2023 was very tough for startups and investors, why and where do we go from here?

Different parts of the world have fared very differently but sitting in Silicon Valley, overall 2023 has been a difficult year for both startups and investors. Three data points:

How did we get here? The biggest culprit is arguably high interest rates. During the core pandemic years of 2020-21, the Fed set interest rates to the lowest levels in modern history but in 2022 they rose within a matter of months to the highest levels in 30 years, illustrated by the graphs below from Mortgage Reports.

The second biggest culprit is likely lack of exits. One metric is IPOs – the stock market in the US continues being slow compared to the years right before. As of writing this article there have been 149 IPOs in 2023, which is lower than the 175 by this time in 2022. And overall 2023 and 2022 have been duds compared to 2021 (1035 IPOs, all-time record) and 2020 (480 IPOs, also a record at the time). M&As follow a similar suit to IPOs. Overall it means there is less liquidity, which means VCs and LPs are more conservative in investing.

How do we get out of this rut?

Barring a black swan event, we should expect such high interest rates of ~7% to come down – perhaps not close to 0% like in 2020 but perhaps to ~4%. That liquidity would then encourage limited partners (LPs, the people who invest in VC funds) to give more to GPs (the actual VCs running a fund) which would then mean more money for startups. Same for exits – with more capital flowing there will be a larger appetite for buying companies or for them to go public. 

When does this all happen?

Nobody knows. But if history is any indication, monetary policy is a critical tool in an election year. An incumbent wants to show a strong economy, while the challenger has an incentive to show quick results. So at Tau Ventures we expect a correction in startup land by Nov 2024, with the effects really coming into force in 2025.

Ultimately a slowdown doesn’t matter in the long run – the inexorable force of progress is going to ensure amazing companies blossom. But the current pain startups and investors are feeling will likely endure for a bit more. Here is to the brave new world.

Originally published in “Times of India” and “Data Driven Investor,”

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