✨ It’s that time of the year again…
As the year draws to a close, it’s with a sense of excitement and anticipation that we present the final newsletter of 2023. This year has been a remarkable journey, filled with significant achievements and groundbreaking advancements in the realms of general technologies, sustainability, as well as blockchain & crypto. As we reflect on the successes of the past year, we can’t help but feel a surge of optimism for what 2024 holds. We’re ready to embrace the new challenges and opportunities that await us, continuing to drive positive change and growth in the VC ecosystem. Here’s to a bright and promising new year ahead!
A Year in Review: Addressing Macroeconomic Uncertainties Through Technological Innovation
―By Luke Carroll & Benoît Turbé
As 2023 draws to a close, we reflect on a turbulent year across all asset classes, marked by increased economic and structural uncertainty. We have distilled four key macro trends that encapsulate our view of 2023 while offering a glimpse of opportunities awaiting in 2024, particularly in technological innovation and advancements through VC investments.
🤑 Persistent Higher Interest Rates and Inflation: It’s time to embrace the new norm of higher interest rates and inflation, which appear likely to remain. The higher risk free rate and credit costs will continue to put pressure on businesses that are not profitable and capex intensive, as these businesses usually rely on debt financing.
👵 Impact of Aging Populations: Despite unemployment hovering around all-time lows, visible worker shortages are becoming a leading cause of expected declining growth rates globally and in particular in the US and China. However, these shortages are favoring the labor market, where real wage growth continues to outpaces inflation, resilient consumer spending.
🌏 Globalization Breakdown and New Alliances: Geopolitical risks are on the rise due to conflicts in Russia-Ukraine, the Middle East, and increased geo-political tensions between the US and China. The world faces more volatile situations than in decades, according to the UN. The upcoming 2024 elections, involving over half the global population, especially the US and Taiwan elections, carry significant importance. his has also continued to add to inflationary pressure and has resulted in significant on/near shoring of resources and production capabilities. Navigating this new world order requires a hands on holistic portfolio strategy to ensure the downside is protected and interesting opportunities are identified.
♻️ Real Physical Damages from Climate Change: Climate change’s real-world costs are not just social but also financial. These costs are challenging to quantify but are growing exponentially. Demand is surging for products and services that enhance climate resilience, addressing increased global temperatures which are also threatening our food supply (draughts, floods, etc.). This is another factor that plays into inflationary patterns.
The Role of Technological Innovation in Addressing Macroeconomic Uncertainties:
We see many areas where Venture Capital will play a vital role in helping to address these global issues of growth, deglobalization and rising climate costs.
🤑 Higher Interest Rates: We are seeing a boon in private credit to fill the void left by banks and other institutions that are under pressure from poor credit and treasury controls. Additionally, governments are stepping up efforts in counties key risk areas to provide grants and subsidies to ensure on and near shoring efforts are successful as we navigate a new geo-political landscape.
👵 Aging Populations: Production efficiencies are crucial for developed economies to sustain higher growth rates. Computing power, AI, and ML are transformative trends guiding both public and private sectors, offering opportunities in areas like robotics, manufacturing, and coding.
🌏 Globalization Breakdown: In a more competitive world, expect increased investment in strategic sectors like semiconductors, energy, defense, infrastructure, and cybersecurity. Shifts in supply chain reliance from China benefit regions like LatAm and India, leading to growth in fintech, credit, and local resources.
♻️ Cost of Climate Change: Government initiatives and consumer awareness are driving substantial investment in climate tech, as evident from VC capital allocation in 2023 (cf. Sustainability Section). This trend is likely to continue in 2024.
What to Watch in 2024:
🏦 Interest Rate Dynamics in 2024: Observers will closely monitor interest rate developments. JP Morgan Asset Management anticipates rate cuts later and deeper than current market expectations, reflecting the central banks’ challenge of balancing inflation control with growth support.
🗳️ Global Elections and Market Dynamics in 2024: Over 4 billion people worldwide will vote in 2024, potentially reshaping fiscal policies, regulations, and international relations. The US election will have global repercussions, influencing trade, environmental policies, and geopolitics. Critical elections in the UK, India, Taiwan, and other countries will also bring policy shifts and market impacts.
🧮 The Continued Rewiring of Globalization: New global trends emphasize “near-shoring,” “friend-shoring,” and “on-shoring” as tensions rise between Eastern and Western blocks. Mexico and India stand to benefit as alternatives in global supply chains, marking a strategic shift from past decades of globalization.
