We have gone through another year rich in both expected and unexpected events. The biggest geopolitical crisis of this century turned into a food and energy crisis, resulting in high inflation worldwide. In response, central banks began raising interest rates, ending the longest period of cheap money in history, which directly affected the valuations of most assets in financial markets and the willingness of market participants to invest in some of the asset classes. It also impacted private investments: according to CBInsights, globally, venture capital funding decreased by 34% quarter over quarter in Q3 2022, returning to pre-pandemic levels.
Among other events that had a widespread impact, we should mention the fall of one of the largest cryptocurrency exchanges, FTX, the turmoil on Twitter following its acquisition by Elon Musk, and mass layoffs in technology companies, with 150,000 people affected in 2022 according to Layoffs.fyi. Just in Facebook, which experienced its first-ever decline in revenue, 11,000 employees were laid off.
However, all of this did not hinder technological development. Which phenomena and technological trends will we remember from this year? Which ones have the potential to shape the market and investment landscape in the coming year? Where will venture capital funds be searching for unicorns?
Surge in Climate Tech investment
One of the key trends in 2023 will be investments in startups and companies that have a positive and measurable impact on society and the environment, known as “impact” companies. After an eventful 2021, with VC funds investing $31.9 billion in this sector, 2022 was more modest, with global climate tech investments reaching just under $25 billion. However, analysts predict that this slight slowdown was a one-time occurrence.
The second driver of impact investments, besides climate protection, is energy security and ways to become less dependent on fossil fuel imports. Investor interest in this area has increased following the Russian invasion of Ukraine. In the United States, this has been expressed through the Inflation Reduction Act 2022 (IRA), which aims to promote investment in domestic energy production with a particular emphasis on renewable sources.
Another area that will gain significance is software for managing renewable energy sources. With the growing interest in the sector, the entire infrastructure needed for generating and storing green energy is becoming more complex. Considering the diversity and increasing number of energy sources, as well as the scale at which it is transmitted and stored, there will be a significant demand for software that can monitor this process.
We should also expect an increased interest in Carbon Capture and Storage (CCS) technology, which involves capturing carbon dioxide from the atmosphere and storing it. Without CCS, some industries have no chance of decarbonizing.
Commercial Applications for Chatbot GPT (and other conversational bots)
In December, OpenAI released an AI-powered chatbot called ChatGPT for public use. ChatGPT was trained to provide detailed responses to user queries in a remarkably human-like manner, regardless of the language or topic. It can compose poetry, stories, and even write lines of code in any programming language.
In less than a week, the algorithm attracted one million users who started exploring various applications for the chatbot. While this is currently mainly for entertainment purposes, it is expected that in 2023, we will see the first commercial applications of this technology. This year, the first children’s book entirely written and illustrated by artificial intelligence was created. It took just 72 hours from the idea to publication.
Graphics created by artificial intelligence
In 2022, generative AI models, such as Stable Diffusion and DALLE-E 2, started gaining popularity among “ordinary” internet users. They did not only lead to an explosion of online creativity but also became the basis for new applications and even entirely new business models.
However, this phenomenon also has its dark side. The models are being used, among other things, to create deep fakes, which are highly realistic photo montages using the images of individuals who are typically unaware and whose rights may be violated.
Another issue is the copyright of artists whose works were used to train the models. After the tools are made available to the public, artists lost control over what was happenning to their art. They also do not have the opportunity to participate in potential profits from its processing.
So what can we expect in this area in 2023? There will likely be initial attempts to regulate generative AI. We can also expect new creative ideas for utilizing this technology, as well as the emergence of commercial projects. Currently, most applications and websites have their paid versions, so we can anticipate an influx of more of these.
Areas such as image and graphic creation, which were previously reserved for a small group of talented artists, will now be accessible to everyone. This promising technology has the potential to revolutionize more than one sphere of our lives.
Healthtech = medtech, fitness & wellness
One of the effects of the COVID-19 pandemic is an increased awareness and interest in health, including mental health and well-being. Even though three years have passed since the outbreak of the pandemic, this trend continues to grow, and we can expect the emergence of more projects in the healthtech sector, such as those enabling health monitoring and remote medical assistance.
In 2023, we can also expect further development of tools supporting a sports-oriented lifestyle. Trend observers predict a particularly high popularity of increasingly advanced exercise monitoring equipment, often enriched with gamification and virtual reality elements. This is especially relevant for younger generations who expect fitness service providers to offer entertainment value.
