In 2022, the era of cheap capital was brought to a halt by soaring inflation and rising interest rates. It has created a very different environment for tech startups compared to the dizzying heights of 2021. But what does 2023 have in store for the UK’s tech sector? To find out, UKTN spoke to those controlling the flow of money into tech startups – the VCs.
From the sectors that will struggle to the impact of layoffs, here’s how 12 VCs predict 2023 playing out for the UK tech industry.
UK fintech will remain strong
“The UK’s fintech ecosystem will retain its position as one of the global leaders for creating and growing exciting startups which are driving innovation. For 2023, the sector will evolve to reflect changing consumer and business demand. The most successful fintech startups next year will be directly solving the most pressing problems of customers through reducing the cost-of-living crisis and driving further disruption in areas such as debt repayment, mortgage lending and tax services.”
- Jed Rose, partner, Antler
Big Tech layoffs will birth new startups
“The tech layoffs we’ve seen will provide the opportunity for more creative ideas to push to the surface as I fully expect there to be an increase in startups founded by former Big Tech employees. It’s not for everyone, but whenever there are mass redundancies there will be a small but important cohort of people who turn a career crisis into an opportunity and become entrepreneurs – and a few of them will be very good at it.”
- Sarah Barber, CEO, Jenson Funding Partners
B2C will be hit hard
“In 2023, certain tech sectors look set to emerge as clear winners. We anticipate that B2C companies will be the hardest hit, as the cost-of-living crisis takes its toll and discretionary spending is slashed. The B2B SME segment could also struggle as companies face cost pressures that lead them to focus on core expenses. The B2B mid and enterprise markets are likely to be more resilient because of longer contracts, the mission-critical nature of product offering and long-term bets on digital transformation.
“In all, we anticipate that the investor flight to quality will continue in the first half of 2023, with a focus on price and terms of fundraising rounds. Founders looking to raise this year should anticipate a slower process: more like six months from the first meeting to money in the bank.”
- Jay Wilson, Investment Director at AlbionVC
Founders will struggle with VC relationships
“Increasing costs, economic uncertainty, political unrest and funding challenges are all going to hit early-stage businesses from different directions. They’ll have to make very hard decisions – treading the line between growth and survival.
“Unfortunately, I expect to see many founders struggle with their investor relationships. VCs have a duty of care to their portfolio. We joined them on their journey as a partner and should act accordingly. We need, as an industry, to make difficult times less difficult. Not pile on and increase the stress. If we choose not to follow-on, we can still provide them with support by being empathetic and listening.”
- David Foreman, MD, Praetura Ventures
An open finance-fuelled fintech boom
“In 2023 we’ll see a big jump forward in the viability of fintech applications built on top of Open Finance connections. August 2023 is the first deadline for the UK’s Pension Dashboard Programme, which requires pension providers to report data securely into new third-party pension dashboards, giving UK consumers a consolidated view of all their pensions. This is an important step, and it won’t be long before consumers expect the same level of open connectivity to their investment accounts, mortgage balances, etc.
“As more and more of these products fall into scope, it opens up a number of exciting use-cases, including the mythical ‘personal finance OS’ – a consolidated view of all of your entire financial position, and cockpit to take control of your financial future.”
- Greta Anderson, principal, Balderton Capital
The best startups will still get funded in early 2023
“Growth and fundraising will be constrained in H1 2023 as entrepreneurs and investors figure out the new normal. If it’s a ‘soft economic landing’ then things will improve in Q2, but if ‘hard’ then not till end of 2023. However, there’s plenty of money on the sidelines, so the best companies will still get funded in H1.
“Speaking of the best companies, themes where I’m bullish in 2023 include climate and energy transition (obviously), data infrastructure and quality, digitalising the real economy especially industrials (this is where we have to improve productivity if our economies are to grow) and digital assets infrastructure. Above all, cloud software is eating the world and now we need to organise all that data better and more responsibly. FTX is a painful reminder how much more professional and efficient we need to make web3.”
- Alston Zecha, partner, Eight Roads
Hydrogen and autonomous vehicles will struggle
“Some cleantech sectors which have attracted vast amounts of investment in recent years may find themselves being hit particularly hard by the shifting market conditions. And this will be nuanced. Take for example autonomous vehicles. We are seeing the demise of some of the previously much-hyped self-driving car players, whilst those pursuing industrial autonomy applications are seeing increased traction.
“Similarly, in hydrogen, we have seen depressed share prices in public companies that have got ahead of fundamentals whilst private business valuations haven’t yet been hit. We are long hydrogen in the medium term but we wouldn’t be surprised to see a correction in the short term.”
- Jamie Vollbracht, partner, Kiko Ventures
Mergers will create strong B2B software companies
“To date, Europe has been a tricky market for pure-play tech but the implementation of Europe-wide carbon regulations for the built world and growing pain points for cross-continental real estate owners is catalysing greater cross-border European cohesion. One consequence of this will be increased opportunity for consolidation in the sector.
“Mergers can then create stronger companies: one sector in particular where we expect this to happen is in B2B SaaS solutions. This will be a welcome development for customers and clients who don’t want to deal with multiple software providers and will see the platform players as winners vs single-point solutions.”
- Greg Dewerpe, founder and CIO, A/O PropTech
Inflation will ease off in the second half of the year
“Inflation remains eye-wateringly high in the UK right now, and while that looks unlikely to change over the next few months, I expect we are getting very close to the peak. Provided that inflation begins to dip after the first quarter of 2023, then we are at or near the peak in bond yields resulting in reduced pressure on tech stock valuations.
“Gradually, a period of stability on that front will have a positive impact on the flow of funding into later-stage tech companies and listed stocks. There’s certainly room to be optimistic about the second half of the year – provided we can get inflation under control over the next few months”.
- Ian McLennan, partner and head of venture and Triple Point Ventures
Mission-driven founders will outperform the market
“I see 2023 as the year for mission-driven founders proving to the world they will outperform the market, by driving value through their social and environmental focus. There is a big opportunity to focus on early-stage investing where the economics are more favourable and more likely to weather the medium-term macro storms, plus the best companies are formed in downturns so now is not the time to take your foot off the gas as an early stage investor.”
- Emma Steele, partner, Ascension
A plethora of commercial uses for generative AI
“Generative AI finally hit the mainstream in 2022. Consumers globally got the chance to play with what is arguably one of the most powerful developments in AI, and have the first glimpse of the true breadth and depth of its applications and the disruption it will bring. Whether this was having the engine write an essay, dubious code or having it create an aspirational avatar of their best digital self. We can now expect a plethora of commercial applications, especially for enterprise, next year. Whether these will yet be robust or reliable enough though remains to be seen.”
- Alex Smout, principal, InMotion Ventures
Edtech startups will grapple with a new model
“We’ll continue to see the rise of the hybrid model in edtech. Just as the place of work has evolved from the office to remote to a combination of the two since 2020, edtech startups will have to grapple with a new model. This will entail corporate and consumer edtechs having to retain the scalability and efficiency of online with the engagement of offline.
“The large-scale layoffs that occurred across sectors of the tech industry in 2022 have resulted in a highly qualified pool of untapped talent seeking work or to go back to education to hone their skills. People are using this industry shift as a way to re-educate, reskill or upskill.”
- Bao-Y Van Cong, investment director, Target Global