Zombies, fire sales, and scrappiness: Here’s what venture capitalists can expect in their ‘year of the dragon’

Given the uncertainty plaguing the global economy–not to mention the absence of anything resembling a crystal ball on my desk–attempting to predict what will happen in 2023 might be considered reckless.

However, given that Techstars invests so early, in hundreds of companies a year (~600 in 2022 alone), and across just about every vertical imaginable, we think we see trends before the rest of the market. With that in mind, here are seven predictions that we believe will shape the year ahead.   

The VC industry will contract

For over a decade, the number of VC firms has exploded. Now all the indications suggest significant consolidation is on the way. Perhaps 50% or more of existing VC firms–in particular those with less than $100M of assets under management–will cease to functionally exist over the next few years, with many becoming in effect “zombie funds” that manage their investments but cannot raise fresh capital.

In 2022 so far, 62% of the capital raised went to just 6% of VC funds. As the downturn deepens, fund performance drops, and fewer $1 billion+ companies are created, even more VCs will likely struggle to raise their next fund–and shutter. Indeed, many small and boutique VC firms Techstars knows have already told us that they won’t be raising another fund.

A wave of startups will sadly fail

In 2023, a large number of startups run out of runway. Much of the pain will be concentrated on growth-stage companies, where valuations have plummeted. Many founders will be unable to fundraise, as investors double down on existing portfolio companies, or they will only be able to raise capital at predatory terms.

These are predominantly companies that were born in the last few years, have only ever known the good times, and therefore prioritized growth over business rigor. How many of them will be able to successfully pivot to a financially sustainable business model is an open question.

Early-stage startups will remain relatively immune from the market turmoil

The vast majority of pre-seed and seed valuations have avoided the frothiness of the growth stage market and continue to be realistic.

Against a stormier backdrop, pre-seed investments will continue…