After stunned the world with its Impossible Burger, the vegan burger that “bleeds,鈥� in 2016, plant-based meat seemed like the natural next step in sustainable dietary consumerism 鈥� one that meat-eaters would happily flock to. Funding to plant-based meat startups between 2016 and 2019 saw a whopping 鈥嬧��1,110% increase, and that percentage shot up during the pandemic.

Much of that success depended not on vegetarians and vegans, who only make up a small slice of the consumer market, 听who were looking to plant-based alternatives for the sake of their health and the environment.

But it looks like flexitarians鈥� attitudes are changing. Inflation, supply chain issues and dwindling customer satisfaction has brought startup investment into plant-based meat to a standstill. Funding went from almost $2 billion in 2021 to around $800 million in 2022, according to 附近上门 data. And these challenges are likely to continue in 2023 as startups work to find ways to deliver healthy plant-based meat products at a reasonable price.

While the outlook for plant-based meat is dismal, the far quieter cell-grown meat industry saw some good news in 2022. California-based got word from the in November that its lab-grown chicken is safe to eat.听

For the first time in years, funding for plant-based and cultivated meat has nearly reached dollar parity. But investors aren鈥檛 putting all their eggs into a new basket. It鈥檚 clear that meat alternatives have not delivered on their promises to consumers.

鈥淎 lot of meat consumption is emotional,鈥� said , CEO of food venture firm . 鈥淎nd a lot of the plant-based consumption and purchase is rational.鈥�

An unforgiving market

In November, plant-based meat giant shared some sobering news during its quarterly earnings call: The company posted net revenue of $82.5 million and losses of $101.7 million. The company said it would lower the amount of product it manufactured and revisit its marketing strategy to only certain consumers.听

It鈥檚 a sharp descent for a company that .听

Other plant-based meat startups face the same reality, and new innovations in the sector will face more frostbite from the venture market than before.听

鈥淚n the past two or three years, a lot of plant-based food companies got funded that should not have gotten funded,鈥� Feria said. 鈥淪o part of what you’re seeing in the market is an adjustment to that. The products are repetitive and not really great.鈥�

According to a 2021 report, for plant-based meat purchases. But it turns out these early movers in ultraprocessed plant-based meat weren鈥檛, on the whole, that much healthier than the real thing.听

Nor were they any tastier, or cheaper. The cost of manufacturing these products has gone up 60% to 70%, and distribution costs have spiked as a result. Everything from plant-based cream cheese to plant-based eggs to plant-based meat have seen shelf prices soar. The GFI report found that more than 60% of consumers would eat more plant-based meat if it was cheaper or less processed.

All of this contributed to the sector鈥檚 economic decline in 2022.听

鈥淭here was a lot of initial purchase and interest in plant-based meat products, but not as much repeat purchase as was expected,鈥� , managing director of agriculture-focused firm , said in an email. 鈥淵ou have a consumer that purchased a product at a premium price and may not have felt that the taste, mouthfeel, or nutrition sufficiently justified making that product a staple item on their grocery list.鈥�

Tall order for 2023

Plant-based meat startups will face a difficult task this year: to create products that taste just as good as (if not better than) the incumbent, while also being healthier and cheaper.听

鈥淭he strategy we see as top of mind involves those solutions that make plant-based meats perform better for the consumer, have cleaner labels, and introduce nutritional benefits that go beyond the 鈥榟alo effect鈥� that this recent wave of products enjoyed but seems to have declined,鈥� Walker said.

Cultivated meat, which uses stem cells to grow proteins streaked with fat and tendons in petri dishes, has emerged as a possible alternative for those discerning flexitarians. But we won鈥檛 see them on the grocery shelves any time soon.听

The industry is still working out how to scale its products in expensive labs. Singapore became the first country to approve cultured meat for sale in 2020 with 鈥檚 lab-grown chicken. (The startup has raised $225 million since then.) And following the FDA鈥檚 鈥渟afe to eat鈥� letter for a lab-grown chicken startup, the U.S. is on its way to seeing cultivated meat reach small-scale distribution levels, like how Impossible Foods opened in a few select restaurants.听

But investors are hesitant to promise too much too fast. Studies show that consumers will be far less forgiving of cultivated meat than they were of plant-based meat.听

鈥淸For plant-based meat], I’m going to give some space for that because I want a trade off, which is nutrition and health,鈥� Feria said. 鈥淲hen it comes to [cultivated] meat, because you’re trying to deliver the same product you have to deliver the same experience or better.鈥�

Illustration: Dom Guzman

1) IPO markets will remain sluggish, but if anybody is going public it could be these companies. While market conditions remain crummy, there鈥檚 also a huge backlog of late-stage startups that have to find an exit at some point. With that in mind, we offered up ideas for 15 companies 鈥� ranging from logistics unicorn to grocery delivery app 鈥� that could be public-market candidates if and when the IPO markets open back up.

