Contact us anytime to know more — Abhishek P., Founder & CFO CISIN
This definitive guide covers trends for 2023 that you should be aware of, regardless of whether you are starting a business or making an investment.
Trends in Capital Funding
Financing is crucial for startups. Capital funding trends are important for business. The meta has been heavily influenced by venture capital for some time.
However, a wave of democratic, conscious, and more affordable funding is now taking over the market as the inflationary forces wreak havoc on the economy.
Valuation Deflation
The rate of inflation peaked in 2023 at an astounding 9.1%. This forced the Federal Reserve into unprecedented actions to lower consumer prices.
Low-interest rates over the last decade have led to a remarkable rise in valuations for startups across all industries. The era of easy money is over. The Federal Reserve increased interest rates quickly, causing startups who previously received cheap funding to scramble for alternative sources of financing.
The rise in interest rates has already led to a drop of 43% in the number of unicorns between Q2 2020 and Q2 2022.
And the situation is unlikely to change much over the next few months. It will make fundraising more challenging and will force startups to be creative to stay afloat.
Crowdfunding
In recent years crowdfunding has become increasingly popular. It will continue to grow as the traditional funding sources for startups dry up.
Indiegogo and Kickstarter have disrupted startup ecosystems by allowing early-stage companies to get funding from small investors.
StartEngine, unlike Kickstarter or IndieGoGo, allows crowd funders to get a share of the company. The total amount of money raised through crowdfunding is estimated to be $1,02 billion by 2022 and $1.06 trillion by 2023.
However, crowdfunding is not an easy option. In 2022, over 300,000 Kickstarter projects failed to reach their funding goals, showing how difficult it can be.
Non-Dilutive Funding
The rise of startup funding that does not dilute equity is another trend worth watching. These types of funding do not require startup companies to surrender any equity.
As valuations fall, every penny of equity must stay in the company.
What is Non-Dilutive Funding?
Startup financing is non-dilutive if the startup does not have to surrender any of its equity. Non-dilutive financing comes in many forms, including grants, loans, and revenue-based funding.
Revenue-based funding is the fastest-growing option among the non-dilutive options. Its CAGR from 2020-2027 will be 61%.
Merger Madness
Consolidation has increased in recent years, as some startups prefer mergers and purchases to more traditional financing.
Consolidation is a particularly intriguing trend, given the current state of the economic climate. M&A expenditures typically fall in economic downturns, but the drastic drop in funding for late-stage startups has led them to look elsewhere.
The trend is likely to continue through 2023. We could also see more unicorns as a consequence.
Statistics on Startup Success and Failure
You may not have known that 90% of startup development company fail.
This is a harrowing stat that some entrepreneurs may find difficult to accept. Don't be discouraged - the startup ecosphere has grown by 239% in the last decade.
How Startups can Succeed in 2023
Although the success of any startup is dependent on a variety of factors, many of them share some common traits.
Raising capital can be one of the hardest aspects of starting a business. Out of 90% of startup failures, 38% are due to a lack of funds.
A startup's success or Failure can also be determined by the market that the company sells its product. Although this might seem like an obvious fact, up to one-third of startups will fail due to a lack of a market.
For startups, it's important to build a passionate team that is committed to success. It takes more than one person to start a business.
Understanding why previous startups failed can assist businesses in preparing for the future. Startups continue to face economic challenges.
A clear trend has emerged: those who have built products that are appealing and manage their finances well will likely succeed.
Startup Costs
Startup costs are high due to the need for talent, technology and marketing.
Their management can either make or break your company.
Office Space for Talent
The cost of payroll is enormous. Payroll can often exceed 50% of the startup's total expenses. In the United States, startups can expect to spend, on average, $300,500 in their first year for five employees.
Rent is the second-most expensive expense. The cost of renting a space can vary greatly depending on the location.
Startups in some areas of the United States may only pay $20,000 per annum for 1,000 square feet, but those same spaces could cost up to $90,000.
Many businesses opt to work remotely or in hybrid schedules because rent and staff costs are so high. It can be a great way for startups to reduce costs.
This can also provide additional incentives to persuade talent to join your team without having them pay San Francisco salaries.
