2024 is shaping to be an exciting year for VC and AI. Below are my predictions for both.
On Venture Capital:
Insider-led rounds have been a trend in the VC universe. It's like the insiders decided to keep the party exclusive in 2023, owing to a cocktail of capital constraints and jittery markets. The dealmaking pace has hit the brakes since mid-2022, and with valuations getting a reality check, insiders are stepping in to cushion their favorites. It's less about bringing in fresh faces and more about doubling down on the old guard. I expect this trend to decline down to the typical 25% of all rounds being insider from the nearly 40% we saw in 2023.
Nontraditional investors, who took a bit of a sabbatical since 2022, could be venturing back into the game in 2024. Thanks to (hopefully) stable or declining interest rates, these investors might find the VC playground more appealing. It's all about the risk-return profile, folks. When the traditional assets start looking a bit dull, the bright lights of venture capital become harder to resist.
IPOs have a good chance of having a stellar H1. After a somewhat sleepy 2023, where the most thrilling event was the Silicon Valley Bank saga, we're expecting a bit of an IPO renaissance. Why? Well, the economy's been playing nice – GDP's up, interest rates are behaving, and inflation is finally on a cool-down. If you're an optimist, you might say we're setting the stage for a great 2024. For the naysayers, 2024 could simply be a carryover of the previous year's challenges.
Unicorns – once the mythical beasts of the VC kingdom, are now facing a bit of a valuation crunch. The count and total value of these rare creatures are expected to drop in 2024. Blame it on a mix of down rounds, operational shutdowns, and a harsher fundraising climate. The big-ticket unicorns are getting reality checks before going public, while others might just run out of steam. I’ve previously written about cultural and business model risks in later-stage startups. If late-stage unicorns aren’t able to combat these risks, we will continue to see unicorns face challenges.
This coming year will see the preference for growth over profitability. This will not be the return of growth at all costs that we were all used to in the ZIRP environment. This will be a preference for growth paired with an indication of capital discipline and efficiency.
Lastly, let's talk about accelerators. In a time when launching a startup is as challenging as explaining blockchain to your mother, accelerators are stepping up their game. They're the boot camps for startups, turning green founders into seasoned entrepreneurs. With the venture scene getting tougher, these accelerators are becoming more crucial, shaping the earliest phase of venture more robustly than ever. One terrible aspect of accelerators was how much equity they take upfront from founders and reducing founder incentives in later rounds. Thankfully, I’ve seen more and more accelerators providing favorable terms. I expect the majority of accelerators to reduce ownership stakes, making these cohorts more favorable for investment.
On AI:
AI and the enterprise will be a very common theme in 2024. Many startups will meet the maturing and fidelity required by the enterprise. We will start to see who the real winners in the AI space emerge in vertical and use case-specific instances. There is a large risk that the products procured will fail to deliver on promises. This could create a drought of AI product procurement, higher barriers, at a time when specialized models will take favor over generalized models.
Agent-to-agent interaction will become the new trend. Need to schedule a meeting? There's an agent for that. Planning a vacation? There's an agent for that too. Heck, there's probably an agent just for choosing what kind of coffee you drink in the morning. And it's not just for the average Joe; businesses are getting in on this too. They'll have their own AI minions, leading to this fascinating ecosystem where your coffee agent chats with Starbucks' coffee agent to get your order just right. It's a brave new world of hyper-personalized, AI-driven convenience – or chaos, depending on how much you trust these digital helpers. I believe these interactions will increase. The question becomes how these interactions will be orchestrated.
Open-source models will eclipse close source in 2024. The rise of models like Mistral, Falcon 180B, EleutherAI, and Llama-2 at the end of 2023 is a welcomed addition to the landscape. These models achieved comparable, sometimes superior, levels of performance compared to closed-source models. Data, privacy, cost savings, faster iteration, and customization are all benefits to the open-source models that will drive design decisions. We believe these will drive further progress in open source than closed source. Closed-source will come out with updates that will only show superior performance for at most a quarter until open source outperforms.
Agree? Disagree? Let me know, I'd love to hear your thoughts. Regardless, all of us at Breakwater wish you a fantastic 2024 and want to thank you for subscribing to Tide Chart.