2) Expect more M&A as companies go bargain shopping: Speaking of exits, we could see more mergers and acquisitions in 2023, dealmakers predict. Although rising interest rates make capital more expensive, there are plenty of deep-pocketed buyers who already have money to spend and could go bargain-hunting as startup valuations drop, sources told Senior Reporter Chris Metinko.

3) Cybersecurity valuations will come back to Earth: Even the well-funded cybersecurity sector isn鈥檛 protected from valuation drops. Industry experts who spoke with Chris about the outlook for cyber startups in 2023 say they expect fundraising and valuations will continue to soften. That鈥檚 despite 2022 easily being the second-best on record for VC funding to cyber companies.

4) Fintech will remain hot, despite the crypto crash: Fintech was the largest recipient of venture dollars in 2022, despite an overall drop in VC funding this year and despite high-profile crypto companies going bust. Next year will likely see continued investment in fintech companies, particularly in the B2B payments and business services space, though we should expect to see a pullback in crypto funding in the wake of 鈥檚 collapse, Senior Data Editor Gen茅 Teare reports.

5) Investors may be losing their appetite for plant-based meat: Investment into plant-based meat startups has come to a standstill, Keerthi Vedantam reports, noting that funding into the sector fell from almost $2 billion in 2021 to around $800 million this year. The challenges are likely to continue next year as startups try to find a way to deliver plant-based meat products at a reasonable price to consumers, who mostly are not vegan or vegetarian. Still, the alternative meat industry did end the year on a good note, with the in November approving听 California-based鈥� lab-grown chicken as safe for human consumption.

6) Biotech offers a rare bright spot: One area that could see continued investment even during a downturn? Biotech, specifically those companies involved with the so-called 鈥渙mics鈥� 鈥� think , , and . That鈥檚 because, as Keerthi notes, 鈥渕any of these startups can turn a profit long before they actually make and sell a drug, simply by licensing out their platform to other biotech companies and employing a fee-for-service model.鈥�

7) Novelty is in, copycats are out: Expect to see fewer startups position themselves as the 鈥� of X鈥� or the 鈥� of Y鈥� next year, contributing reporter Joanna Glasner writes. While during times of easy money, VCs tended to glom on to follow-on startups riding a hot trend, that era is likely now over. Instead, 鈥渟tartup investors will be looking for novelty in the companies they back,鈥� Joanna predicts. 鈥淥ut with the me-too business plans. In with those quirky or differentiated enough to stand on their own.鈥� And what are some of those startups? She offers a few picks, from bee startups to a defense tech unicorn.

Industry experts expect a continued softening of the fundraising market in cyber 鈥� despite 2022 easily being the second best year ever in terms of raising venture capital in the industry.

鈥淚 think we are going back to normal,鈥� said , co-founder and managing director at 鈥� which specializes in cybersecurity and infrastructure software investments. 鈥淵ou are already starting to see that.鈥�

2021 set a record for the sector, with more than $23 billion raised by VC-backed startups in network, cloud and cybersecurity, per 附近上门 data. While 2022 will only see around $16 billion, that is still nearly double from 2020.

鈥淎cross the board, you are just seeing much more realistic valuations,鈥� said , managing director at , who invests in cybersecurity. 鈥淚 think in 2023 you will see the same type of thing we have been seeing the last six months.鈥�

Not 2021

The days of a cybersecurity startup generating less than $1 million in revenue seeking a $300 million pre-money valuation are over, said Y茅pez. The market is normalizing, he said, especially as more 鈥渢ourist investors鈥� 鈥� those who do not focus on the sector 鈥� have left.

That is not to say funding is not available.

鈥淕ood companies will get funded,鈥� Ward said. 鈥淭hey always do.鈥�

, founding director of San Francisco-based financial advisory firm , said while considering VC funding in general it is important to remember there is a record high amount of dry powder 鈥� estimated at more than $300 billion for U.S. VCs alone 鈥� that needs to be deployed.

鈥淎dditionally, cybersecurity spending and budgets continue to rise, even in the midst of a recession,鈥� he said. 鈥淎s such, given the underlying strength of the industry, coupled with an accelerating amount of dry powder, I expect to see much stronger investment activity [in 2023] as this capital is deployed.鈥�

Looking for an exit

For those cyber startups that have trouble raising cash, more exits may become available, but maybe not the much-dreamed-about IPO.

鈥淲ith the overall deterioration of the economy 鈥� interest rates, supply chain issues, etc. 鈥� I don鈥檛 see the IPO market opening soon,鈥� said Y茅pez, adding it could be in late 2023 at the earliest.

However, Boukouris said he believes as soon as the public markets recover, the IPO window will naturally reopen.听听

鈥淲e’re already hearing of companies who are prepping filings for 2023 in anticipation of a market recovery,鈥� he said.