There are also increasing expectations in this area from corporate employees. Under pressure from their employees, employers are expanding the range of benefits they offer, including well-being applications, extended medical packages, and access to psychotherapeutic care. Therefore, we can expect the emergence of new startups catering to such needs of the business world, as well as existing projects expanding their offerings to include B2B cooperation. Wellbee, a company in our portfolio, has already made this decision over a year ago and successfully onboards corporate clients who want to provide their employees with access to a platform facilitating support from psychotherapists, psychodieticians, coaching specialists, etc.
Layoffs as a Catalyst for the Development of Breakthrough Technologies?
According to the portal Layoffs.fyi, over 150,000 technology workers lost their jobs in 2022 alone, and the number amounts to as many as 250,000 since the start of the pandemic. In 2023, the creativity of this newly available talent pool may be unleashed. Some of these individuals will likely join existing technology projects, accelerating their development. There is also a chance that we will be surprised by truly revolutionary ideas, as was the case with Airbnb, Uber, or Dropbox, which emerged shortly after the 2007-9 recession.
Starting a business during a slowdown has its advantages. In addition to the increased availability of qualified staff, challenging market conditions often serve as excellent validation for business models. Companies that can generate revenue during tough times are more likely to succeed when conditions improve.
The Impact of the War in Ukraine on Technological Innovations
Historically, the arms race has always been accompanied by a technological race as well. Canned food, digital cameras, microwaves, computers, the Internet, and GPS, which are now part of our daily lives, were initially invented for military purposes.
In this regard, the war in Ukraine is no exception, and the involvement of the technology sector is already yielding results. One example is biotechnology. In response to the challenges of delivering supplies to remote military locations, scientists are working on technology that allows for on-site production, ranging from proteins and fuel to painkillers. Such solutions will undoubtedly find applications in the civilian world as well.
Another example is hypersonic speed. The technology that enables achieving speeds 5 to 25 times the speed of sound, initially used to create the world’s fastest weapons, is now being developed in the civilian world as well. An example is the American startup Venus Aerospace, which is working on a spaceplane that aims to transport passengers to any location in the world within an hour.
Research on quantum computers is also largely funded by military resources. This emerging technology will certainly make headlines in 2023. Ultimately, it will have a wide range of applications, from drug development, cryptography, and financial modeling to logistics optimization and weather forecasting.
Decentralization and new directions in semiconductor chip production
Semiconductors are key components that power electronics, from computers and smartphones to brake sensors in cars.
Due to the relatively slow growth rate of the traditional semiconductor market, investments in this area have not been very attractive for venture capital funds. However, a new category has recently emerged in the market – companies designing semiconductor chips for artificial intelligence. This technology requires a different kind of chip – one that achieves high performance and computational speed specific to artificial intelligence. It can be expected that the growth rate of the market value for this category of semiconductors will be significantly higher than that of traditional semiconductors. Therefore, this area may become a favorite new investment target for venture capital funds.
What will surprise us?
From a technological standpoint, 2023 promises to be very interesting. In addition to the further development of already visible trends, we will certainly witness the emergence of completely new phenomena. One of them may be the first Super App in the Western world, a platform that offers more than one core function (following the example of the Chinese WeChat). Companies such as Meta, Amazon, Microsoft, and Apple are competing in this race, continuously expanding their offerings within one ecosystem. Elon Musk has also announced the addition of additional features to Twitter.
Technological advancements in the areas of edge computing, quantum computing, and digital twin technology (creating virtual copies of physical objects) also show promise. We will undoubtedly witness further development in Web3 as well. The market for games operating in this environment (based on blockchain technology, which leads to decentralization and democratization of all aspects of the game, putting it in the hands of players) may have significant potential. The breakthrough may also occur when Web3 is adopted by large institutions: companies such as Starbucks, JP Morgan, and KKR have already expressed interest in the adoption of cryptocurrencies and the emergence of Web3. Gradually implemented regulations will support these developments.
Difficulties in obtaining financing? Not necessarily
During the market correction period, many investors held back from investments, but these sentiments have already begun to change. Given the overall economic situation and inflation, venture capital investments are increasingly seen as the best way to deploy capital in these circumstances. This is good news for innovators: it can be expected that as long as their projects meet real market needs, fuel for their development will not be lacking.
We eagerly await the emergence of such exciting projects, including in our portfolio.
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