Over the past three years, founders and investors have navigated an astounding number of strategic shocks—a global pandemic, economic lockdown, the Ukraine crisis, rising interest rates, inflation, and more. Even listing them all is challenging, yet the innovation and technology communities have weathered these crises and are now looking ahead.
The big question is, what comes next? The upcoming year will likely entail more economic and geopolitical challenges, impacting founders and investors alike. Read on for our forecast of what’s to come and how founders and investors can turn these turbulent times into opportunities for growth and success.
Founders: The name of the game is survival
That was the objective throughout the pandemic, and it remains so as we approach a likely recession in the U.S. Thanks to the ongoing volatility, founders will face a new and changing slate of variables in the coming year. Surviving requires an ability to separate the “signal from the noise” and remain agile. Tools cultivated in the military are useful: establishing priorities, a main effort, defining success outcomes or objectives, backward planning, contingency planning, etc. All will be critical for success in 2023.
Another ongoing area of importance for founders is finance. Staying agile may entail revisiting and sharpening your financial model to reflect the evolving market and economic landscape. This shouldn’t be news for founders—the early years require continuous learning and adjustments, After Action Reviews, and assumption calibration. However, most founders, who are forced to wear so many hats, often struggle to make the time to build these important muscles into their startups’ operating fabric. Now is the time to develop and fine-tune these skills so that your company can adapt to challenges and capitalize on opportunities that may arise during the downturn or recovery.
Even amidst the turmoil, seed-stage activity remains robust. Startups solving critical problems, exercising financial discipline, and operating on business models less reliant on raising a next round, will likely emerge the winners in this environment.
Investors: Now is the time to invest
Economic pressure often yields great creativity. It’s not a coincidence that many of the best and most respected software companies in the world emerged during times of maximum market tumult (2008-10). The most recent list includes Twilio, Instagram, Slack, and many more. In fact, we see new companies form every day, undaunted by the headlines and motivated to solve meaningful problems and follow their purpose. For investors, the message is that now may be one of the most exciting and promising times to invest. That’s because venture capital investing is a bet on the future. And if you believe that the U.S. economy will be stable, more robust and growing again between 2025 and 2030, then the time to move is now.
Regarding investment, we’re keenly focused on supporting startups that make our nation more secure. There’s an immediate and pressing demand for innovation in defense tech (this recent article about Josh Wolfe of Lux Capital dives into the opportunity). To be sure, difficulties connecting to legacy procurement systems and venture capital’s resistance to investing in defense have previously created headwinds for startups. But the landscape is rapidly changing. As investors, we can accelerate the shift by pursuing defense tech—not just for financial purposes but also because we want to protect our country from foreign adversaries such as China, who has used the venture capital industry to its favor for many years.
Doubling down on diligence and transparency
Many investors we’ve talked to have expressed concern at times with VC fund managers due to a lack of transparency, limited due diligence, and little discipline concerning valuations. We wholeheartedly agree that the industry would do well to listen to LP demands for slowing down investment activity and returning the focus toward diligence, transparency, and partnering with founders to create and drive value.
We hope the current market downturn enables a return to these best practices and reinvestment in resources for VCs and startups. The efforts must include a renewed focus on building more infrastructure for investing in and supporting portfolio companies (e.g., advisory boards, talent networks, and venture partners).
Preparing for a landmark year
While we’re buckling up for a bumpy economic ride, we’re also excited about the ultimate destination. This year, the defense, cybersecurity, and healthcare industries will demand mission-critical innovations to solve dynamic and essential problems. They’ll need these solutions regardless of economic tumult—and, in some cases, because of it.
For agile founders and astute investors, 2023 will be a landmark year for solutions, investment, and meaningful outcomes that will make our nation more secure and society stronger. At TFX, we’ve executed on this belief via recent investments in Tidal (cybersecurity) and Magenta (healthcare), and there’s more to come in the months ahead. Partner with us as we leverage the current challenges into opportunities for the future. Be Bold!