🤖 Artificial Intelligence’s Rise in 2024: AI’s commercialization will be unmistakable in 2024, fueled by advancements like ChatGPT, increased computing power, and hardware. AI is expected to disrupt various industries, including manufacturing, education, logistics, mobility, and MedTech/Biotech.
🏥 Breakthroughs in Medical Innovation: Medical innovation is poised for breakthroughs in treating diseases like Alzheimer’s and advancing neuroscience. Personalized healthcare facilitated by AI promises transformative changes in medical science and attractive investment opportunities.
🔗 Crypto Maturation: As we close out 2023, we witness the early stages of a new market cycle in the crypto world, marked by a significant institutionalization moment. This shift was highlighted by the positive progression of numerous ETF applications. 2024 will also be the year of the next Bitcoin Halving which may also confirm the positive market trend. On the technological side, we’re on the cusp of advancements in technology in crypto. We’re anticipating a significant shift towards practical and scalable decentralization, which promises to democratize digital platforms and enhance user control. The user experience in crypto is set for a major transformation, with innovations like passkeys and smart accounts simplifying and securing interactions. Additionally, the convergence of AI and blockchain technology is expected to democratize AI, making it more accessible and equitable. These developments are poised to reshape not just the tech landscape but also the broader societal and economic dynamics.
🌱 Climate Tech: Given the capital intensity of climate tech businesses, we are expecting to see many models be put under pressure and tested in 2024 and 2025, as interest rates increase costs and availability of capital becomes a little more scarce. That said, this will be an important maturing point for the sector and given the real world costs and implications, we expect to see continued investment in this space in 2024.
🔮 In summary, 2024 presents pivotal developments in both the macroeconomic and technological spheres, offering substantial investment opportunities within the Venture Capital industry, despite accompanying challenges and uncertainties.
Read more ⬇️
Opportunities in a Complex World, Investment Outlook, Q1 2024 — HSBC
Stepping into a new reality, Investment Outlook, Q1 2024 — BNP Paribas Asset Management
Grabbing the wheel: putting money to work, 2024 Global Outlook — BlackRock Investment Institute
In case you missed it…
General Technologies 🚀
📈 VC Market and Who is Outperforming
The venture capital (VC) world is undergoing a notable shift, particularly evident when comparing the peak activity of 2021 to the current trends in 2023:
- 2021 Peak: The year saw 1,397 U.S. funds raise a remarkable $157.8 billion.
- 2023 Decline: A significant downturn is observed, with only 197 funds managing to raise $27.6 billion so far.
So what is happening?
📉 Smaller deals, but still active: Despite the downturn, the venture scene remains active with an estimated 2,186 investments in 2023. However, the total investment is expected to drop to $40B, a stark decrease from previous years.
🐘 Shift in focus: Late-stage and growth funds are facing notable challenges in fundraising and capital deployment, particularly affected by the market correction that led to approximately 400 unicorns being stripped of their status. This phenomenon, commonly referred to as ‘dehorning,’ has created significant obstacles for growth funds. It underscores a critical reassessment of startup valuations after the hype of 2021 and notably shaken investor confidence, reflecting a broader shift in the investment landscape.
📊 Industry outlook: A predicted decrease in global VC firms, from 10,000 to around 7,000, indicates a consolidation trend.
What are the Key Factors Essential for Funds to Achieve Superior Performance?
🚪 Access matters: This year, more than ever, the performance disparity is strikingly evident in VC as it doubles when moving from the top half to the top quartile of funds and doubles yet again within the top decile. This phenomenon underscores a significantly more pronounced skewed distribution in venture capital compared to other asset classes.
⏰ Timing matters: Generalist funds saw a boost in IRR during the venture capital boom of 2017 and 2018 when valuations soared.
🐭 Size matters: Smaller funds (>$350m) tend to have 50% higher likelihood of achieving 2.5x TVPI than larger ones.
🎯 Specialists vs. generalists: Both show similar overall performance, but specialists tend to have slightly higher TVPI due to focused expertise.
Read more on the subject ⬇️
Battle of the funds: Do VC specialists outperform generalists? — Pitchbook
Big VC Funds Are Underperforming Smaller Ones and Their Future Is Dim— II
Sustainability 🌍
🔥 “What’s even hotter than Generative AI in 2023?” — Yoram Wijngaarde
We are thrilled to announce that Climate Tech has emerged as the top investment category. The complete report will soon be available on Dealroom.co, but in the meantime, here’s a little preview:
🌱 COP28: Insights and Implications
As the curtains fall on COP28, you may have come across various headlines and discussions surrounding this significant event in our global climate journey. But what are the deeper implications of the outcomes achieved at this conference?
