It might only be the second of 12 months in 2023, but some issues from 2022 have spilt into this new year.
Slowdown of VC funding.
Global economic climate.
War.
Inflation.
Rise of interest rates.
Resurgence of COVID-19 in certain locations.
These concerns are unwelcome, and unpalatable and may be affecting the hope of normalcy and financial progress in the African and, indeed, the global start-up ecosystem.
One of the recurring predictions on the VC landscape (see here) is “there is going to be less VC money available for African start-ups.” This may or may not be due to a shift in focus, among other factors.
Valuable insights from the Africa Financial Industry Summit revealed “the current investment environment is characterized by a stronger focus on unit economics and the ability of start-ups to control and manage their cash burn. Investors now require clear visibility on when a start-up will break even and be profitable in a sustainable way, with a maximum time frame of 18 months. This shift in focus means that start-ups must now be more strategic in their use of capital and may need to adjust their business models to achieve profitability within a shorter time frame.”
It is no secret that the venture capital industry is like a human being in terms of adapting to changing circumstances. In so doing, this can lead to business innovation.
Besides the slowdown in VC funding and a shift in its focus, five other trends might also characterize the VC landscape this year, according to Coresignal, an online data company. They are:
Alternative data: These deviate from traditional data that investors can use to determine companies who need their funds and arrive at informed decisions—social media, credit cards, online vacancies’ posts, etc. Alternative data not only reveal vital information about start-ups but also fit into the changing landscape of VC and the world at large.
Sustainable investing: This type of investing has gained momentum over the last few years (and the trend is likely to continue) because it goes beyond profit. Investors are focusing on companies that tackle environmental concerns, health issues and positively impact globally in order to create a better world for all.
Automation & technology adaptation: The tech industry (e.g. FinTech) will always feature in VC investments because of the constant advancements in technology. Technology gives people more time, remote work/learning, efficiency, better communication channels, etc.
Portfolio diversification: This portfolio diversification tends more towards the start-ups’ valuation instead of being in different industries. Many VCs diversify their portfolios by investing in both companies valued at $1 billion and those that are much less. Both companies can coexist in a portfolio and the investors can still find success.
Cryptocurrency: Like alternative data, cryptocurrency offers VCs an alternative trading approach. Unlike traditional investing, it’s not as regulated. Cryptocurrency uses an initial coin offering (ICO) that allows companies to raise funds via a digital coin. This technique has found a home with both VCs and companies alike looking to be more flexible while investing or finding funds, respectively.
One more trend before closing comes from South Africa’s Bizcommunity. It says, “The biggest trend in the local start-up scene in 2023 is going to be the rise of venture builders (VBs) – companies that literally build other companies. . .Start-ups fail for two reasons: a lack of mentorships, and a lack of funding. VCs give funding, but no mentorship. Incubators give mentorship, but no funding. VBs bridge the gap by getting hands-on and dirty with the businesses they invest in, which gives them a far greater chance of succeeding—and that’s exactly what South Africa needs right now as we look to build the economy and grow employment.”
2023 is shaping up to be an interesting year.
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