While companies like , , and others are at the top of the list for IPO hopefuls, a number of them have run into trouble during 2022, with mass layoffs, and other challenges maintaining growth.

鈥淚t will be interesting to see which companies will resume IPO preparation and which may seek other alternatives,鈥� Boukouris added.

That alternative could be M&A.听

鈥淩ight now people have money because of what they raised in 2021,鈥� Y茅pez said. 鈥淏ut you will see an increase in M&A. Right now, acquirers are sitting on the sidelines 鈥� as startups have trouble raising, you will see them act.鈥�

Drivers

Some of the same things 鈥� or offshoots of them 鈥� will continue to drive cybersecurity trends in 2023, experts say.

鈥淚 think data is the next frontier,鈥� Y茅pez said. 鈥淧eople do not know where their data even is.鈥�

Startups that can help with assessment, security posture management and data rights and privilege will continue to be looked at by investors, he said.

Also, while the term 鈥渟hift left鈥� 鈥� the practice of moving testing and performance evaluation up in the software development process 鈥� will continue to be in vogue, so will 鈥渟hift up.鈥�

Shift up is the attempt to streamline protections of your clouds, containers, laptops and servers all on one platform. Doing so allows companies to move from more siloed cyber tools and lets them apply rules, privileges and entitlements across the whole operation.

Y茅pez invested in one such startup 鈥� Massachusetts-based . There likely will be others that join the market, including larger players like and .

In general, chief information security officers want fewer single-use tools and more platform plays as they try to stretch their dollars further in a slowing economy, said Ward.

鈥淭ool fatigue is a very real thing,鈥� he said.听

鈥淐ompanies have to ask, 鈥榃hat do CISOs want?鈥� 鈥� he added. 鈥淭hey don鈥檛 want long six- to 12-month rollouts. Companies need to be able to show their value proposition quicker.鈥�

Payments could remain the most-funded sector within fintech, especially startups focused on B2B payments. On the other side, cryptocurrency and blockchain, which experienced a large increase in funding in recent years, will most likely face a pullback in the wake of 鈥檚 collapse.听

Leading sectors

Venture investment into fintech companies in 2022 reached $81 billion as of Dec. 14 鈥� down 41% so far from the peak of 2021 at $137 billion. Still, that $81 billion figure still exceeds 2020 amounts by more than $30 billion.听

All told, the sector has grown more than 10 times in the last decade from $7 billion in 2013.听

Within the fintech sector, payments- and banking-related startups received the most venture funding over the past five years, 附近上门 data shows. Cryptocurrency startup funding exceeded these two leading sectors in 2021, but dropped back a bit in 2022. Blockchain technology also received more funding in 2021 and grew its share into 2022.听

E-commerce and insurance, meanwhile, fell as a proportion of overall dollars invested.听

First innings in fintech

The fintech sector is still in early innings, according to from venture firm that analyzes the changes modern fintech has brought to the world of finance.听

The New York-based firm, an investor in private and public company stocks, wrestles with the question of value creation in the fintech sector in the report on the state of fintech.听

Of the $11 trillion in market capitalization in financial services companies as of October 2022, only $508 billion 鈥� 2% 鈥� was in modern fintech companies, Coatue notes. That proportion was higher in 2021 at 5% due to high valuations given to public technology stocks, but in prior years it did not reach 1%.听

鈥淥n the way up everybody values growth,鈥� , the co-head of its fintech practice and co-COO of Coatue鈥檚 growth practice, said in an interview. 鈥淥n the way down, everybody is valuing profitability and retention. The highest-quality business models within fintech have actually been hit a lot less than the rest of the market.鈥澨�

There is a large amount of gross profit for modern fintechs to eat into: Across the financial services sector, gross profits globally totaled $6.5 trillion in 2021, Coatue estimates.听

Fintech business models

Not all fintech businesses and business models are created equal. Newer and in some cases unproven business models that have been hit harder in the public markets are consumer finance, insurtech and SMB payments, according to the report.听

Source: Coatue Whitepaper: Fintech and the Pursuit of the Prize, October 2022.

Public fintech

Coatue analyzed the strength of public financial services businesses across four measures: revenue retention, gross margin, operating margin and revenue growth. It then used its 鈥渞ule of 200%,鈥� which states that if those four factors combined add up to 200% or more, a company is in a stronger position in this market.听

By that measure, public fintechs leading on the list are Uruguay-based cross-border payment provider , Palo Alto, California-based back office financial startup and North Carolina-based banking platform .听

Source: Coatue Whitepaper: Fintech and the Pursuit of the Prize, October 2022.

