It doesn’t take a crystal ball (or any other kind of magical paraphernalia) to see that 2023 is going to be a challenging year for businesses. A global recession is on the horizon, though the full extent of the scale and length of it is still unknown.
Tech in many ways is the first industry experiencing the impact of what’s to come. The news has been overrun with announcements of layoffs, hiring freezes, and drops in investments and funding. Financial commentators are sounding the alarm bells , saying that we’re headed for a tech bubble burst like those in 2000 and 2008; that companies should hunker down and prepare for the worst.
We all need to take a deep breath and a step back: There are plenty of current indicators we can look at to see how 2023 is going to play out. And—get ready to exhale that inhale—it’s not all bad news.
The differences between 2008 and 2023
To really understand what’s to come, we need to see how the sector has changed over the last 15 years. In 2008, startups predominantly focused on consumer-facing hospitality or travel platforms and apps, and some small areas of fintech. But today, tech permeates every industry, and investment levels and valuations have skyrocketed beyond anyone’s imagination back in the 2000s.
In contrast, investment levels and valuations in the first quarter of 2022 alone were nearly six times greater than those in the entirety of 2007.
Additionally, funding for tech startups is no longer limited to venture capital like it was in 2008. When these institutions crashed due to the financial crisis, startups crashed with them and this domino effect made recovery nearly impossible. Today, founders have access to a rapidly expanding market of alternative financing options and traditional financing—like getting a loan from a bank—is a much more accessible option than in 2008 (though not always with great terms).
Suffice to say: the 2008 recession is not a good indicator of what the 2023 downturn will look like, nor should companies use it as a roadmap to operate their businesses this year.
What companies should expect in the year ahead
So the 2023 downturn will not look like the 2008 one—but what trends will we see emerge this year? Here are a few crucial ones:
VC funding will retreat and valuations will fall
We saw the beginnings of this in 2022, but in 2023 venture capital funding will continue to dwindle and company valuations will fall accordingly. Availability of VC as an option to new startups will also diminish. Profitability will eclipse growth as the primary set of metrics investors will use to decide on who to allocate capital to.
For founders, this means that not only will the barriers to access VC capital become more stringent, but they will need to give up much more of their equity in order to close VC-backed funding rounds.
More established startups will continue to pursue VC funding, and receive it, but early-stage startups with solid foundations will pursue more alternative financing solutions to retain a bigger stake in and more control of their company.
Alt finance will continue to grow
With the stricter and less-attractive terms of VC backing that will emerge in 2023, alternative financing and other non-traditional forms of debt are going to play a much larger role in the growth of startups this year. Within the next decade, we will most likely see a new generation of startups who have reached their maturity through alt-finance over VC funding.
Alternative financing also allows companies to withdraw smaller amounts as needed and therefore be more strategic with how and when they allocate their funding—this will play a significant role in why alt-finance will rise in 2023.
Funding will be allocated strategically and precisely
In 2022, we began to see that companies are using different forms of funding for different purposes. Longer-term funding, like equity, is being used for riskier initiatives where returns are unknown—like entering new markets and product research and development. On the other hand, alternative, non-dilutive capital is being used for more niche goals, such as user activation and working capital.
As a result, in 2023 we’ll see an uptick in companies taking on smaller financing rounds to be used for very specific purposes to safeguard their business during an economic downturn. The primary ways this financing will be used will include increasing client conversion and shortening sales cycles.
Technology will become more crucial to lending
Finally, the use of technology solutions to underwrite and monitor how a company is using funding and their growth metrics will become more prevalent in 2023. At Capchase, we have some exciting planned improvements this year that will lean into this trend.
Overall, tech companies are well positioned to weather the recession in 2023, as we discovered in our Pulse of SaaS report. And if these predictions prove themselves out, we should see the tech industry begin to exit the recession in 2023.
To learn how Capchase can help you grow and scale your business with non-dilutive capital, get in touch with our team.