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2023: Why We're Optimistic

Alistair OwenJanuary 12, 2023

2022 was a polarising year. Tech company valuations in public and private markets hit all time highs only to come crashing down as the macroeconomic environment responded to the aftermath of the pandemic. Interest rates rising from close to zero to a projected peak of more than 5% and the end of quantitative easing has placed a renewed emphasis on free cash flow as opposed to pure topline growth. The venture market at the growth stage has also become increasingly tight as many later-stage investors have paused or withdrawn from the market.

This isn’t a new reality for many of our startups, many of which come from unfashionable geographies or sectors and have had to focus on efficient growth and strong unit economics so they could reach profitability sooner. We believe this mindset will again become the new normal in this market environment.

However, despite these headwinds, we remain optimistic. Unlike in previous tech market downturns, the majority of the tech companies have reached substantial revenues and we continue to see a clear and established need for software to vastly improve the way we work and live.

The VF team are as excited as always, if not more, since in this period we expect founders who are more committed to start their entrepreneurial journey. We have continued to invest at a similar pace in new startups throughout 2022 and expect to continue to do so this year too!

In the spirit of optimism, we wanted to share a sample of the areas we’re excited about in 2023.

Fintech

Fintech has always been a major focus for VentureFriends and we continue to invest in startups that impact the financial system. It's likely that we'll see increased M&A activity as many growth stage fintechs aren't able to match the expectations set by punchy valuations and those startups that remain well-capitalised can take advantage of a weak funding environment.

At the early stage our team are excited to speak with founders working on:

  • B2B Payments
  • Embedded finance
  • Verticalised financial services
  • Any service that supports and improves the current infrastructure of financial services.

B2B SaaS

SaaS has seen incredible growth over the last decade, but growth assumptions are now being challenged as many have failed to find profitability and the macro environment hitting net new ARR and net retention. This has already impacted valuations, but it may also become tougher for early-stage SaaS startups to grow via product-led growth as larger organisations restrict discretionary spend on subscriptions.

Of course, there are many business activities to be digitised or archaic software to be displaced, so we're still optimistic. It's especially interesting to see how recent leaps in AI will affect the way SaaS is built, sold and supported.

Some areas we think are interesting:

  • Copilot for knowledge work (AI)
  • Tools for creative work
  • Next generation of automation tooling (AI)
  • All-in-one offerings that displace point solutions

Proptech

Proptech is often seen as capital intensive, which is often true when looking at models such as iBuyers (e.g. Opendoor) or business models that require leasing or owning the underlying real estate (e.g. WeWork). These models will be more difficult to fund and operate as cost of capital increases, pressuring margins.

However, there are plenty of capital-light approaches that can achieve increbile growth. A recent example is Huspy, who started with making it easy for homebuyers to find mortgages and is now handling the entire buying process in UAE and Spain.

  • Software improving the speed and execution of construction
  • Changing property management to have postiive NPS and improving yields for owners
  • Automation of activities such as planning

We'll share some deeper thoughts on these areas in upcoming deep dives, but for now will focus on Consumer & Marketplaces.

Consumer & Marketplaces

Consumers have transitioned from high savings rates to soaring debt levels and many segments are struggling to meet their costs of living. There are still opportunities, but purchasing behaviour will become increasingly considered and it will be tougher to acquire and retain this spend. To be successful in this environment, consumer startups need to penetrate deeper into the consumer hierarchy of needs and focus on solving problems that truly improve customers’ quality of life.

Marketplaces have also seen major headwinds. Consumers are less willing to pay a premium for convenience, which has especially impacted players in the food and grocery sectors. Platforms that relied on gig work have also found it more difficult to retain their supply side as the labour market stayed tight and inflation pushed up pay, suggesting that established network effects may not be as unnassailable as once thought. However, we believe there are still a number of exciting opportunities for marketplaces in 2023, especially those that focus on B2B transactions.

Consumer Healthcare

Staying in good health is one of our essential needs and it’s an easy sell for consumers to pay for products and services that offer the chance of a longer, better life.

The consumer health landscape in Europe has typically been challenging as public health care systems are less open to adopting new modes of care versus insurers in the US. However, we believe that there are huge markets to tackle for conditions, often chronic, that are typically underserved by state systems.