Sectors for investment in 2023

鈥淚t’s very clear that it’s easier than ever to offer financial services, whether as a standalone business or as part of incremental margin and revenue in an otherwise non-financial business,鈥� said of . 鈥淎nd we believe that trend is going to continue for the rest of our lives.鈥�

With the slump in new tech listings in 2022 and the nosedive in value in public technology stocks including fintechs, where do investors see opportunities in 2023? Here are some sectors that stand out.听

B2B fintech听

Coatue continues to focus on B2B fintech, Gilroy said. Based on an analysis of the firm’s investments the best business models are in B2B. That鈥檚 because business-oriented financial services tend to have lower churn 鈥� compared to consumer fintech 鈥� and business customers often grow over time, increase spend and provide opportunities to cross-sell with new products.听

There is also opportunity in a 鈥渧erticalized approach, whether you’re going after landlords in the real estate market or restaurants,鈥� Gilroy said.听

Emerging markets听

Emerging markets present another growth opportunity for fintech startups.

鈥淭here’s a lot of underserved communities around the world in terms of access to even the most basic financial products,鈥� said , a principal at and an investor in the firm鈥檚 early-stage practice in fintech and B2B software.听

Coatue noted in its report that 鈥渇or incumbents who often struggle with customer service and innovation, doing business in emerging markets is practically impossible due to the increasing rate at which locals are coming online.鈥�

Latin American fintechs that have gone public include cross-border payments dLocal, neobank and e-commerce platform , which went public in 2007.听

CFO stack

Then there鈥檚 the so-called 鈥淐FO stack,鈥� or technologies that would make a finance executive鈥檚 job easier.

鈥淭here’s a tremendous amount of digitalization yet to come. A lot of that is around payments, but a lot of that is also around what we would characterize as the CFO stack, all of the different functions a CFO might ultimately have to navigate,鈥� said Savage.听

Areas of innovation in this stack include tackling expense management, payroll and benefits, stock allocation, business analytics, financial planning and accounting.听

鈥淭he opportunity areas in fintech focus on the boring areas of infrastructure, fraud, payment operations, compliance, and taxes. CFOs will be more focused than ever on impact to the bottom line,鈥� , a general partner at , said via email. 鈥淔intechs that can demonstrate an improvement in payment authorization rates, better reconciliation rates, or reduction in fraud that is measurable will weather the downturn.鈥�

Owning the balance sheet

Becoming a bank is expensive and time consuming in the U.S., according to Coatue, but can ultimately provide longer-term stability for a fintech company.听听

With that in mind, many fintechs are applying to get banking licenses in order to hold customer deposits, manage money transfers and offer loans instead of partnering with an established bank. received a banking license in March 2021 to be able to originate loans through Square Financial Services. has a banking license in the European Union but has yet to be approved for a banking license in the U.K. Neobanks Nubank and Chime are not licensed as banks.听听听

听鈥淚n a rising interest rate environment, legacy banks, insurance providers, and asset managers have the potential to weather down cycles better than capital-light business models, e.g., insurtech and consumer-facing fintech,鈥� said Coatue in its report.

鈥淭hrough this last cycle, balance sheets have kind of been a bad word within financial services, and we’re learning that owning the balance sheet, whether you鈥檙e consumer facing or business facing, puts you in control of your own destiny and takes you away from the need to maybe go and partner with somebody and continuously work on these these balance sheet agreements,鈥� said Gilroy.

Looking forward

Last year, the big themes in financial services were infrastructure building, embedded finance, consumer fintech and a big interest in buy now, pay later platforms.听

With an increase in interest rates and the market downturn, consumer fintech and lending companies face choppier waters while those focused on enterprise payments have a greater potential for consistent growth in 2023.听

We expect consolidation as funding dries up, and fewer companies can scale up.听

Rising interest rates make money more expensive, but those in the industry say both private equity and strategics have significant capital to get deals done now that prices have come down.

鈥淚t鈥檚 true debt is more expensive, but valuations are coming down,鈥� said , senior managing director and head of investment banking at .

Although 2022 couldn鈥檛 come close to the robust number of deals announced in 2021, it was on par with previous years 鈥� with more than 1,070 VC-backed startups in the U.S. getting bought, according to 附近上门 .

However, it is interesting to note dealmaking in the space did drop off as the year went along. The fourth quarter of 2022 was on pace to be the slowest of the year, perhaps dragged down by an uncertain economy and fears of a recession.

Big deals

Some of the biggest deals of 2022 involving VC-backed startups in the U.S. included:

• In September, agreed to acquire San Francisco-based collaborative design platform for $20 billion in cash and stock in the largest purchase of a U.S. private, venture-backed company in 2022.听
• In January, announced it will buy Alameda, California-based device software company for $4.3 billion.
• Also in January, acquired Bellevue, Washington-based gaming company for $3.6 billion.听
• In May, bought Cambridge, Massachusetts-based clinical-stage biopharmaceutical company for up to $3.3 billion.

