By Venktesh Shukla–
(Venktesh Shukla is founder and general partner at Monta Vista Capital, a venture capital firm that specializes in investing in early-stage technology companies. The views expressed are personal)
For my 2023 retrospective on startups, I sought perspectives from various venture capitalists, and their insights offer a vivid snapshot of the year:
- “Mania in Generative AI and back to reality for the rest.”
- “A year of very few exits, failed IPOs, and craze for Gen AI.”
- “Funding freeze, shift in focus from growth at all costs to proven business models that lead to profitability. Down rounds and layoffs while some startups closing doors.”
These sentiments encapsulate the essence of 2023, where the frenzy around ChatGPT and Generative AI (GenAI) became palpable.
ChatGPT achieved a significant milestone; that of reaching 100 million users in just two months. It had taken landline phones 70 years to reach these many users, while the internet took seven years and WhatsApp two years.
It made OpenAI one of the fastest startups to hit $1 billion in revenue within a year of releasing ChatGPT. The impact of GenAI extends beyond ChatGPT, with 40% of all S&P earnings calls mentioning GenAI. Major technology companies, including Microsoft, Alphabet, Amazon, Meta, Nvidia, Apple, Salesforce, and Adobe, have unveiled ambitious GenAI plans.
The GenAI phenomenon has reverberated throughout the startup landscape, posing an existential challenge to earlier generations of conversational AI startups.
Over 500 startups in conversational AI, targeting various niches, now face the imperative to adapt swiftly to the dominance of large language models (LLMs) or risk being outpaced by newcomers leveraging this technology.
Also under threat are conventional Business Intelligence (BI) and enterprise search companies that use enterprise data to generate insight. Given the complexity of these tools, a decision maker cannot use these tools by himself/ herself and needs to rely on a dedicated cadre of business analysts that interface with these tools.
That introduces delay in getting critical inputs for decision making. With GenAI tools such as ChatGPT, Bard or Bing, the interface is natural language which anyone can use to extract insight.
It not only accelerates decision making but enables the decision makers to ask a lot more questions and explore a much bigger decision space. Enterprises have been reluctant to expose their internal data to tools such as ChatGPT, Bard and Bing for fear of it being used for training these tools and becoming public information. Vendors have been quick to respond to such concerns with an assurance of how enterprise data is protected from any use from outside that enterprise.
Microsoft, Open AI, Alphabet, IBM have all been aggressively pitching such solutions to large enterprises. Venture investors have shown enthusiasm for GenAI, leading to significant investments in its application across HR, legal, health/biotech/pharma, and various enterprise applications.
However, outside the GenAI realm, the investment climate experienced a subdued phase. The decline in tech IPOs and tepid M&A activity limited liquidity options, impacting startup fundraising.
Series A/B funding rounds took longer, with lower valuations than in previous years. Later-stage funding became scarce, resulting in challenging valuations, down rounds, layoffs, and closures for numerous startups.
The seed stage, however, stood as an exception albeit with a modest valuation correction. Despite this, activity levels remained robust.
For instance, Monta Vista Capital, where I am founder and general partner, invested in five new startups in 2023, surpassing the previous year’s count of four.
For startups and the venture community, 2023 served as a harsh wake-up call. Investors shifted focus to demanding business models leading to profitability, abandoning the “growth at all costs” mindset.
This shift may ultimately prove a blessing in disguise, fostering a more grounded and sustainable startup ecosystem.