Technology
The technology stack of a startup is an important business element that shouldn't be overlooked. The tech stack of a startup should contain tools to improve its efficiency, protect data, and engage customers.
These benefits are not free, however. The average startup employs between 4 and 10 different tools.
In the future, technology is going to be a more important component of a startup. Software as a Service industry (SaaS), for example, is expected to increase from $130 Billion in 2021 up to $716 Billion by 2028.
Marketing
Some businesses spend as much as 11 percent of their revenues on marketing. Spending on platforms that are right for your business is more important than ever.
There's no set budget for startups.
They allocate it based on the goals they have and their industry. Statista's study shows, however, that North America and Europe startups often place social media marketing, digital advertising, and SEO at the top of their priority list.
In 2023, startups with tight margins will likely opt for more cost-effective digital marketing methods like SEO or email marketing. These options offer ROIs as high as 3,600% or 2,200%.
Most Promising Startup Industries
These are big numbers, but you should also remember that all startup companies and industries are not created equally.
Biotech startups and virtual reality companies may have greater potential than fintech startups.
Fintech Startups
Fintech is a term that refers to the use of technology to make transactions, documents, and trading easier within the financial industry.
This industry has exploded over the past few years, and you can see why. Fintech has made some aspects of financial life, such as trading and money transfer, easier to access for everyday people.
It's also not only about digital payment. Fintech covers a wide range of topics, from financial services to net banking.
Fintech funding declined in 2022's first half as economic meta-data weighed down on consumers. However, the sector accounted for 21 % of unicorn companies.
Consumers will continue to seek out financial services such as fee-free trade, alternative banking, and other technology that can help optimize finances.
It may not grow as fast as some sectors, but it is still expected to reach a market size of nearly $700 billion by 2030.
Artificial Intelligence Startups
Artificial intelligence will be a massive part of the startup industry by 2030, and the valuation is expected to exceed $1.5 trillion.
If the rapid growth of Open AI’s ChatGPT is anything to go by, you can anticipate AI playing a major role in marketing strategy, research, content creation, and many other business activities.
The AI Blockchain industry has seen the largest growth in funding since 2017, with funding increasing by over 90%.
Robotics was a close second in terms of funding increase, which grew by up to 70%.
Metaverse Startups
Facebook's CEO has placed his future in virtual reality, and this bet may be justifiable. The metaverse covers everything from digital fashion, gaming, and crypto to NFTs and cryptocurrency.
The revenue potential is huge. Analysts predict that the market will reach $800 billion by 2024 and $1.6 trillion by 2030. The digital gold rush is attracting major brands such as Gucci, Nike, Coca-Cola, and many others.
The top funded metaverse companies in 2023 include:
- Epic Games has raised $2 billion in funding for the company that created Fortnite.
- eFuse has secured nearly $1 billion of VC funding.
- Yuga Labs has raised $450m in a funding round led by Andreessen Horowitz and $285m from a crypto sale.
- Immutable is an NFT startup that has raised $200 million in funding, bringing its valuation up to $2.5 Billion.
- LincTix Digital is a metaverse brand of fashion that has raised $100 million.
Biotech Startups
Biotech is a field where engineering and biology combine to solve some of the most difficult problems in the world, such as world hunger or rapid pandemic response.
If you think the metaverse is a huge opportunity, then this industry could be bigger. Grand View Research predicts that the global biotech industry will reach a value of $3.8 trillion in 2023. The CAGR, or compound annual growth rate, is 13.9%.
The following are some of the most interesting new biotech trends to emerge in recent times:
- Genome Surgery: Gene editing is a new technology that can prevent diseases, protect endangered species and create a more resilient agricultural system.
- Bioprinting: A 3D printer that mimics the properties of human tissue and can be used to create organs.
- Genome Sequencing: It is similar to big data in biology in that it will provide genetic information that can help doctors identify diseases before they occur.
- Personalized Medicine: A more personal approach is taken to medication.
- Biomanufacturing: It is a technology similar to bioprinting but on a larger scale. This technology, for example, is used to produce artificial meat. It could be a food source that would allow more sustainable farming.
Read More: The Future Of Mobile App Development
Startup Team Styles
Early in 2023, The Great Resignation dominated the headlines. This buzzword was sparked by a prediction made by the World Economic Forum that up to 41% of workers would leave their job before the year's end.
