Tech Predictions 2023: what’s in store for European Tech this year?

Raphaëlle d'Ornano
9 min readJan 11, 2023

At the start of 2022, some investors predicted that things would slow following a record 2021. But few would have anticipated the speed and depth of the downturn, both in terms of deal volume and valuation blowdown.

After an unprecedented private investment boom fostered by the pandemic, the entire Tech sector declined in 2022, in part because of rising interest rates, inflation, and a strong US dollar. Per Pitchbook data, the VC-backed IPO Index ended the year down 61.3%. The Russian invasion of Ukraine and China’s COVID Zero ambitions came on top of macro-economic headwinds and raised supply chain issues that negatively impacted all Tech verticals, from e-commerce to Climate Tech. The implosion of FTX was perhaps the final body blow of the year and spelled even tougher times for companies operating in the Crypto + Blockchain vertical — a sector already viewed by many as speculative.

So, it was a hard year for Tech in 2022. And Europe was not spared the fallout.

As we start 2023, here are some predictions on what could be in store for Tech assets across Venture Capital and Private Equity in Europe. While forecasting the future is always risky business, our experience working with leading investors and entrepreneurs gives us enough confidence to gaze into our crystal ball.

(1) A soft macro landing

2022 put the macro-economy in the spotlight, specifically for Tech companies. The fact that money has become much more expensive particularly impacts these companies for which a core part of value creation rests in future earnings. When money was cheap no one was talking about macro conditions. Now that the economy is top of mind, let’s see what to expect from a macro-perspective in 2023.

Central banks across the world, starting with the U.S. Federal Reserve, will start backing off the monetary policy tightening they began last April. The Federal Open Market Committee (FOMC), which sets interest rates, has predicted that rates will peak at 5.1% in 2023.

Inflation should also ease, though not disappear, because we are still at the beginning of the current macro-economic cycle that started at the beginning of 2022. Don’t forget: Macro-economic cycles are longer and not aligned with the Tech sector’s compressed concept of time and desire to move as quickly as possible. This disconnect may require patience to navigate successfully.

If geopolitical tensions are limited and a solution is found to the energy crisis (there are encouraging signs here, notably in France), then I predict a soft landing or mild recession in Europe.

A note of caution: the macro-environment will be uncertain, and this will be a key investment consideration, more than what we have seen in recent years. Continuous re-evaluation of the economic environment will be critical.

(2) A bad year for most Tech entrepreneurs — but not for all

The implications of this economic cycle for entrepreneurs are not encouraging at first glance.

European startups waited to raise rounds in ’22 as overall funding for the region (including Israel) fell 18.6% from 2021 and the number of deals dropped 14.3%, according to Pitchbook. Many of those will need to raise funding in ’23 and will see down rounds or flat rounds. Valuations will be reset because the decorrelation between Public and Private markets cannot continue forever.

In Venture Capital we expect that the slowdown in dealmaking will continue compared to the highs of 2021. If it’s a hard landing (i.e. a recession) then we will have to wait until the end of 2023 for investment to accelerate. But if it’s milder, dealmaking could pick-up by the end of H1 2023.

VC investors who suffered big setbacks last year will become extremely picky and fund only the very best startups. That means a reckoning for weaker startups that can’t deliver strong metrics.

But the best companies will still get funded, even in H1 2023. And a big reason for that is because VCs have a lot of dry powder on the sidelines. According to Pitchbook, VC funds in Europe raised more than €23.3bn.

PE investors, who act as non-traditional investors in Tech companies and who have gained experience in the recent period in investing in these newly profitable companies (or still unprofitable in some cases) will continue to seize the opportunity of investing in now discounted assets as long as the unit economics are convincing.

The bottom line for entrepreneurs: The intensity of the correction will depend on the quality of a company’s growth (more on this below) (cf. supra).

Worth noting: Corporate VCs remain a wild card in this picture. They might be strong at early-stage (overall less impacted by the downturn). Depending on their reactions, corporate venture might be a key driver of the trends that emerge in the coming year.

(3) Growth redefined: “resilient” growth and the birth of the Jellyfish

We think Growth will be redefined. Investors will increasingly wan to understanding the quality — and not just the rate — of revenue growth. This new analysis will be a core consideration in Tech investments going forward.

Founders will need to demonstrate:

- truly recurring revenue (for SaaS businesses of course, but also for other non-SaaS business models in which recurrence can be demonstrated);

- effective retention of customers (measured both through gross and net retention);

- effective acquisition (measured through consistent LTV/CAC ratios and the magic number amongst others).

Investors will want to confirm that a company is able to constantly acquire new customers — at a cost that makes sense — while also keeping and increasing revenue on existing ones. Businesses with this high-quality growth will find financing as long as they also demonstrate an overall path to profitability.

Companies that can’t showcase “resilient” growth will need to reflect on their revenue model and make those necessary adjustments. Some won’t, of course, and so we expect to see a surge of failures in 2023, with a subset being acquired before they hit a wall in a defensive move.

Once “resilient” growth is achieved, there will be 2 paths forward for VC-backed Tech companies that remain unprofitable:

- Those companies wanting to pursue a high-growth strategy (north of 30%-40%) will be able to continue to do so and will find the right investors (cf. supra). We think large US VC and Growth investors will continue to be bullish on European companies that fit in this category, in part thanks to lower valuations compared to their US counterparts and the strength of the US dollar.

- Those willing to reduce growth rates (though still maintaining >15% growth) and thus cash burn will be ideal candidates for Private Equity investors or Strategic Acquirers.

