Room for Optimism as we Enter 2023, Despite the Most Seismic Macroeconomic Challenge of the Modern Era
Permacrisis, the word of the year, according to the editors of the Collins English Dictionary. Defined as ‘an extended period of instability and insecurity’, it is certainly an accurate encapsulation of the past twelve months which have borne witness to a land war in Europe on a scale not seen since 1945, a resultant energy crisis, the highest rates of inflation since the 1980’s and the biggest macroeconomic challenge in the modern era. As we enter 2023, challenges lie ahead, particularly for established companies who are less able to easily adapt to change, but there is room for optimism.
The serious economic downturn has resulted in some of the largest companies in the world shedding talented people. People who, because they aren’t getting the capital or the support they need from their employers, are asked to leave, or do so of their own accord to start new businesses. These talented people have great ideas, the right experience, and because they are exactly the fuel venture capitalists need, financial backing.
Young and fledgling businesses have an advantage over established companies in these periods of uncertainty because they are able to adapt and respond to change much more rapidly if, and only if, they are managed astutely by great entrepreneurs and backed by investors who have been here before. Seasoned investors know this. Indeed, many of them have run multiple funds through recessions and come out ahead, partly because the entrepreneurs they invest in have been able to get their hands on resources more cost-effectively than in boom times. That is why we can expect them to keep on investing through a recession; history says it is the best time to thoughtfully do so.
It is also important to remember that venture capitalists are not ‘short-termists’. They think over ten-year periods and in doing so, back businesses that do incredibly well when we come out of recession, dominating the market. Structural change, the likes of which we are seeing in the energy, agriculture and transport sectors, forces investors to find the people that are going to be the next leaders and back them today. And not only that, for companies the quality of investor matters much more, so we predict a flight to quality towards seasoned investors.
Of course, economic downturns do not affect all companies equally and, in many cases, stimulate growth. Our portfolio companies grew 58% last year, proof that if you are in the right place, with the right company the opportunity for growth is there. Take the fuel crisis. It is forcing people out of cars and onto buses, which benefits Zeelo — the bus sharing company. It has speeded up the decarbonisation efforts in the maritime industry, resulting in growing demand for DeepSea Technologies’ AI software and it has driven people to Phenix and their digital solutions to food waste. As the Mayor of London, Sadiq Khan extends his Ultra Low Emission Zone to cover all London boroughs we witness a drive (no pun intended) towards electric vehicles, not just for individuals, but for auto industry fleets. Car manufacturers respond to this by bringing out models that are not only more affordable, but cost-effective and the sustainable mobility boom continues.
Let us focus on sustainability and renewable deployment as this is an industry that has to accelerate. Why? Because there is no green premium now. Renewable energy is the cheapest option and if using it saves money then it should drive change. We should prepare ourselves for a massively increased need for intelligent control of renewables around Europe as they come to dominate energy output and we should expect a rate of innovation around mobility that we have never seen before. The opportunities will be extraordinary.
Alongside this, a new trend we see emerging and one which will be one of the biggest in 2023, is the need for software to provide measurement and data around sustainability; a demand for genuine data science companies to provide real meaning in the market. Take Fairly Made, they offer supply chain visibility and impact measurement for the fashion industry. Data which enables better decisions and with better decisions comes a more efficient, less carbon intense society. This information is there. It is at our fingertips and so we need to go out there and use it. Previously we have not really done this, and when we have tried, the data has not been trusted, but when we move to third party providers, we achieve accuracy, transparency and consistency and these things combined enable trust, which is critical.
Let us not forget that no matter the state of the economy, the world around us continues to change. The climate emergency is real, it is not going away, and better models are needed to not only predict things like floods and forest fires but deal with the billions of people who will be displaced because of them. Industries that are focusing on the next five to ten years and changing the way we live, and work will have some degree of protection, and these are exactly the types of industries we expect to prosper in a recession.
There will, of course, be tensions and it will be interesting to see the pace at which governments around the world force regulatory change and society keeps up. We do not see the environmental agenda slackening through recession though, it cannot as the urgency will still very much be there and innovation which is able to address that urgency will be highly, highly valued.