Five Venture Capital Trends to Watch in 2023
December 05, 2022
The past year has been full of challenges and unprecedented turbulence. Many look to 2023 and beyond for the hope of normalcy and financial progress. For many others, the venture capital industry is the source of such hope. The current growth in the venture capital industry may play a role in recharging the economy and bringing resolution to the financial services industry. However, it is important to note that global technology advancements and even recent public health crises have strongly impacted venture capital. Let’s take a look at some recent venture capital trends and what potential lies ahead.
The changing landscape of venture capital
Since its genesis nearly a century ago, the venture capital industry has faced many challenges of a rapidly evolving world and financial landscape. These transformations have only accelerated, but venture capital has continued to persevere through these challenges. According to Business Wire, the venture capital industry has shown strong signs of potential growth from 2020 through 2025.
While surveys in the last few years have shown that less than 5% of new firms depend on venture capital during their initiation or primary growth stages. This is nothing new, as venture capital in this century favors technology start-ups, which are continuously on the rise, and still do not account for a considerable share of all new businesses. However, it seems that even for technology startups, venture capital has found recent competition: crowdfunding and cryptocurrency, notably.
This can be explained by the rise of alternative financing methods for a business project, such as crowdfunding. Such democratization of investing has provided many entrepreneurs with alternative funding sources, especially in the industries rarely financed by venture capital. Consequently, venture capital firms place innovation and quality above quantity. Thus, although only a small share of new businesses attracts the interest of venture capitalists, every critical and impactful transformation in the field does.
Five trends to keep an eye on
The venture capital industry is very good at adapting to changing circumstances and transforming to always lead business innovation. Here are the venture capital trends that are especially likely to impact such transformations this year.
1. Alternative data
For some time now, investors have looked at more than just traditional data sources like press releases and financial statements to make their decisions. Part of the strength of alternative data lies in its variety. From credit cards to social media, from satellite imagery to online job postings - virtually anything can become a source of important information for investors.
Venture capitalists use alternative data to find the companies that need their funding the most, build models capable of accurately predicting the potential of a specific product or start-up, and track the changes in a firm’s popularity online. There are types of alternative data that reveal many insights for every stage of a company's development. Furthermore, alternative data is a trend built to last, since as the world is changing, new types of data emerge to reflect it. Thus, this trend will certainly continue to impact venture capital in 2023 and beyond.
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2. Sustainable investing
Sustainable investing, also understood as theme investing, has become increasingly popular over the past few years. Due to the recent trend of socio-political awareness in a time of global difficulty, many individuals have been directed towards investing in companies that will positively impact global relations, environmental concerns, and, most notably, public health topics. As investors realize that these outcomes are not as unrelated as they may seem at first, sustainable investing keeps gaining momentum.
Oftentimes, this method of investing coincides with zebra investing. Opposite of unicorn investing, zebra investing focuses on companies valued below $1 billion and are sustainable. Likewise, considering both methods of investing, benefits for the environment and society attract socially responsible investors. But these benefits also mean that the investment has growth potential in a more aware future we all hope for. This year should see more investors turning to it and more ways of development for sustainable investing.
3. Automation and technology adaptation
Consumers have always been interested in new technology they could master to improve their lives with. Businesses also keep adopting automation to ensure efficiency and stay competitive. Consequently, the fintech industry has seen a recent boom in-market success, as many businesses and everyday customers are benefiting from the recent advancements within the industry. For example, financial literacy solutions and online-only banking have been undoubtedly favored during the pandemic as they allow for remote access, learning, and communication.
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4. Portfolio diversification
With increasing globalization and digitization of investing, geography has become less of a concern for venture capitalists. For example, within the tech industry, there has been a recent decentralization of capital away from Silicon Valley-based companies and increased capital in other cities all over the world. Relatedly, this trend has not only expanded from a geographical and globalization standpoint, but it has also expanded into diversification in the way investors think about how global disasters, movements, and trends impact a portfolio. Circling back to zebra and unicorn investing, many VCs diversify their portfolio by investing in both unicorns and zebras. For example, the pandemic and other global impacts, have proven to investors that zebra and unicorn investing can coexist within a portfolio and still find success.
With an expected global blockchain market of $39.7 billion by 2025, it is unlikely that cryptocurrency is going anywhere soon. And although cryptocurrency can be applied to the previously mentioned automation and technology adaptation trend, as cryptocurrency is an offshoot of fintech, its exponentially expanding market size makes it enough of a trend to stand on its own. VCs have found that cryptocurrency offers a more alternative trading approach, as it's not as regulated as traditional investing. Like an initial public offering (IPO), cryptocurrency uses an (ICO) initial coin offering that allows companies to raise funds via a digital coin. This method has proven to be quite fruitful for both VCs and companies alike that may be looking for more flexible ways to invest or find funding, respectively.
Alternative data processing and beyond
The venture capital trends that we have ahead of us this year are quite different. But they do have one thing in common: speedy data analysis. The venture capital industry must note the importance of high-speed data processing systems that can handle exponentially increasing amounts of insightful data, leading to an unprecedented time of investment intelligence. Likewise, the parallel advancements of alternative data and those of data processing have proven successful for VCs and companies alike, even during global calamities.
While we have many reasons to look forward, it is clear that the venture capital industry's current trends provide us with even more reasons. Equipped with the knowledge of various new possibilities, investors will once again provide the fuel for necessary changes. As venture capital trends come and fade or develop into something bigger, one thing that remains is a need for knowledge. Therefore, it is to be expected that venture capital investors will continue looking for new data sources and utilizing those that are already available.
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