Obesity is a major concern for most Western countries, but is largely addressed through telling patients to eat less and exercise more. Regimes using combinations of coaching, cognitive-based therapy, diet planning and weight-loss medication have been proven to show better results and the economic impact of obesity represents a $2 trillion global opportunity.

Chronic conditions have a major impact on our quality of life, especially as we age, but most healthcare systems focus on maintenance. Similar to obesity, we’d be keen to speak with startups that are focused on improving quality of life by bringing modern approaches to consumers faster.

Online pharmacy is still stuck in the 2000s approach to ecommerce and this €5B market is expected to double over the next 10 years. There’s an opportunity to bring a 2020s approach to user experience and customer relationship to both provide higher satisfaction but also drive a stronger relationship with our health. This doesn’t need to be delivered in 15 minutes, but same day could make sense.

Vertical Marketplaces

Arguably in B2C marketplaces many of the low hanging fruits have been picked and it has become more difficult to acquire and retain consumers in recent years. There is however, more room for growth when it comes to vertical B2B marketplaces as businesses become more comfortable with transacting online.

Agriculture & Commodities are huge markets and the way that liquidity is established in this sector hasn’t changed much since the Chicago Mercantile Exchange was founded in 1898.

For example, the global coffee bean market processes ~$22B in GMV annually which was one of the factors for VF to invest in Almacena last year. Almacena massively increases transparency in the coffee market, which not only improves price discovery but also fairer prices for producers who were reliant on a small number of distributors to reach the European market.

Similarly the grain market is the largest market out of the trillion dollar global agricultural market, which again it lacks digitization and runs often on excel. Lack of digitization in combination with the growing population that is projected by the UN to reach 9.7 billion by 2050 are some of the reasons we invested in AgroClub. AgroClub is an agriculture marketplace connecting farmers and grain buyers around the world. It is a full stack platform that executes transactions end to end taking care of KYC, quality control, logistics and financing.

We believe there’s space for several marketplaces with the same scale of opportunity focused on similar commodities, while we often see the need for such marketplaces to offer additional services to further enable the matchmaking and execution of trades. In particular these services mostly revolve around financing as well as logistics.

Skilled Labour marketplaces also present an exciting opportunity, where talent supply is fragmented and difficult to retain and employers rely on agencies to find their staff.

Companies such as Jobandtalent have found huge success with “blue collar’ hiring, but we believe this approach is more interesting where the talent force have skills and training that make them both hard to replace but also acts as an incentive for talent to stay within that industry. For example, a skilled plasterer with years of training is much more likely to stay within the industry long-term than a delivery driver.

The medical and caregiving sector will be another exciting area across Europe as aging populations increase the provision required, reduce available workforce and deteriorate conditions. Labour marketplaces can proactively match talent with vacancies in a more efficient way than agencies and also provide upskilling to match gaps they identify in the market.

Energy

The war in Ukraine has led to skyrocketing energy prices as Europe has been over reliant on Russian gas for electricity and heating. There are therefore opportunities for startups that can help with affordable energy now, and it’s likely that the true standouts will be those that take advantage of a renewed focus of transitioning away from fossil fuels.

To combat climate change, the EU has implemented a number of measures which provide further tailwinds to the sector, such as increasing the use of renewable energy sources, improving energy efficiency and promoting low-carbon technologies.

Solar and heat pump installation is likely to see increased uptake in the coming years as homeowners realise that they want more price stability from self-generated electricity and want to move away from gas-powered heating. There have been a few success cases in Europe, but the process for consumers is still confusing and often with unexpected costs. We’re interested in speaking with startups that can provide an amazing customer experience, while still maintaining a lean operating model.

Smart and flexible grids will likely be key components of the energy transition. Together, these technologies can help to ensure that renewable energy is integrated into the grid in an efficient and reliable way. We’re therefore keen to speak with companies facilitating the transition to a decentralised and flexible network.

Talk to us!

If you’re a founder in Europe or MENA and are working on something in these areas we’d love to talk to you. The quickest way to speak to us is filling out this form here: https://venturefriends.vc

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