As a result, 2023 will not be the year of Unicorns, but the year of the Jellyfish. For a sector that many desperately need a new mascot for inspiration, the jellyfish is the ideal choice because it is the most energy efficient create in the animal kingdom. 😉

(4) A new Tech playbook for Private Equity

Private Equity exposure to Tech has increased since the pandemic and we do not think this will change. However, the playbook will be different.

First, we expect take-privates to continue to be an important play. In the US, the 75 PE take-privates announced in 2022 were acquired at an average discount of 6.7% to the 52-week high of the company’s shares (source: Pitchbook, 2023 US Private Equity Outlook). Despite the ongoing credit crunch, we expect this trend to continue in 2023 while expanding to smaller more mid-market targets (n.b. the average take private deal size in the US in 2022 was $2.8 billion!) and to more European companies.

Second, we expect to see an increase in the number of carve-outs as large companies strip-off their non-core Tech assets creating interesting opportunities for PE players.

Last, we expect to see persistent buyout activity on those high-quality Tech assets, in line with the record software deal A2 Mac1 signed at the end of the year in one of the year’s largest Tech buyouts in Europe. If an asset ticks the boxes of resilient growth and the investors gain a conviction on the existence of a large TAM, we expect deal-making and valuations to remain unchanged, though this will affect only a handful of companies in Europe this year.

(5) Tech redefined: Scientific Tech vs Non Scientific Tech

Despite the impact of non-traditional investors, Venture Capital remain the primary source for financing innovation. Where VCs place their money in 2023 is a key question and we can already see how the 2022 debacle is changing their thinking. At CES, for instance, we saw much less hype around gadgets.

At the NY Dealbook Summit in late November, BlackRock CEO Larry Fink suggested that VCs, strung by losses in sectors like crypto, will turn to startups that have are based on scientific research, what we in Europe refer to as Deep Tech.

I agree that themes and verticals like Decarbonization, Space Tech, and AgTech should receive the necessary funding to build the economy of 2030 and beyond. The potential impact, and therefore the opportunities for returns, is big.

But that doesn’t mean the current era of innovation has run its course. We think that many companies in the cloud computing space, and notably Enterprise Software and Applications, will continue to be a core investment thesis for VCs. That may be even more true for non-traditional investors at late-stage and beyond. The move to the cloud is still accelerating — Gartner forecasts worldwide public cloud end-user spending to reach nearly $600B in 2023 — and the Digitalization trend spurred by the pandemic has not been halted by the 2022 Tech meltdown.

Where we do see a culling is commodity investments, especially those that run counter to the growing emphasis on ESG fundamentals, such as last-minute delivery. These will falter and we won’t be shedding any tears.

(6) Tech verticals to watch: Climate Tech, blockchain, and AI

Three key sectors will provide important clues to the overall health of tech investing:

Green Tech or Climate Technology should continue to see increased funding. To date, the vertical has received huge amounts of capital and positive regulation which will bring immense funding over the next decade. Many VC, Growth and PE funds have created dedicated climate funds and there is a vast amount of capital ready to get deployed here.

Carbon measurement and carbon credit companies, both on the decarbonization megatrend, should fare well.

One negative note: The majority of companies in the Green Tech vertical are auto manufacturers that have faced supply chain problems. EV stocks like Rivian have been particularly hit [Rivian = — 82% in 2022]. Tesla of course is also a good example. Operational issues could put pressure on the whole vertical as many companies in Climate Tech are not asset-light businesses and have to deal with such issues.

Crypto + Blockchain verticals will undergo a lot of triage in 2023. We expect less activity in H1 2023, butthe Crypto + Blockchain vertical is not on pause. From what we are seeing at the firm, those projects and protocols that have found product market fit and that have good token economics are doing ok. Once the climate is better, things will bounce back here.

Artificial intelligence is definitely changing in a profound way and enabling new and also stronger business models. On top of generative AI, which has created a lot of buzz recently but whose Technology was not that new, we think that the incursion of AI into “real” situations will be a game-changer in ‘23.

Consider healthcare. From the recent urinary test revealed at the CES by French champion Withing to the use of AI in cancer care by Résilience, AI will allow faster and more accurate treatments both at primary and specialty care level.

(7) The need for a new form of Due Diligence

Finally, the trauma of 2022 will bring a renewed focus on fundamentals. Investments based on hype and momentum will be jettisoned in favor of companies built on strong fundamentals.

Identifying these winners will require more than just a return to the due diligence basics. Instead, investors will embrace Hybrid Growth Diligence, a sharper and more sophisticated tool designed to :accurately measure the economic fundamentals and resiliency of Growth Assets.

This new due diligence draws on a wider range of data as well as legal, financial, and extra-financial inputs to provide unparalleled insight into these growth-oriented business models. The analysis is rich and complex, but the goal is simple. By identifying and answering the right questions, HGD helps the investor decide whether to make this deal as well as developing the critical value creation plan that will serve as the post-investment playbook.

HGD builds on classic due diligence by adding two important aspects: multi-dimensional and multi-timescale assessments. You can read more on how HGD works here and the changes in the startup landscape that inspired it here.

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Overall, 2023 will be a tough year. To survive, companies will have to win the race to resilience. That may seem like a grim short-term prognosis, but we think this will lay a stronger long-term foundation. This will result in more robust economic models and back-to normal valuations that set the ground for deal-making to pick-up again. Better due diligence will help investors not only assess risks, but also confirm this robustness, reveal opportunities, and bring a (welcome) second pair of eyes.

So, let’s be optimistic about the year to come. But let’s also be prepared.

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Raphaëlle d'Ornano

Managing Partner + Founder D’Ornano + Co. A pioneer in Hybrid Growth Diligence. Paris - NY. Young Leader French American Foundation 2022. Marathon runner.