This time last year, the European venture community was celebrating a record year of investment, which topped €100bn for the first time. It was perhaps inevitable that 2022 would fail to match up.
Yet, if you take 2021 out of the equation, this year would still have been a record, with funding levels incredibly totaling more than 2019 and 2020 put together. Plus, in many ways, the current reset is a positive development for the European tech scene, driving entrepreneurs and investors to take stock and focus on the most promising ideas while prioritizing business fundamentals over ‘growth at all costs.’
Despite the current downturn, opportunities are still out there for innovative companies and entrepreneurs who are addressing real problems in traditional industries. Digital transformation will continue unabated, as critical sectors overhaul manual processes, combat inefficiencies, and overcome post-pandemic skills shortages.
Here are my thoughts on where we will see the most exciting developments in the year ahead.
1. Reset of VC funding conditions will drive a back to basics approach
A reset of venture capital funding conditions is currently underway, sparked by turbulence across the tech market in general. However, this reset hasn’t fully played out and we will only see it fully realized in the first half of next year, particularly in the case of mid-stage businesses – those at Series B, C, and D – which will face a substantially reduced funding landscape and may not be able to reach their peak valuations.
Consequently, there is a ‘back to basics’ swing in investor sentiment, as VCs focus on businesses that are solving complex issues for legacy economy sectors, such as healthcare and manufacturing – and doing so profitably. These sectors are defensive by nature, given that they sell to large, well-funded buyers, plus they are on a mission to cut costs and improve efficiency by investing in digitization.
For such companies the opportunity space is massive, and the best founders are still being courted by large amounts of VC and private equity dry powder. And while there are still external risks to success such as conflicts, social instability, and protectionism, tech innovation now extends beyond borders, which means that companies can draw on global talent to build solutions where they are most needed.
2. From SaaS point solutions to full-stack operating businesses
The Netscape executive Jim Barksdale famously said that the only way to make money is bundling and unbundling. And for many years innovation has come in the form of unbundling the tech stack, providing incremental SaaS solutions that digitize one aspect of the value chain. In many cases these have come in the form of APIs, such as Stripe or Klarna for payments, or Twilio for online messaging and communication, which companies can integrate into their systems, alongside other point products, to make up the total offering.
However, tech founders are realizing that in many cases, these point solutions are still falling short, in their ability to create the joined-up systems, customer service, and efficiency that customers are looking for. Their solution? Launching full stack competitors, which in many cases span both physical infrastructure and digital processes, effectively bundling the tech stack up again, whilst owning the physical experience as well.
This approach is proving especially effective in businesses selling direct to consumers, such as healthcare or food service. One interesting example is Cala, a French restaurant, which has built its own digital software stack along with robots to prepare the food itself. We are also seeing it in B2B sectors, for example, Superscript, an insurtech selling to small businesses, has built its entire tech stack in-house, rather than drawing on existing providers. Another clever idea is Daedalus, which has developed its own software systems to improve the production of CNC-machined parts, significantly speeding up order fulfillment times.
3. Augmentation of frontline workers with automation and robotics
Developed countries around the world are suffering from chronic shortages of frontline labor in critical sectors, such as healthcare, agriculture, manufacturing, and transport. Exacerbated by tougher immigration rules, plus the rising cost of living, it is harder and harder for organizations to find individuals prepared to do these jobs, build the workforce they need to maintain service levels, and ultimately scale their operations.
Leaders in affected sectors are under serious pressure to find solutions by correcting a decade of underinvestment in technology. This is now starting to happen, and we will start to see increased automation of low-value tasks to improve the productivity of existing workers. Companies doing interesting things in this space include Teton.ai, which uses computer vision to help care staff to understand what’s happening on the ward, to improve care and take pressure off staff. Another is Thingtrax, a manufacturing performance platform, which automates the management of manufacturing processes.
These solutions are also increasingly being combined with robotics, which has advanced significantly in recent years thanks to innovations in hardware and software. Edge-based computing power also means that robot ‘workers’ are increasingly able to perceive and respond to their surroundings. The industrial robotics industry is set to grow to $80bn by 2030 and professional services robots are set for a market volume of up to $170bn by 2030. Use cases include elderly care, applications in retail and public services, and multi-purpose personal assistants in households.
4. Technology that improves the way we produce, store, and consume energy
With governments around the globe committed to achieving Net Zero by at least 2050, the race is on to find the best technological solutions for improving energy efficiency. Through a combined effort between private enterprise and academic research, we are now seeing a host of truly transformational ideas come to light, and 2023 could be the year when these start to be rolled out in the world around us.
Battery technology is one notable example, with a selection of companies working on how batteries can be made longer lasting, more durable, faster to charge, and lighter weight than those that currently exist. Structural batteries are one ground-breaking idea, which can be integrated into the objects that need them, for example, the hull of a boat. A company called Nanom is doing this using nanotechnology and it has the potential for use in cars, airplanes, bicycles, and more.