While quit rates have declined, the impact has been significant.
It has driven startups to prioritize employee health and well-being, improve culture at work and enhance the employee experience.
The "Big Quiet" has also encouraged companies to rely more on technology to track everything from employee satisfaction and productivity to their happiness and well-being.
Health and Wellness
COVID-19 has shifted the priorities of both employees and employers. Health and well-being quickly became the focus of the global reimagining of what is truly important at work.
The approach a company takes to wellness and health can determine whether or not an employee remains.
It may come as a surprise to many that 47% of HR leaders say that employee retention is their greatest challenge, and the two main reasons for employees leaving are lack of career advancement and work/life imbalance.
More than half of the tech companies include benefits for managing mental and emotional well-being in their flexible work policies.
More than half of employers believe that health and wellness will be more important in the coming three to five-year period.
Technology and Data
The popularity of remote work isn't likely to diminish anytime soon. Startups have relied heavily on technology, such as predictive analytics platforms, automation, and artificial intelligence, to adapt to the new norm and create better work environments.
The global market for HR software is predicted to increase by over 100% between now and 2028 as startups invest in new technology.
Employers are most concerned with the following:
- Planning for the future of your workforce.
- Platforms for analytics
- Scale-building is a skill that builds on the scale.
- AI-based Productivity Tools.
The tools allow employers to use data in a variety of ways, including improving productivity, measuring employee skills, determining pay disparity, increasing efficiency, and more.
Training and Upskilling
The ability to acquire new skills is one of the biggest factors in employee satisfaction. It should be a win-win for startups who make a concerted effort to address this issue, given that 98% of businesses report skill gaps.
Only 40% of companies are using upskilling and targeted learning to close skill gaps.
This trend will likely take off as employers see the benefits of investing in training and mobile app development.
It also helps fill their company rosters with experts who are certified in a given topic. As employers begin to see the results of their efforts, this trend is likely to grow.
ESG is the Startup Ecosystem
No one can ignore the trend of Environmental, Social, and Governance (ESG). ESG has been the basis for entire hedge funds and venture capital companies.
ESG measures a company’s impact on the environment and people. It can be the difference between a startup getting funding or not. Venture capitalists are now considering ESG for funding at all stages, from seed to growth.
As more and more businesses make business decisions, they are increasingly considering ESG. It's also not because it is the right thing.
A growing number of studies show that funds that prioritize ESG outperform their counterparts.
Environmentally Conscious
Disclosure of environmental impacts has become not only a common practice but could be made mandatory. Many investors already consider it a top priority.
In early 2023, we noted that investors with assets worth over $140 trillion were calling for companies to disclose their climate risk. This trend won't disappear into thin air. The environmental impact of the 2023 energy crisis is a hot topic. This comes as a result of the European energy crisis resulting from the conflict in Ukraine.
Social Responsibility
The startup ecosystem is also embracing social responsibility. The startup ecosystem is undergoing a shift. Companies must now do more than just increase shareholder value and post profits.
They are expected to take care of employees and have an ethical supply chain. Investors and consumers are recognizing and celebrating startups with policies that ensure fair pay and protect against misconduct and non-discriminatory practices.
Startup Governance
In recent years, the governance of a new startup has been scrutinized. In the past, things that were tolerated are now not.
Investors are considering the following key factors:
- A Clean Political Record: Companies shouldn't donate to candidates for preferential treatment.
- Transparent and Accurate Accounting: Companies should be honest and open in their financial reporting.
- Diversity in Leadership: Companies should provide equal opportunity for all employees, from management to executive leadership.
Diverse Startups
Also, we're seeing more diversity in the teams of startups. The trend is driven by a growing awareness of the importance of inclusion and diversity, along with a desire for new markets.
Investors are considering the following key factors:
- Racial diversity
- Gender diversity
- LGBTQIA+ inclusion
- Neurodiversity
Take note of these quick facts:
- The funding for Black Entrepreneurs in 2023's first half is expected to exceed $1.8 billion
- Women-owned businesses will have raised more money in 2023 than they did before the year 2000.
- Only $3 billion of the $167 Billion raised by startups in 2020 will go to Black and Latina female founders.
- Fewer than 1% of all funds go to LGBTQIA+ Founders.
