It’s that time of year, traveling with family, trying to get mentally prepared for the next year, but alas, there are still a few days left of 2023. As I start to look back on the year that was, I review my notes from the major events of the year and try to find a singular theme that threads together all the forces that ripped through though the tech startup and VC ecosystem. Usually, it takes me a while to land on this unifying theme; for 2023, it was pretty easy.
Looking back on tech startups and venture capital for 2023, it can all be summed up with one famous line from Warren Buffett: “You only learn who has been swimming naked when the tide goes out.” It’s believed Buffett first uttered these words in 1992. Today 30 years later, these few simple words echo loudly.
For many years, it was high tide, and those high tides produced an incredible surge of entrepreneurship, new company formation, and public companies we may take for granted today. As the tide began to flow out in line with unprecedented rapid interest rate hikes from The Federal Reserve, Chairman Jerome Powell warned “There will be pain.” The receding tides left Silicon Valley’s two most “startup and VC friendly banks” insolvent, forcing the Fed to step in, reassure depositors their funds were safe, and brokered the sale of these assets to larger banks.
Interest rates and the change in business regime presented one major tide force, but there were other major forces at work, too.
- National prosecutors from the DOJ, the SEC, and various state governments aggressively brought fraudulent behavior in the startup tech sector into focus, laying down heavy charges, fines, and eventually prison sentences.
- Public market investors shed no tears as numerous startups that went IPO in the past few years (especially via SPAC) were pummeled to penny stocks, while private equity patiently waited for some public market price stability before preparing their well-timed buyout offers to clean shop inside companies that executed well on product innovation but less so on efficient business processes.
- The White House and Congress got much tougher on international business competitive strategy, placing restrictions and even outright bans on certain types of high-tech cross-border transactions, moves that even forced the hands of investment firms with arms in East Asia to sever ties.
- Last but not least, the tide really went out for large cap M&A prospects — less than a decade ago, Facebook purchased WhatsApp for roughly $20B; fast forward to today, and the DOJ swatted down Adobe’s proposed $20B takeover of Figma, putting a halt to the flow of nearly $30B in proceeds (merger was to be half in Adobe stock, which has shot up post-announcement) headed back to employees, shareholders, and the large underlying institutions that fund the venture capital ecosystem.
If you asked me when 2023 began, I’d have said that any tides that “go out” would be economically driven; now with 2023 behind us, I’ve learned the tidal forces can be diverse in nature — not just economic, but regulatory and political.
There are glimmers of hope for the future of tech startups. The continued rise of generative AI techniques and solutions are creating new opportunities all the way from the end-user to the infrastructure developers who want to build systems for generative AI to be properly deployed and used. Startups like Instacart and Klaviyo demonstrated that startups with base-level metrics “can” go public if they choose to do so. “The Magnificent 7” high-tech public companies soared in 2023, contributing nearly 70% of the total gains of the S&P 500 Index while also contributing significantly to AI tailwinds enjoyed by the startup sector. Depending on your point of view, global instability has turned “defense tech” into startup’s hottest market sector. Startups such as Coinbase, Airbnb, Uber, and DoorDash, among others, showed that not only is there ample room for massive consumer-facing startups, they all weathered the pandemic demand surge and regulatory uncertainty to find themselves in unique positions of strength as 2024 opens up.
The glimmers of hope for the future are, frankly, hard to focus on today with all of the serious distractions around us. Even though the pandemic is behind us, we are still dealing with the economic version of “long-Covid.” There is clearly a new financial regime that’s dominating market narratives, one that anticipates a future of higher rates, tighter liquidity, and significantly lower multiples. Tighter economic, uncertain domestic, and high-temperature geopolitical conditions have contributed to a further erosion of trust, a phenomenon that the startup ecosystem isn’t immune to. Conversations among startup board members that were tense in 2022 shifted into a new gear in 2023, and 2024 will no doubt see a continued march of private companies that will be exposed as swimming without bathing suits.
This is how I’ll remember 2023 in the world of tech startups and venture capital. Lots of upheaval, the tides going out, but new tides will eventually come in. And as I look to 2024, I have to remain optimistic. The founders we seek to back early rarely think about all of the things I’ve analyzed in this post; it just doesn’t occur to them versus their obsession with the thing they love. These are all big distractions, but as early-stage investors, we have to tune them out and focus on the founder, the person who can change the trajectory of the future. And for that optimism, I come back to the safety of Warren Buffett’s legendary wisdom for inspiration with the following quotes smashed together in a hopeful call for the new year. “American magic has always prevailed, and it will do so again… A simple rule dictates my buying: Be fearful when others are greedy, and be greedy when others are fearful; Uncertainty actually is the friend of the buyer of long-term values; The sillier the market’s behavior, the greater the opportunity for the businesslike investor; and The best way to think about investments is to be in a room with no one else and to just think. If that doesn’t work, nothing else is going to work.”
That all sounds like good advice for 2024, indeed.