TL;DR -
As 2023 ends, we share our thoughts on what 2024 will bring:
- Higher quantity and quality of deals will be funded at more reasonable valuations. With many companies running low on cash and the continued interest in AI, we expect 2024 to be a busy year across venture. Nonetheless, the increased scrutiny by investors will mean that not all companies will secure funding, leading many startups to cease operations due to a lack of capital.
- GenAI startup quality will continue to increase. Akin to how transformative mobile apps like Uber and Instagram emerged a few years after the iPhone’s debut, GenAI founders will build more robust and valuable solutions as they better understand developing with LLMs and have more mature infrastructure in place to leverage without having to drain resources building from scratch.
- Low-code tools will enable anyone to build their own AI-enabled applications. The emergence of AI-first low-code platforms will enable non-technical users to create highly customized applications and complex AI-driven operational workflows that can replace existing SaaS solutions simply by using natural language as code. This shift represents not just a technological advancement but a cultural change in organizations, emphasizing tailored solutions for diverse sector needs.
- Startups will continue to do more with less. In 2023, startups became more capital-efficient due to pressure from investors to cut burn rates and access to lower-cost remote workers. Next year, the integration of generative AI tools will accelerate this trend, enabling them to achieve even more with less capital and approach profitability more rapidly.
2023 in Retrospect
As 2023 draws to a close, a year marked by the meteoric rise of Generative AI, the notable collapse of SVB, and persistent global turbulence, it’s an opportune time to reflect on our previous predictions and share what we think is in store for 2024.
Last year, we anticipated AI’s transformational impact, the continued digitization of SMBs driven by vertical SaaS adoption, the maturity of embedded financial products, and the evolution of software infrastructure. The year unfolded largely in line with these predictions. We continue to believe that despite some of the market challenges over the last 18 months, the increased availability of talent, continued venture activity, and rise of LLMs have ultimately created an environment ripe for entrepreneurs to build significant companies.
The Federal Reserve’s stringent measures against inflation led to a cumulative interest rate hike of 5.5% across 11 increments, rippling through the economy. This shift not only impacted real estate sectors but had a profound effect on venture capital dynamics. The rising interest rates prompted investors to move away from high-risk assets, including venture funds, leading to a 9-year record low for fundraising from LPs.
Ardent’s Predictions for 2024
As we transition into 2024, the economic landscape seems poised for a more stable period. Despite global turbulence, the consensus is that interest rates have peaked, and a “soft landing” is the highest likelihood outcome.
In the tech sphere, generative AI has emerged as a beacon of innovation and excitement, igniting the entrepreneurial spirit among startup founders and investors. This burgeoning field has not only redefined our work and personal lives but has also become a focal point for venture capital, attracting a quarter of all investments by Q3 2023.
Prediction #1: Enthusiasm for GenAI startups will continue, but we expect the broader market to align with more reasonable valuations
Throughout the pandemic, the venture capital market was awash with liquidity, allowing investors to make bets on companies before seeing concrete results and venture beyond their traditional thesis areas. This flexibility was underpinned by the expectation that follow-on investors would continue funding these ventures. However, as the market shifted, investors pivoted towards a more conservative approach, emphasizing valuations that aligned more closely with the historical contours of the various funding rounds. Investors wanted to see evidence of traction and product-market fit before committing capital, a stark contrast to the previously more liberal funding environment. A notable exception to this sentiment was GenAI deals, where investors were willing to pay the price to invest in this hot sector, regardless of evidence of traction.
For startups outside the GenAI bubble, investor conservatism did not align with the expectations of many founders, who were accustomed to higher valuations. As a result, a significant number of them opted to delay or forgo fundraising efforts, unwilling to settle for less favorable terms. This led to a noticeable slowdown in deal-making, as the gap between what investors were willing to offer and what founders expected widened.
Looking ahead to 2024, many founders who postponed fundraising will re-enter the market. Their valuation expectations will adjust to align with the realities of the current investment climate. Consequently, we anticipate an increase in deal activity driven by the necessity of these companies to secure funding.
This uptick in deal-making does not guarantee success for all. A number of ventures, previously buoyed by VC, will struggle to secure new funding. This will lead to an increase in the number of venture-backed companies ceasing operations. According to Pitchbook data analyzed by the New York Times, 3,200 venture-backed businesses went out of business in 2023, making it “the most difficult year for startups in at least a decade.” We expect this to accelerate in 2024.
Prediction #2: GenAI will continue to mature rapidly
Reflecting on the evolution of GenAI, consider the iPhone’s introduction. The App Store debuted a year post-iPhone launch, and it took another year for giants like Uber and Instagram to emerge, leveraging mobile technology to create groundbreaking businesses. Their trajectories illustrate a common pattern in technology: groundbreaking companies often require the appropriate infrastructure in place before they can take off.
In 2024, we expect infrastructure for GenAI applications to advance rapidly. This development will enable founders to concentrate on creating domain-specific solutions for complex problems without the heavy investment previously required in infrastructure. Echoing the evolution of cloud infrastructure, we foresee a scenario where companies can efficiently build ML and AI applications using traditional engineering skill sets.
Prediction #3: Low-code tools will enable anyone to build their own AI-enabled applications
The landscape of application development is poised for a dramatic shift in 2024, marked by an evolution from traditional low-code platforms to more advanced, AI-first solutions. While existing low-code tools have already made app development more accessible, the new generation of platforms is set to redefine the possibilities in this space, particularly in developing sophisticated AI workflows.
These emerging tools go beyond the basics of drag-and-drop interfaces and simple “if-then” logic, typical of earlier solutions. They incorporate sophisticated AI, such as natural language processing capabilities seen by OpenAI’s recent launch of GPTs, enabling an unprecedented level of intuitiveness and customization. This evolution means that non-technical users can not only build applications that are highly tailored to specific operational needs but also orchestrate AI to perform complex operational workflows through the use of LLMs. Previously, this was only possible through the use of AI/ML engineers.
This isn’t merely a technological leap; it’s a culture shift within organizations. These AI-first low-code platforms represent a deeper understanding and acknowledgment of the unique requirements of various teams. They promise a future where enterprise SaaS is not jut about automating processes but about offering customized solutions that cater to the specific needs of different sectors.
This domain is an area of focus for Ardent, and plan to publish a blog in the coming weeks to share more of our thinking.
Prediction #4: Doing More with Less
In 2023, we saw startups become more capital-efficient for a number of reasons, including pressure from the investors to cut expenses to reduce burn, leveraging lower-cost remote workers, and the availability of new technologies that drastically increase the efficiency of individual contributors.
Looking ahead to 2024, we predict the integration of generative AI tools will accelerate this trend. Companies will increasingly leverage AI-driven co-pilots to significantly boost efficiency across various functions such as marketing, customer success, and coding, ultimately driving down capital expenditures. While these tools aren’t yet advanced enough to automate tasks fully, they are transforming processes like crafting marketing content, resolving customer inquiries, and assisting software engineers.
Conclusion
As 2024 quickly approaches, we at Ardent are filled with excitement for the opportunities we’ve identified and those yet to come. The past year was a remarkable one in the world of venture capital, setting a unique precedent that we are not likely to forget for a long time. It has paved the way for the way things will go in the industry in this next era, and as this new year rapidly approaches, we feel equipped and eager to embrace it with the same vigor we’ve shown in previous years.
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