⛽️ Fossil Fuel Phase-Out: A landmark decision made, signaling a shift in climate policy. But questions remain about its implementation, especially given the global dependency on fossil fuels. Critiques, including those from figures like former U.S. Vice President Al Gore, point to potential loopholes and lack of robustness in the agreement.
💸 Increased Financial Commitments: Noteworthy financial commitments were announced, with the UAE pledging a significant $30 billion fund. However, juxtaposed against the enormity of the climate crisis, one wonders if these funds can bridge the substantial investment gap needed for global climate solutions.
🔋 Renewable Energy and Energy Efficiency Targets: A bold goal was set to triple renewable energy capacity to 11,000 GW and double energy efficiency by 2030. Despite these ambitious targets, achieving alignment with the 1.5°C target remains a formidable challenge due to slow renewable adoption rates and infrastructure hurdles.
💨 Methane Reduction Pledges: A notable initiative from the oil and gas sector promises near-zero methane emissions by 2030. However, this commitment covers only a part of global emissions. With 50 companies involved, representing significant portions of global oil and gas production, the real test will be in the execution and broader impact.
🏙️ Focus on Urbanization and Transport: COP28 shined a spotlight on cities and transport, crucial for climate mitigation and adaptation. Urban areas, accounting for about 75% of global CO2 emissions, are at the forefront of climate action. Key advancements include the mobilization of $467 million for urban climate action and significant strides in green shipping and hydrogen-fueled maritime transport.
🌾 Agriculture and Farming Emissions: Over 130 nations have agreed to incorporate agricultural and farming emissions into their national climate change strategies. Furthermore, a coalition of more than 25 prominent food and agriculture organizations has united to expand regenerative farming practices. This collaboration involves 3.6 million farmers and aims to transform over 160 million hectares of land to preserve soil health and reduce carbon emissions.
🔮 COP28 marked a shift in policy and intent, especially regarding fossil fuel. Now the real challenge lies in translating these agreements into tangible actions in order to significantly impact global emissions. The gap between current commitments and the actions needed to effectively mitigate climate change is still wide. The years ahead will be crucial in determining whether these pledges translate into impactful actions and substantial global emissions reductions.
Read more on the subject ⬇️
This Is What Has Been Agreed at COP28 So Far. What Happens Next? — BCG
IEA assessment of the evolving pledges at COP28 — IEA
COP28: Urbanization and transport — McKinsey Sustainability
Read from Breakthrough Energy, a venture capital fund initiated by Bill Gates, and Evolved Energy Research about how federal policies, technological diversity, and robust infrastructure are key in transitioning the U.S. to a sustainable, net-zero emissions future here.
Blockchain & Crypto 💸
⚖️ Regulations
- Coinbase has sought court review after the SEC decided not to enact new crypto regulations.
🏦 Financial Institutions
- BlackRock and Ark Invest have updated their spot bitcoin ETF proposals to now permit cash redemptions.
- Société Générale is set to become the first major bank to list a stablecoin.
- Nubank has partnered with Circle to introduce experiences with digital dollars.
📈 Crypto Exchanges
- CoinList has settled with OFAC for $1.2 million over allegations of breaching Russian sanctions.
- KuCoin will discontinue its operations in New York and has agreed to a $22 million settlement for a lawsuit.
🔥 Top Stories
- Following the rise in the value of $BONK tokens, sales of the Solana Saga phone have surged. What was initially a $10 airdrop of 30 million $BONK tokens for Saga phone users has now exceeded $500 in value, effectively covering the phone’s cost.
- Ledger, a renowned ‘hard’ wallet designed for off-chain asset security, experienced a hack resulting in the loss of $600k worth of assets. The company has since fixed the breach and committed to compensating the affected individuals.
🔎 Research
💳 Nichanan Kesonpat (1kx) discusses the evolution of wallet infrastructure and how it will spur new decentralized applications.
🎉 A16z crypto shared their perspectives on what they expect to see in 2024
📰 Messari just published their annual crypto theses for 2024
📹 Videos
- Bankless discussed the impact of JITO on the Solana ecosystem
- Bankless hosted a discussion with Ryan Selkis, CEO of Messari, on 2024’s crypto trends.
- Bankless hosted Matthew Nigel, Head of Digital Assets at VanEck, to talk about their 2024 crypto predictions.
- Bankless decrypts Vitalik’s philosophy of a deliberate and balanced path in technological development.
