The startup ecosystem is constantly changing, and 2023 definitely holds some big challenges and possibilities for the future. We will jump into the top trends shaping the businesses, especially startups’ future in 2023.
Startup landscape around the word
Not too long ago, before the introduction of startups, business used to be a lot simpler than it is today. It was just about creating the products and services, making sales, and investing that money in the company’s growth to create more products and services. Then start this cycle over and over again.
So, the growth process was reliable, predictable, and even more manageable than it is today.
Nowadays, business works differently in the startup world. Product, sales, and profit can be replaced by venture capital. The research found that 46% of venture capitalists have funded startups without being profitable previously, hoping that these startups will be successful in the long run.
In several cases, investors fund innovative startups if they recognize they have a growth potential to become a scalable business. This decision can benefit them in the long run despite the more significant risks, as the potential rewards can also be substantial.
But what are the odds of investing in a startup that will be a profitable business in the future?
Generally, half of the startups fail in the first five years, and only 40% of the startups will turn profitable from those that survive. Statistics show that startups take an average of 3-4 years to become profitable, while the odds of becoming unicorn companies is approx. 1%.
Why do investors invest in loss-making startups?
Thinking logically, people would think after reviewing the statistics that only those startup businesses that survive longer manage to become profitable and have a strong business model. And yet, the startup trends showed that investors are paying billions to loss-making startups.
According to a market research platform, Tracxn, only 17 out of 80 unicorns in India are turned into profitable. There might be different motives why investors keep funding startups that did not turn into profitable businesses.
Investing in a well-known brand already established in the market can be a good investment strategy. Even if the startup is currently in a loss-making position, selling products and services in a growing market. It is because the startup has already created a brand that possesses a valuable asset to gain investors’ and users’ trust (Uber and Zomato, for example).
Created an extensive user base
This can be especially key in the case of B2C startups when the investors are focusing on growth rather than profitability. A large user base has many advantages; it contributes to brand awareness, help to generate a buzz around the brand, and provides valuable insights about user patterns.
In a nutshell, it can lead to more users and, ultimately, more revenue. While building an extensive user base is crucial for the success of a B2C startup, taking an overly aggressive approach and offering too low prices to attract more users can result in a loss-making operation.
One per ten rule
Investing in ten startups and expecting only one to be successful is a common approach. However, it is essential to consider the amount of time required to determine which startup will be the winner and how to identify the ones that do not have the same business potential.
The question is, how do you make these decisions? Is there a predefined timeline for when these decisions should be made? Ultimately, the success of this approach depends on the strategy, accurate information, and available funds.
Trends show that investors can keep investing if the startup shows promising growth potential that can attract interest from a larger company (M&A), or the option of an Initial public offering (IPO) can be a driving factor. In such cases, there is a possibility that they can realize a substantial profit on these deals, and they do not want to quit before it.
However, several market factors can affect such a transaction. So, there is never a guarantee that an M&A or IPO deal will occur in the world of startups.
Top startup trends in 2023
Considering the top trends and the health of the global economy, the question is whether it is still sustainable that investors will continue funding the loss-making businesses. There are still rumors about the potential future layoffs, and most companies already decreased their annual revenue projections for 2023.
These trends significantly impact the overall financial performance of the startups. It also affects the investors’ willingness to further invest in startups that are still in a loss-making position. There are already slight changes in the trends of raising money in the startup world.
Swift from growth to profitability
Acquiring funds is more challenging than it was before. Compared to a couple of years ago, vision and growth potential were the critical factors in raising money. When the capital was cheap, the main focus of tech startups was on achieving Product-market fit (PMF) and establishing a massive user base.
However, investors now have different demands due to the current trends and higher interest rates. Specifically, they emphasize the importance of cost discipline, return on investment (ROI), and profitability. For a startup company to succeed nowadays, it goes beyond just having a PMF.
Dropped and slower access to venture capital
According to a report by Crunchbase, global venture funding was down 35% in 2022 compared to 2021.
One of the most affected regions is Latin America, where startup funding declined by 79% in 2022 compared to the previous record year. There were already signs of a decline in startup funding in North America in the second quarter of 2022.
The reduction of funding peaked in the last quarter of 2022; for instance – the investments in North American startups experienced a decline of 63% in the last quarter of 2022 compared to the same period in the previous year.
The slowdown of the venture capital mainly affects those growth stage companies, which already had a Series B and Series C investment. Their valuation was way too optimistic compared to the business’s progress.
Securing pre-seed or seed funding has also become more challenging. So it is more important than ever to have a solid business model and reach milestones before pitching to the possible investor.
The funding opportunities are less, and the process can become slower. There might be more due diligence, and investors may want to dig into the company’s figures in more detail.
Although slowing the funding might cause problems for companies running out of money, it can also be good. The slowdown in venture capital activity can provide more time for the startup to focus on business fundamentals.
Despite the slowing of fundraising, the market experienced a 116% increase in exits and M&A activities. While many startups may face cash problems currently, the statistics show that it can also be an opportunity for investors and companies to purchase startups at a discounted price.
Higher failure rates and less successful startups
As per Forbes’ study, once a startup reaches a Series B or Series C round, it will last for approximately 1,5 to 2 years before new capital is needed.
If the current economic trends do not improve, many startups may be forced to layoff employees or run out of cash before becoming profitable or receiving another round of funds.
Expansion of artificial intelligence-related businesses
Fundraising might be slower, but it does not mean that it will stop. According to GlobalData’s information, AI startups raised over $50 billion in venture capital funding in 2022.
Although the closure of Silicon Valley Bank may cause challenges for business loans, venture capitalists consider AI as the “new internet”. While the most reputable AI-powered platform reached Series A, B, or C funding, most are in their early phases, seeking seed or pre-seed funding.
There is already some exciting startup that has started the implementation of AI tools in various industries. One good example is Caktus AI, whose mission is to transform education with AI-based tools.
There are already some remarkable funding rounds and unicorn births in Q1 of 2023. Even though AI startups are attracting significant funding and capturing global attention, the overall investment activity in the AI industry could not avoid the challenges of the broader venture landscape.
Related post: AI Startups Shaping A New Era Of Possibilities
Even though the conditions to acquire funding from investors might change, raising capital is still possible.
One of the most crucial aspects of a proper fundraising strategy today is to keep tracking the changing demands of investors. This includes understanding what types of businesses and industries investors are currently interested in and what attributes they seek in a potential investment opportunity.
Prioritizing cost-effectiveness and profitability over fast-paced growth can be a good start to deal with current uncertainty and changed investor demands.