ADP, Kostogri (which belongs to Nicolas Beraud, Betclic’s CEO) and RAISE Sherpas constitute the new investors. 

According to official statements made by the company, the money is going to be used for an expansion to the US. This would be the third expansion after Spain and the Czech Republic.

Daniel Ek Takes Responsibility For Job Cuts at Spotify

Tech layoffs continue, Spotify being the most recent company to announce that they will be cutting 500 more jobs – 6 % of Spotify’s global workforce. Founder Daniel Ek has taken full responsibility for this, stating that the reason for the cutback was that in 2022, the growth of Spotify “outpaced the revenue growth by 2X. That would have been unsustainable long-term in any climate, but with a challenging macro environment, it would be even more difficult to close the gap.” 

What this means in short is that Spotify was too ambitious, invested ahead of their revenue growth, failed hard in doing so, and now the employees are paying the price. 

The biggest investment that has yet  to reap rewards is the acquisition of podcasts for around EUR 1.11 billion that has, until now, returned only $200 million.

The other reason why Spotify now has to cut back is the same reason why the audio streaming company is so popular with its users: they refuse to raise their prices, whether the economy is good – as it was from their founding in 2011 until pre-Corona 2019 – or the economy and environment was suboptimal – the better part of the past three years. On the other hand, similar companies like Netflix have raised their prices six times in the same time period. One has to add at this point that it didn’t do them much good though – Netflix also had to cut down on 450 jobs in 2022.

Since Spotify presumably won’t be raising prices, the only viable option to appease shareholders would be to cut down their spending on non-profitable acquisitions of podcasts. The fact that they let Dawn Ostroff (Chief Content and Ad Business Officer since 2018) go is an indicator for this. Ostroff was a very strong supporter of investing in podcasts and was responsible for the investment of hundreds of millions of dollars that showed no return.

5 Freshly Formed Fintech Startups to Watch 

In our last article we talked about how the sluggish environment may give rise to a new batch of startups that bring with them the requirements to weather harsh conditions like scaling in a sector where no one will deploy funds.

Tapline

Tapline positions itself as a "digital funding marketplace." The concept of the company is the following: "We have experienced how challenging the fundraising process is for subscription based companies. That's why we started Tapline, where you can trade your recurring revenues for instant cash without being diluted or taking on debt."

Woolsocks

The Swiss startup Woolsocks is an allrounder when it comes to anything involving handling money (expenses, savings, income etc). A very handy feature is the cancellation of unwanted subscriptions with just one tap. Another neat feature is that Woolsocks relies on an extensive cashback program that helps users get money back. 

Maya

The Berlin-based company focuses on early-stage investments in, what they call, 'nature-based solutions'. Quote: "Our technology platform connects project developers with institutional investors on a single platform that digitises project origination, risk assessment and due diligence."

Qosty

Vienna-based FinTech Qosty focuses on mobile banking and budget planning. Their proposition: "All your accounts and transactions are clearly arranged in one app. Stay top informed and keep your finances under control!"

Tradants

As the name indicates, the startup focuses on playful trading. The company concept: "Our business is centred on transparency, equality and fairness, and we aim to develop innovative skill-gaming solutions set to transform the financial gaming industry on a global scale."

Outlook

Nonetheless, the startup environment is still feeling the hangover of the previous year. Layoffs are still happening as a result of failed management that was too focussed on “growth above all,” while they should have been focussing on increasing revenue sustainably, something Spotify’s Daniel Ek would attest to (and has).  

It’s too early to make any hasty assumptions as to whether this is the beginning of an upswing for 2023. What can be said for sure is that no year will be like 2021 any time soon, investors of all kinds have grown too cautious for that. Nonetheless, factors like the growth of the African startup environment, the funding of startups with sustainable products and realistic goals, as well as the founding of new startups despite the harsh environment feel like a breath of fresh air after a very stuffy 2022.