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💡 Why aren’t early stage investors investing in 2023

Derek Watson
Derek Watson
N2 Blog

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What Is FinTech? The Basics

We are all cognizant of the shifts in venture capital funding since the heady days of 2020/21.
Headlines such as these have fueled the negative narrative:
🌍 “Global VC funding falls dramatically across all stages in rocky Q1”
🔻 “Job cuts in Silicon Valley add to recession worries”
🚫 “No more FOMO, as VCs approach startup funding with new metrics and priorities”
➡️ While these headlines reflect our reality, they also overlook a key fundamental long held by early-stage investors: that necessity is the mother of invention. With your amount of dry powder available, (I have heard many counter arguments about the volume and drawdown capability of these funds, but most of these arguments seem ill-conceived) the question is – why aren’t these investors taking full advantage of the situation? 🤔 📉
Understandably, activity plummeted at the end of 2022. Public market tech valuations crashed, inflation soared, geopolitical tensions rose, war, and the Climate Crisis continued to worsen and VC’s and Startups were crushed.
🗓 Although 2023 began with a hint of optimism, the harsh reality persists. Tech valuations have stabilised near their lows, inflation continues to rise, more geopolitical tensions, there is no resolution to the war in sight, and the Climate Crisis continues to escalate. Amidst these challenges, we also had the FTX debacle and then SVB, Frauds, and the U.S. banking crisis has triggered scrutiny of how VC managers handle investor cash and conduct due diligence, but more worryingly, the U.S. debt crisis and the potential downfall of the dollar loom large.
➡️ These macro factors, while significant, are known knowns. While the final impacts are uncertain, we can, and should, strategize to handle most of these eventualities. Yet, few early-stage investors seem prepared or knowledgeable enough to implement basic asset management practices, such as hedging against unwanted interest rate or currency risks, understanding and modelling the impact of these macro events on their holdings, or diversifying their concentration risk at the banks that hold their (investors’) cash. 💼
➡️ These concerns are clearly dominating investor attention and raising questions from LP’s, both in terms of managing their portfolios and in deciding where to make new investments. However, in my opinion, the real issues are deeper rooted at the GP psyche 🧠and microeconomic level.
🐘 We must acknowledge the elephant in the room that I believe is drastically affecting the pace of capital deployment: the rise of Artificial Intelligence (AI). While the concept may not resonate with the majority of the world’s 8 billion inhabitants who are either unaware or quite frankly don’t give a 💩, within the echo chamber of innovation, it is a pressing concern that is impossible to ignore. 🤖
➡️ When we take into account the shift that businesses have to make towards sustainable solutions at every level, the impending job losses and the need for reskilling in response to current job losses and the imminent arrival of advanced robotics, as well as the substantial impact these changes will have on consumer behaviour in both B2B and B2C contexts, we can really understand why capital is not flowing freely at the startup stage. 🔮 It is literally fast forward, throw out yesterday’s thesis and start digging deep to figure out how tomorrow is going to look.
⛏️ This is who we are and capitalism thrives on innovation. We have witnessed the creative destruction of entire industries throughout business history, and it is a repetitive cycle where there will be winners and losers. Technological innovation has had some big losers:
🔌 Advent of Electricity: Gas lamp manufacturers and distributors, candle makers
🚗 Introduction of Cars: Horse-drawn carriage drivers, blacksmiths, and saddle makers
📱 Mobile Phones and then Smartphones: Pager companies, landline telephone service providers, feature phone manufacturers, traditional camera manufacturers
📺 Television Revolution: Cinemas, print media publishers, radio broadcasters
💻 Personal Computers: Typewriter manufacturers, some manual data entry occupations, paper-based file management systems
🌐 Advent of the Internet: Traditional print media publishers, physical retail stores, travel agencies, and some brick-and-mortar businesses
😮 So therein lies the reality—the procrastination of deployment is coupled with huge excitement, denial, scepticism, and outright fear. 😬
✅ Excitement stems from the opportunity that is presented, as investors try to understand and identify who the winners will be.
✅ Denial and scepticism arise regarding the size of the impact and whether it can live up to the hype, which is leading to some FOMO.
✅ Fear looms over the destruction of value suffered over the last year and the values of current investments that are not set up to benefit or will quite clearly be creatively destroyed.
➡️ The overarching question is, “Are our software investments robust and adaptable enough to survive and thrive in this new sustainable and AI-driven world?”
🌐 The world is at an inflection point, and as a startup founder, these factors require 🧠 critical assessment to determine if you are indeed the lines that connect the dots in this paradigm shift we are living or if you will simply be creatively destroyed.

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