Three of those deals occurred in the first half of the year, when the market was still riding the tailwinds of 2021. While the dealmaking market started slowing as 2022 wore on, most saw that 鈥渨ait-and-see鈥� attitude from buyers changing as potential targets started to run low on cash.

鈥淐ompanies will want to raise capital, but are looking at what will be a dual-track process,鈥� said Nash, meaning startups will be looking at both fundraising deals as well as possible sales.

鈥淥ur initial prediction is that volume picks up, but dollars will not鈥� in 2023, said Nash. He added he expects dealmaking to pick up as the year wears on.

Valuations drop

In addition to the need for cash, many startups are not nearly as expensive as they were even as recently as the start of 2022.听

The skyrocketing valuations in the private markets and the option to go public via a SPAC left many would-be corporate acquirers on the sidelines, said , managing director at .

鈥淭he drop in valuations in public markets and the ensuing drop in valuations for many startups will bring pricing back in line,鈥� he said.

, general partner at , said even with dropping valuations, the听 question is whether the buyers will be similarly motivated.听

鈥淔or the most part, their motivation will be 鈥榳ait and see鈥� and there isn鈥檛 much of a rush, especially because of a perception that the market hasn鈥檛 hit bottom,鈥� he said.

However, private equity is sitting on more dry powder than ever before 鈥� over $1.5 trillion 鈥� and strategics have perhaps been timid because of what had been until more recently a frothy market.

鈥淵ou have large companies that are scaling back right now,鈥� Nash said. 鈥淪o they may start cherry-picking really interesting companies.鈥�

Nash said that is especially true as cutbacks at these companies could have stifled innovation, which they may now need to acquire.

Also, big tech companies like , and have 鈥� despite a brutal 2022 that involved layoffs 鈥� significant cash and could put it to use now that the market has turned back to their favor.

Affected areas

Where that dealmaking may occur could be the real question.

Nash said the IPO backlog has affected industries including health care, fintech and consumer tech the most. He added fintech could be a good spot to cherry-pick some of the best companies as funding dries up.

Other areas, such as renewables and cybersecurity, also could see activity 鈥� although valuations in cyber have not been affected as much in the recent downturn.

, founding director of San Francisco-based financial advisory firm , said while M&A activity was down year over year, 2022 should still easily be the best year ever for dealmaking, with the exception of 2021.

He expects 2023 to be another big year 鈥� certainly in terms of volume.

鈥淎s the funding crunch has continued for a bit longer than most expected in 2022, and many companies face considerable ‘down’ rounds in their next capital raise, M&A activity will likely increase, albeit at lower valuations than in prior years,鈥� he said.

While interest rate hikes could curtail some dealmaking, said the market may see companies explore alternative financing plans and an increase in equity components as cash becomes more expensive.

鈥淚 don鈥檛 think the overall M&A numbers will stay down due to hikes, but we could see certain industries’ numbers fall,鈥� he said. 鈥淥verall, I think we will continue to see a steady pace of M&A deals into 2023, but it won鈥檛 quite be the historic highs of 2021.鈥�

When was ascendant in the early 2010s, startups habitually touted themselves as 鈥渢he next Uber鈥� of their field. When e-commerce aggregators were hot last year, it seemed like everyone was doing it. Same holds for autonomous trucking, 3-D printing, 鈥渂uy now, pay later,鈥� i-buyers. 鈥� Wherever you saw a hot trend, you鈥檇 find a cluster of well-funded startups.听

This strategy worked well when public market investors and acquirers were on board. Companies far from profitability could cash in on their industry鈥檚 perceived future-changing potential, as we saw in the early days of the SPAC boom.

But that was then; this is now. The rising tide has long since receded, and the SPAC boom has turned to bust. In today鈥檚 market, companies associated with once hot sectors that have fallen out of favor are seeing share prices shellacked pretty much across the board.

So what鈥檚 a venture capitalist to do? For 2023, we鈥檙e predicting that startup investors will be looking for novelty in the companies they back. Out with the me-too business plans. In with those quirky or differentiated enough to stand on their own.

Defining novelty

This assertion begets the question: What qualifies as novel? In particular, what does novelty mean at the late stage, where business models have presumably been around long enough for others to mimic?

Generally, we鈥檙e looking for companies in under-represented sectors that have a significant lead over would-be competitors in technology or gaining market share. It also helps to be the kind of startup that doesn鈥檛 remind people of another startup.

Of course, there is some subjectivity involved, and not everyone will agree with our picks. Nonetheless, here are a few that stand out among the largest, late-stage funding recipients:

For a sense of the logic in defining novelty, and the numbers involved, let鈥檚 break out some of these listings in more detail:

: We鈥檒l start with the most heavily funded name on the list, defense tech startup Anduril, which pulled in $1.5 billion early this month in a Series E round that values the company at $8.5 billion. Launched in 2017 by founder , Anduril stands out in the startup field in that defense has historically not been a popular space for venture-backed companies, despite the enormity of spending that goes into the sector.

