In late 2022, like many, I made some predictions on what 2023 will bring to the tech investing ecosystem. Specifically, the Fed will tame inflation and the fundraising market will thaw, but overall, arguing that 2023 would be the first year of a “new normal” era for markets and that machine learning would permeate most of the software operators workflow they use today.
Fast forward a year later, and we’re entering the second year of the post-pandemic economy. The state of venture capital investment and technology are battling many factors, some of which are repeats of 2023 and some brand new, including but not limited to higher interest rates, a more demanding market that requires better product-to-market fit, and of course the rapid evolving state of artificial intelligence.
Will we end 2024 in the same market we started in 2023? Through exploring the lackluster first half of 2023 and how AI exploded in the second half, I have several predictions about what we can expect to see next year.
The IPO market remains closed during the first six months of the year, but a few major mid-year releases reopen it for others, with seven venture-backed software IPOs completed.
It was widely speculated that Klaviyo’s exit would open up the public markets and cause a ripple effect for others, but that didn’t happen. The 2024 market will somewhat mimic the 2023 market as the higher interest rate environment and geopolitical tensions continue to weigh on valuations and delay IPOs, resulting in a quiet landscape. Still, there will likely be a few outliers that give a boost to others, mostly in core software, with companies showing spectacular financials and cash flows.
Mergers and acquisitions increase throughout the year as either the expectation or the reality of a change in interest rates accelerates them due to the fearsome increase in valuations. Over the past two years, on average, mergers and acquisitions have totaled about $49 billion. It will top $60 billion, mostly due to AI acquisitions. Private Equity becomes a key buyer of companies growing by 10-25%, just like it did in 2023.
The value of M&A acquisitions plummeted in Q4 2022, rivaling the dot-com bust and the Global Financial Crisis for lack of activity. We will see a small change in the market and then increased M&A activity as public tech markets begin to show strength and valuations recover. Take-privates totaled $50.2 billion in 2023, with Qualtrics and Coupa topping the list.
AI and data continue to dominate the funding landscape.
Just as mobile technology became a de facto part of every startup, artificial intelligence is no longer a category, but the core or a component of every product. It is still early days with LLMs, and there is much work to be done. However, LLMs have already completely transformed data in many ways, and data-driven innovations will continue to drive VC investment. Likewise, venture dollars will continue to flow to startups in the space. LLMs have driven increased demand for data, caused a complete architecture change within companies, and changed the way data is handled. As technology evolves, we will continue to see an increase in new data products and data pools.
Bitcoin ETF drives resurgent interest in web3 funding. The crypto winter has forced many companies to become profitable and we will see the first widely successful dividend tokens (probably outside the US). We are also seeing more ARR driven web3 businesses achieve scale.
Last year, I predicted that 2023 would see a continuation of the hangover from the high level of 2022 web3 activity. This year, we will see a resurgence after industry setbacks as US regulators decide to move forward with bitcoin ETFs. This will take the industry out of recovery, mark a significant change for the web3 and consolidate the digital asset space as part of traditional finance.
US VC deals fall from $275 billion in 2022 to $200 billion in 2023 and hold at around $200-220 billion next year. Valuations will remain relatively stable, except for AI businesses, which will command a premium of around 10-15% to the market.
While VC deals fell dramatically between 2022 and 2023, 2024 will not see a sharp drop. Reallocation of LP to other asset classes continues, still controlled by the sharp collapse in valuations in 2023 and the need for liquidity.
The debate surrounding AI regulation has become a critical issue in the US due to rapid European regulation. It is a vital part of the election debate, particularly as deepfakes and machine-generated content sow growing distrust of the media.
The EU AI law will have a negative impact on American businesses and the AI debate in the US as the administration rushes to develop operational processes and frameworks. Biden’s executive order on artificial intelligence will be hotly contested during the presidential debates and will likely serve as a point of greater divisiveness between the parties as it questions the extent to which private companies can or should be regulated.
The share of AI-enabled searches is approaching 40% of all consumer searches, as consumer behavior patterns, especially on mobile, drive innovation in this direction.
AI made significant waves this year for its consumer use cases through chatbots, personalized content, AI-enabled search and more. Consumer behavior patterns, especially around e-commerce, will continue to drive the growth of AI-enabled searches as consumers leverage the technology for more personalized experiences.
Companies and startups, in particular, are reporting significant productivity improvements from AI, reducing headcount growth but increasing revenue just as much as predicted. ARR per employee is up 10%, double the decade average.
In 2013, these companies’ average revenue per employee totaled $200,000. Today, that number is $470,000 for a group of successfully publicly traded software and infrastructure companies — a 135% improvement. While most companies do not grow revenue per employee annually linearly, AI will drive this growth to happen more steadily and with greater rigor as AI adoption and applications increase efficiency in companies.