This is important because white men represent only 30% of the total population but manage a staggering 93% of the VC dollar.
The startup ecosystem is characterized by a major disconnect between the opportunities available and those that are being pursued.
Startup Exits: Trends
The exit of a company can be a great opportunity for founders to make money.
Publication
It is an important step for startups to go public. The company is brought into the spotlight and opens up new funding possibilities and scrutiny.
Three main ways exist to make a business public: an Initial Public Offering, a Special Purpose Acquisition Company, or a Direct Listing. There are pros and cons to each of them.
The initial public offering (IPO) is the best-known way to take a business public. The benefits of an IPO include media coverage and price guidance by top Wall Street Banks, but they are also expensive.
SPACs are special-purpose acquisition companies that were created to use funds raised from an offering to buy another company.
The proceeds of the offering will be returned to the shareholders if the merger or purchase fails to take place.
Direct listing has become a popular choice for established, larger companies. Direct listing allows companies to pay less for lawyers and banks while still allowing the market to determine how shares are priced.
Fenwick surveyed executives and investors to determine whether they believe that activity in the two-to-five-year period will increase.
Direct listings are expected to be the most popular.
Acquisition
Startups most commonly exit through acquisitions. Acquisitions can be less risky and give founders the chance to do other things.
Investors and shareholders can also see how much they'll receive and when. Public offerings are a different story. They require that a stakeholder sells their shares for whatever the market thinks is fair.
Half of the startup founders who were asked to describe their long-term goal said that they hoped to be purchased.
Merger
There are differences between mergers and acquisitions. In an acquisition, a large company takes over a smaller startup, absorbing its processes, products, and sometimes even its talent.
In contrast, mergers are often the result of two companies merging to form a new company.
Startups find mergers appealing as an alternative method of raising funds. They can gain access to new talent, technology, or money to help them advance.
Merger considerations tend to be paid directly by shareholders. And unlike stock sales, 100% ownership of a business can be transferred with no consent from all shareholders.
Trends in Exit by Numbers
In the first half of 2023, mergers and acquisitions accounted for the majority of exits, with 2,502 total exits.
Public offerings (including SPACs) accounted for only 156. North America led in terms of the number of unicorns that existed globally during the first half of 2021 with 182, followed by the Asia Pacific region, which accounted for just 87.
Best Countries To Start A Business
It is important to note that the startup ecosystem does not only exist in a few countries. Some tend to perform better than others.
The United States will not lose its status as the de facto capital of a startup in the world. However, China is worth watching, particularly after some important policy changes earlier in 2023.
United States
Due to the United States' strong capacity for research and development, its friendly policies, and many funding options, it is likely that this country will remain a leading destination for startup companies.
The total funding for the United States will exceed $108 billion in 2021, a 108% rise from the previous year. The United States has created 865 unicorns and is likely to lead for quite some time.
United Kingdom
The U.K. supports its startup community, just like the U.S.A., with grants, tax incentives, and other government initiatives.
U.K. startup companies raised over $13,75 billion in the first half of 2023 and had 66 unicorns.
Israel
Fintech and cybersecurity are the leading sources of funding for Israel's startup scene. Israeli startups have raised $10 billion during the first half of 2023.
They are home to 42 unicorns.
Canada
Canada has, along with the United States, a vibrant ecosystem for startups. It is regulated and offers a variety of funding opportunities.
Canadian venture capital deals were relatively strong throughout the first half of 2023, despite the recession. The average deal was $ 23 million. Canada has 21 unicorns.
China
China has a huge population, a 17 trillion dollar economy, and is the world's largest startup nation. There are many opportunities in China's technology sector for startups.
However, government censorship and oversight have historically hindered domestic startups.
China is home to 162 unicorns, the second most in the world. As its economy starts to recover and its government begins relaxing some of its regulatory scrutiny, this number may rise dramatically.
Conclusion
In 2023, the macroeconomic climate will certainly drive some major trends within the startup ecosystem. However, there are many promising opportunities, particularly for startups that prioritize people and sustainability.
Many of the trends that you have seen in 2018 will likely continue into 2023. It's now time for many startups to get creative and tighten their belts. Although the economic outlook is bleak for the near future, now may not be a bad moment for startups.