Bee startups and : Bee-related startups comprise a growing space, but also a pretty differentiated one. One unique standout is听 Beewise, an Israel-based company that makes robotic beehives and has raised around $119 million to date. Another is BeeHero, which has raised $66 million to date for its 鈥減ollination as a service鈥� offering, adding data science and sensor networks to the old-fashioned business of getting bees to do their thing.

: Dallas-based Island has raised a lot of cash, even in this down market. The startup, which develops enterprise browsers it says enhances security and worker productivity, pulled in $275 million over multiple rounds this year, at a last reported valuation of $1.3 billion.

: Los Angeles-based Therabody, which pulled in $165 million in September, is best known for its massage guns, which it claims can help with physical performance, pain, stress and sleep.听

These, of course, are just a few examples. Others on the list are addressing markets that range from mini golf to geothermal home heating to non-alcoholic craft beer.

Maybe novel investing, too

Beyond backing more original-sounding businesses, later-stage investors may also be more likely to consider companies that have done a well-known seed round or have an early-stage VC firm on the term sheet.听

Looking at the collapse of and other high-valuation upstarts with famous investors, it鈥檚 clear prominent backers are capable of missing major red flags. So why not take a chance on something more 鈥渙ut there鈥� and get in at a lower valuation, to boot?

Dry powder is as high as $1.3 trillion globally for private equity and $580 billion globally for VC, according to one estimate from of . The dry powder in 2021 was roughly the same, he said, but investors were putting money to work at a record pace.

• See Also: The Largest US Venture Funding Deals Of 2023

Investors are likely to hold back in 2023, at least in the shorter term, as funding valuations trend down. Founders are becoming more disciplined around spending, which will impact growth. And limited partners who overextended in venture capital assets would prefer firms to come back to raise subsequent funds with wider time horizons.

All of these new conditions will make for a much more cautious funding environment next year.听

While fundraising by venture investors increased in 2022, funding to startups slowed significantly. In the third quarter of 2022, global venture funding dropped by more than 50% year over year, per a 附近上门 News analysis. Late-stage funding has plummeted even more dramatically by 63% year over year.听

The LP perspective听

Limited partners who invest in venture funds are expected to slow down commitments in coming years.听听

鈥淲hile I have not heard of many LPs looking to get out of the venture asset class, I do generally expect to see increased LP churn in 2023 and potentially into 2024,鈥� , a partner at , which runs its allocation to venture funds in the U.S. and globally, said in written responses.听听

鈥淚f history is any guide looking back from the 2000 dot-com bubble bursting and the Great Recession of 2009, I think we will see a reduction in 2023 in the total number of venture funds raised, and possibly into 2024,鈥� she said.听

Fund managers should expect a tougher fundraising climate, Clarkson said. 鈥淚 don鈥檛 believe this means emerging venture managers won鈥檛 get funded, but I do think the bar has been raised for all venture managers on what constitutes true underlying performance versus high paper valuations.鈥�

2021 multiples

Many of the high valuations set in 2021’s frothy market, particularly for late-stage startups, are starting to look unsustainable, according to industry watchers.听

This is 鈥渞eflected very much in private markets, where there’s tremendous uncertainty around the forward path of pricing,鈥� according to , a partner at . 鈥淚n the middle and later stages it’s been a much more difficult year to find compelling opportunities.鈥�

Fewer companies are seeking funding at late stage either because they have raised large fundings in recent years that can tide them over or because they are cost-cutting or seeking other types of capital, as venture capital is not flowing as freely as it did in 2021.

As investors turn away from late-stage financings due to pressure on valuations, companies that need to raise funding face a dilemma. Those not able to grow into prior valuations will be forced to reset. For example, in July 听slashed its valuation from $45.5 billion to $6.7 billion to better position itself should it plan to go public in the next year or two. Meanwhile, , cut its internal employee share price in October, resulting in an internal valuation cut from $39 billion to $24 billion. And in September, cut its valuation in travel tech startup from $9.6 billion to $2.7 billion.听

Sitting on funds

With record funds raised, how will the venture markets look in 2023 and beyond?听

鈥淲hile there is still pressure to invest, it depends on fund size/length, relationship with LPs, and market volatility,鈥� Lightspeed鈥檚 Ephrati, who manages the firm鈥檚 follow-on investment practice, wrote in an emailed response. 鈥淚f a fund size is large ($1 billion-plus) with a 10-plus-year lifespan, investors can make the argument that markets are too volatile, private and public valuations have yet to converge, and there will be better buying opportunities in 2024.鈥澨�

He anticipates that VC financings will pick up in the second half of 2023.

