Ivan Malopinsky

Startup insights from investment outlooks, mid-2023

I’ve been reading investment outlook reports from various firms for a couple of years now. It’s been helpful for me as a founder, since subtle macroeconomic changes can significantly affect my business. Usually I read 15-20 reports* (from firms like Merrill, Vanguard, and Schwab) every summer and write a summary outlining common themes and thoughts. This year I decided to share my findings, so they can be useful to others.

Reviewing last year

In mid-2022, the economy turned a corner when interest rates started increasing. I was fundraising at the time and could sense a mood shift in meetings with investors. After reviewing recently published mid-2022 investment outlook reports, I found some common themes:

Months later, generative AI became huge (driven by ChatGPT) and interest rates blew past 4%. AI hype dominated the startup world while the rest of the economy kept getting battered by inflation and layoffs. Now, a year since, AI hype has subsided, interest rates are at the highest level in decades, and the finance industry is still reeling from massive bank failures. Things could be better.

Outlook in 2023

The 2023 reports seem more pragmatic than pessimistic to me. Several firms acknowledge a new economic cycle. There is no expectation of a return to 2021 or anything similar. The following are common themes I found shared across various reports, reflecting a subtle consensus.

In short, firms recommend predictable, profitable investments. The worst may be almost over, but the consensus seems to be that prior assumptions no longer apply and that the economy will have to go through an adjustment period.

Thoughts for startups

The reports acknowledge that smaller companies are going to struggle for the foreseeable future, which naturally includes most startups. It’s likely safe to say fundraising and sales will be tough for the next year, if not longer. For many companies, this means an “extinction event” is all but inevitable. Others will have to adapt to a changing environment.

Impact on fundraising

There are multiple factors that will make fundraising difficult in the short term. Investment firms advising a defensive approach (large caps, dividends, bonds), warnings of persistent high interest rates, and banks pulling back on lending all generate an unfavorable environment for small companies seeking venture funding. Many startups will also fundraise in the fall of 2023 following a difficult 12 months, which means investors will have their pick of investment opportunities. Cash and traction should be top priorities if possible.

Impact on opportunities

A few thoughts around opportunities, some tactical in nature:

Impact on teams

Startups found it increasingly difficult to compete with Big Tech over the last decade, as the latter offered stability and very lucrative compensation. Now, after the generative AI boom and huge layoffs in Big Tech, hiring for startups should be easier. Weakness in office demand and inflation contributing to high cost of living would imply continued remote work in cheap areas, which should help with stretching hiring budgets.

Moving on

After the shock of 2022, 2023 is looking like the beginning of a new harsh economic environment last seen over a decade ago. I’m optimistic about 2024 as the “turnaround” year, but it seems like most startups will struggle to survive until then. Here’s looking forward.

*: Reports from the following firms were used for this post: Lazard, Schwab, BlackRock, Vanguard, T. Rowe Price, Coutts, First Republic, Merrill, Capital Group, Commonwealth, Invesco, J.P. Morgan, Nuveen, Wells Fargo, LPL Financial, Citi, Julius Baer