Another area that is advancing rapidly is microgrids, which flip the electricity model on its head, enabling offices and households to produce their own renewable energy, and share it amongst the local community, taking the pressure off the central grid. This is being combined with the use of machine learning to analyze energy data to ensure that all participants have access to electricity when they need it and that there is maximum energy utilization across the system.
5. Continuous supply chain transformation
The past few years have highlighted the fragility of the supply chain, with daily reminders in the form of fulfillment delays, cancellations, or unavailable products. Many companies have continued to struggle with logistical challenges, with a significant impact on the bottom line.
These issues have led to an increased focus on the digitalization of the supply chain, driven by cloud technologies, robotics, AI, computer vision, and precision handling. Now, three years after the pandemic hit, we will see these solutions come to maturity, enabling a truly connected supply chain – from the moment of order to the point of delivery.
Advances in sensors and the IoT are generating huge volumes of data, which, with the help of cloud technologies are being combined to help firms plan and then optimize shipping routes in real-time, whether across the sea, air, or road. Robotics are also playing a part in replacing many of the manual jobs within the supply chain, such as picking and packing items in warehouses, using computer vision and artificial intelligence. And while autonomous carriers are likely to still be some way off, autonomous vehicles such as forklift trucks are already in use in warehouses and ports – taking us one step closer to a fully automated supply chain.
6. The death of the ‘blockchain’ and digital assets (other than bitcoin
Despite being around since 1991, blockchain still has no use cases and in 2023 we will see the misplaced enthusiasm around the technology finally come to an end. A blockchain is effectively just a database, and a slow and expensive one at that, because its data is distributed across multiple nodes. It has primarily been used for the launch of tokens, but regulators are likely to put a stop to that following the FTX debacle this year.
The argument that tokens can be issued on top of these blockchains to represent ownership (fractional or whole) of external assets (e.g., a banana, a piece of artwork, or some real estate) is a fallacy. Whilst the arguments for a token seem persuasive at first glance, they fall apart on closer scrutiny. For example, were a banana to be tokenized on the blockchain, who would be trusted to check if the underlying banana was real? The point of a blockchain is to remove intermediaries, and yet here we have a third party foundational to the construct itself.
‘Digital assets’ is another meaningless term. To be a digital asset, information must be non-copiable, but you cannot make information non-copiable in the digital realm. The only thing that is non-copiable in the digital realm is bitcoin the asset, because of its basis in proof of work. Thus, it is the only ‘digital asset’, and the current upheaval in the crypto and blockchain space will solidify its role as the digital money of choice in 2023.
7. Bitcoin infrastructure ready to scale
As a monetary protocol, bitcoin allows us to transmit value anywhere in the world at the speed of light, in a permissionless fashion, and for a negligible cost. For governments and financial institutions, it offers a significant upgrade on the antiquated Swift and Fedwire payment systems. For businesses, it brings down the cost of payment processing and reconciliation, and for consumers, it will likely mean cheaper products and an end to excessive fees placed on routine financial transactions.
Making the most of these benefits requires infrastructure that is only now becoming commercially viable to scale. For example, the ‘lightning network’ that provides the rails for bitcoin requires substantive investment to reach a point where it can be used by everyone, for all financial transactions, all the time.
Now, a host of exciting startups are attracting the investment they need to build bitcoin infrastructure that can rearchitect the monetary system and our economic system more broadly. Examples include Bolt.Observer, which is building essential tooling for companies running lightning network nodes, Galoy, which provides open-source bitcoin infrastructure for nation state and corporate adoption of the bitcoin standard, and Fedi, a privacy and scaling solution looking to bring billions of people in the global south onto the bitcoin standard.
8. The great hope for the unbanked
Finally, we will also see an acceleration in the use of bitcoin as a solution for the unbanked. Globally around 1.4bn people remain unbanked due to the restrictions of traditional banking systems, and bitcoin enables people to circumvent all of these, with the lack of a central authority meaning anybody can purchase the currency with just a smartphone or a computer. Furthermore, it is much easier to transfer and make payments than with fiat currencies, with no third-party involvement, plus lower transaction fees.
Unbanked communities are already using bitcoin for these reasons, with emerging countries ahead of every developed nation except the United States in adopting, mining, and trading cryptocurrencies; four of the seven nations with the highest concentration of unbanked adults are those that are leading crypto adoption (China, India, Pakistan, Nigeria). And as we see more decentralized finance innovations come to the fore, enabling unbanked people to create savings communities and issue loans, for example, we will see more people liberated from financial exclusion via bitcoin.
Startups will lead the way to growth
Of course, it is impossible to predict the future accurately, and if recent years have taught us anything, it’s how quickly the landscape can shift, and unexpected events can eclipse existing plans and priorities. But the constant is always change, which is why the role of VCs and startups is so powerful with their focus on transformation and improvement, irrespective of what is happening at a macro-economic level.
During difficult times, more than ever, societal problems rise to the surface, and that brings opportunities for new technologies and those individuals capable of putting them to good use. The innovation and energy necessary to find real solutions to big challenges will never come from the corporate sector, which is bereft of ideas, dominated by bureaucracy, and without the necessary entrepreneurial minds. It is up to startups – and their venture capital backers – to lead the way.