鈥淎 ton of great companies will raise in Q3/Q4 2023 because they’re (a) running out of cash or (b) would like to take advantage of friendlier private market conditions,鈥� he said. 鈥淭hose companies will also have grown into their 2021 valuation 鈥� meaning, the gap and price distortion between a private company’s last round valuation and where public market comparables are trading will be smaller.鈥�

Tech rout

Companies last year were advised to grow at all costs. Investors rewarded them with funding and high values, which in turn led to more than 1,400 private companies valued at $1 billion or more on The 附近上门 附近上门. The majority of those, 1,192, have raised funding since the beginning of 2021. And over 900 of those joined the board since the beginning of 2021.

In 2022 the message became to cut costs and extend runway.听

What happens in 2023 is still unclear. Will those same companies that come through to the other side and ready to raise funding meet a venture market willing to fund them?

Will 2023 be the comeback year for IPOs? What will it take for the public market to thaw? Here are the 附近上门 News staff鈥檚 top picks for the companies we think could go public next year.听

And if some of these sound familiar, it鈥檚 because they are: In our 2022 edition of this list, we predicted many of these might go public this year. Little did we know that the IPO markets would stall. So here we are again, offering up some thoughts on who might make public debuts, if and when IPOs start happening again.

Enterprise tech and cybersecurity

: It wasn鈥檛 that long ago when Eden Prairie, Minnesota-based Arctic Wolf seemed IPO bound. The company raised $150 million in a Series F in July 2021, taking its valuation from $1.3 billion to $4.3 billion. At that time, then-CEO said an IPO was likely the next logical move. Then the market changed drastically, and in October the managed security provider raised $401 million in convertible notes led by existing investor. Convertible notes work like a short-term loan, but these notes are repaid to the investor at a later point in equity 鈥� i.e. after an IPO 鈥� typically at a discount. The managed security space can support large players and Arctic Wolf has grown large since being founded in 2012. Perhaps those notes turn to equity in 2023.

: Everyone has been on Databricks for a while. As recently , CEO talked about going public, but offered no timeline. The market has only grown colder for IPOs since then, but this is a company that ended 2021 with more than $800 million in annual recurring revenue. It鈥檚 big and growing. It also hit a post-money valuation of $38 billion after raising a $1.6 billion Series H led by in August 2021. And that big Series H came just seven months after the company raised $1 billion at a $28 billion valuation. That valuation may be what is keeping the San Francisco-based company from going public. Nevertheless, Databricks 鈥� which creates tools and products to help companies view both structured and unstructured data in a single location 鈥� could look to 2023 to finally offer employees and investors the liquidity they鈥檝e waited for.

: The supply chain is still top of mind, so maybe some company will ride that to the public market. San Francisco-based Flexport, which was on our IPO list last year, locked up a $935 million Series E in February led by and at an $8 billion valuation. The global freight forwarder and logistics platform moved nearly $19 billion in merchandise across 112 countries in 2021, even as global supply chains suffered from multiple disruptions. In total, the startup has already raised more than $2 billion, according to 附近上门 data. Despite a down VC market this year, logistic and supply chain startups still were able to raise cash from private investors. Maybe they can do the same with public ones?

鈥� Chris Metinko

Fintech and banking

: The most obvious and one of the most successful fintech startups to add to this list is online payments company Stripe, which is co-headquartered in London and Dublin. It is the fifth most valued startup on the The 附近上门 附近上门, and was most recently valued in a 2021 financing at $95 billion. Founded by brothers , its CEO, and , its president, Stripe is now 12 years old and has raised more than $2 billion in funding. The company processed $640 billion in payments in 2021 up 60% from the prior year. It was said to have according to . As a result of the market correction, the company lowered its internal valuation in 2022 to $74 billion. The company filed its intention to go public in July 2021 but has not yet set a date. It cut around 1,100 jobs, or 14% of its workforce, earlier this year.

: London-based Revolut is the second most valuable European fintech, valued at $33 billion as of July 2021. The company is 7 years old and has raised $1.7 billion in funding. Founded by and , Revolut took off as it made transferring money in different currencies easy for those who work or travel in multiple countries. Revolut has not initiated layoffs in 2022 鈥� in fact, it has kept hiring. The company announced revenueof 261 million pounds in 2020 but has not posted revenue for 2021. Revolut has 25 million retail customers and applied for a banking license in the U.K. in 2021.听

: San Francisco-based Plaid connects user bank accounts to fintech apps. The company was founded nine years ago by , its CEO, and , a board member. It was last valued in Series D funding in August 2021 at $13.4 billion and has raised $734 million over time. Plaid’s revenue in 2020 was said to be in an article by Forbes. planned to purchase the company in 2020 for $5 billion, which was halted by regulators the following year. In December 2022, Plaid laid off 20% of its staff, or around 260 employees, as Peret said that slower than expected growth after the pandemic meant that Plaid鈥檚 鈥減ace of cost growth outstripped our pace of revenue growth.鈥� On the other hand, Peret also said that the number of customers Plaid serves has grown 50% in the past year.听

