Investors say web3 and hype are in for 2023, high valuations are out — maybe?

This last year has been tumultuous for venture capitalists, to say the least. The ecosystem watched startup funding dry up, held its breath as a $32 billion venture-backed company evaporated almost overnight, and witnessed one of the most all-time great startup acquisitions.

Did you hear someone yell “bingo?” Probably not. It’s unlikely that many investors would have come close to predicting what would happen in 2022. But hey, there’s always next year.

It looks like we are entering another interesting and tumultuous year: the crypto market is hanging by a thread; everyone watches with popcorn in hand to see which unicorn will be the next to fall; and the hype around AI continues to grow.

Some think 2023 will just be the start of a winter of risk and an overall economic recession, while others think we could see some stabilization as things return to normal by the middle of the year. But who is that to say?

To find out how investors view the year ahead and what they expect, we asked over 35 investors to share their thoughts. Here is a selection of their answers, slightly edited for clarity.

What is the impact of the current economic climate on your deployment strategy for next year?

US-based early-stage investor: My goal is to deploy the same amount every year, but the climate has led to much less exciting corporate/founder fundraising, so I’ll probably deploy 20-30% of what I want.

Bruce Hamilton, Founder, Mech Ventures: We plan to reduce the size of our checks so that we can double our number of investments from 75 to 140.

Damien Steel, Managing Partner, OMERS Ventures: We believe there will be incredible investment opportunities available over the next few years and we are excited to continue the same pace of rollout that we have had in the past. I expect international funding in Europe to slow in the coming year as GPs come under pressure. We see this as a great leaning opportunity.

California-based VC: New deployments have stopped for us and the remaining funds are being directed to follow-on cycles for our existing portfolio.

Ba Minuzzi, Founder and CEO, UMANA House of Funds: The current economic climate has had a massive positive impact on our deployment strategy. I’m excited for the first quarter of 2023 and all of 2023 for the opportunities ahead of us. The end of 2022 was a big wake-up call for founders. It’s time to be disciplined with the burn and very creative with the growth. Times of scarcity create the best founders.

Dave DeWalt, Founder, MD and CEO, NightDragon: We will not change our deployment strategy much despite the macro conditions. There are several reasons for this, most of which are rooted in the continued importance and investment in our core cybersecurity, safety, security and privacy market category.

We see a huge market opportunity in this space, which has an estimated TAM of $400 billion. This opportunity has remained strong and extensive, even when the economy as a whole is struggling, as e-budgets have remained highly resilient despite corporate budget cuts in other budget areas. For example, in a recent survey of CISOs in our advisor community, 66% said they expect their cyber budgets to increase in 2023.

Innovation is also always in demand beyond what is available today as the threat environment worsens globally. Each of these factors gives us confidence in continuing to invest and deliver results for our LPs.

Ben Miller, Co-Founder, Fundrise: The economic climate will deteriorate before it improves. Although the financial economy has already been reassessed, with multiples returning to historical norms, the real economy will be the next to decline. This will reduce growth rates or even reduce earnings, amplifying the compression of valuations even more than what we have seen so far.

We are responding to these circumstances with a new solution: offering uncapped SAFEs to the most promising mid-stage and late-stage companies. While SAFEs are traditionally used for start-ups, we believe founders will be very receptive to expanding their leads with the fastest, least frictional investment solution available on the market.

Dave Zilberman, General Partner, Norwest Venture Partners: Ignoring the macroeconomic climate would be unwise. As such, given that we are multi-stage investors, we see the current market as an opportunity to overweight early-stage investments at the seed and Series A stages.

Economic headwinds will not preclude the need for more development solutions; developers support the basis of competition in a digital world. As developer productivity and efficiency will be of even greater importance, solutions with a clear ROI will excel.

What percentage of unicorns aren’t actually worth $1 billion right now? How many of them do you think will fail in 2023?

Kirby Winfield, Founding General Partner, Ascend VC: Must be like 80% not worth $1 billion anymore if you use public market comps. I think maybe 5-10% will fail in 2023, but maybe 40% by 2025.

Ba Minuzzi, Founder and CEO, UMANA House of Funds: We kicked off 2022 with five portfolio companies that had “unicorn status” and two of them have already lost that status. I believe this data is indicative of the overall theme – that two out of five unicorns will lose, or have lost, their $1 billion valuation. I see this trend continuing into 2023.

Harley Miller, Founder and Managing Partner, Left Lane Capital: Up to a third, I would say, are worth significantly less than that, especially for companies with paper valuations between $1 billion and $2 billion. Businesses with high burnout rates and a structurally unsound unit economy will suffer the most (eg fast commercial delivery). It’s not just about whether they’ll still have “unicorn status,” but rather whether they’ll be fundable, at any value, period.