鈥� Gen茅 Teare

Consumer platforms and services

: Instacart is kind of the startup equivalent of the 鈥渁lways a bridesmaid never a bride鈥� cliche. It鈥檚 always high on lists of likely public market entrants, but has never actually consummated an IPO. Well, we think 2023 will be the year. (Yes, we said that last year too, but cut us some slack.) An offering started looking even more likely after the company in May that it filed a confidential draft registration with U.S. securities regulators, with a debut currently expected to come next year. The filing followed a steep write-down, as Instacart cut its valuation in March from $39 billion to $24 billion.

: Denver-based Guild was also on our list last year, but all told, it still looks like a strong IPO candidate. The Denver-based company, which offers a platform for extending employer-covered education and upskilling to workers, has raised over $640 million to date, including $265 million in a June Series F round. It鈥檚 particularly noteworthy that the company secured a big round in a period in which overall edtech funding has been declining, indicating investors see a lot to like in the business model.

: If you鈥檝e been around long enough and raised enough money, inevitably investors will be looking for a return. This notion applies quite succinctly to Faire, an online marketplace for independent retailers and brands that has raised $1.7 billion since 2017, per 附近上门 data. The company鈥檚 business model could also see some favorable headwinds as consumers return to local stores, which stock from its suppliers, after a pandemic-driven shift to predominantly online shopping.

: TripActions is another heavily funded company that鈥檚 often bandied about as a likely IPO candidate. The 7-year-old, Palo Alto-headquartered company provides corporate cards and expense management tools, with a focus on business travel. Startup investors certainly seem to like the brand. The company pulled in $300 million in an October Series G round at a post-money valuation of $9.2 million. TripActions also is already making progress on the IPO path 鈥� it filed confidential paperwork for an offering with the SEC, per a September report.

鈥� Joanna Glasner

Life sciences, agtech and foodtech

: We鈥檙e still waiting for Lyra 鈥� or maybe or some other teletherapy company 鈥� to go public. A first-mover teletherapy startup that took the direct-to-employer route in 2016, Lyra Health has worked with companies including , and to provide teletherapy long before insurance companies at-large embraced the practice. At the beginning of this year the startup raised $235 million in Series G funding, upping its valuation to $5.58 billion. Lyra held back during the 2021 IPO mad rush its competitor participated in, but it鈥檚 more than ready for the public markets.

: We consider vertical farming and urban farming a solid bet next year. Thin-margin grocery stores are being hit hard by logistics and supply issues, so the idea of a produce farm located close to consumers seems pretty ideal. Vertical farming startup Plenty rang in 2022 with $400 million in Series E funding, almost half of all the funding the company has raised since it got started in 2014. Plenty began building out a vertical farming 鈥渃ampus鈥� in Virginia, where it would grow strawberries for the large farming conglomerate . There aren鈥檛 that many agriculture startups that went public 鈥� almost made the leap via SPAC in 2021 until funding closed up 鈥� but Plenty seems ripe to go public.

: Armed with $1.3 billion in funding over nine funding rounds, precision medicine startup Tempus is easily one of the most intriguing companies to come out of the pandemic. Its technology platform is different from most biotech upstarts that focus on developing molecules. Tempus scooped up two clinical trial-related startups and has its hand in multiple parts of the drug-making lifespan 鈥� something we don鈥檛 see outside of giant pharma companies such as or . Tempus raised $275 million in debt financing in October for its ability to leverage AI in drug discovery and genomic sequencing.听

鈥� Keerthi Vedantam

Outside the box

: Design-software maker Canva has reeled in more than $572 million in funding and a $40 billion valuation from venture investors. The Australia-based company is known for its design software for nondesigners, but new tools rolled out this year show its ambitions are even bigger. It recently that promises to help automate marketing copywriting, around the same time that 鈥檚 ChatGPT tool set the tech world abuzz. Investors seem to be increasingly drawn to technology that automates even the most creative of fields, and Canva is at the head of the pack in that group. At least one of Canva鈥檚 biggest investors is feeling more bullish on the company again: , after the design softwaremaker was previously hit by a series of writedowns.

: We thought it鈥檇 be fun to include a name that doesn鈥檛 generally grace the likely IPO lists, and that鈥檚 where ICON comes in. The Austin-based construction technology company, known for its iconic 3D-printed homes, has raised more than $450 million in venture funding in the past five years. It鈥檚 the kind of branded, consumer-facing technology company that might benefit from the higher public profile that comes with a listing on a major exchange.

听鈥� Marlize van Romburgh and Joanna Glasner