The investment boom of recent years is set to recede in 2023, threatening cloud infrastructure companies looking for late-stage funding, analysts predict.
Silicon Valley startups raised $10.7 billion in the third quarter of 2022, an 11-quarter low that brought venture capital funding down to its lowest level since the end of 2019, according to data from CB Insights. Venture funds in 2022 focused more on early-stage deals than they did in 2020 and 2021, according to the company, which analyzes venture deals.
Those trends are set to continue into 2023, driven by markets tightened by a looming global recession and rising interest rates. Venture funds, which pump money into new technologies and products hoping for big profits, are putting less of their money into late-stage, mature companies, putting a crunch on companies that got massive investments just a few years ago.
For some, that will mean taking on debt or down rounds, which adjust the valuation of a company.
“There’s definitely a valuation reset,” said R. Scott Raynovich, founder and chief analyst of Futuriom, an independent cloud technology analysis firm. “The companies that are going to be in trouble are the ones that raised money at higher valuations.”
Those high valuations came during a boom in venture funding in 2021 when every quarter represented a new record high in deal-making, according to CB Insights.
Push-and-pull market
The news isn’t all bad: Market analysts are predicting a push-and-pull effect on cloud computing for 2023. End-user spending on public cloud services will grow to $591.8 billion in 2023, up from $490.3 billion in 2022, according to a forecast from Gartner. That would mean spending on cloud will grow by nearly 21% in 2023 over 2022.
All segments of cloud infrastructure are expected to grow in 2023, but none more than infrastructure-as-a-service, which is set to reach $150.3 billion, up from $115.7 billion in 2022, according to Gartner’s forecast.
This boom has some startups in the industry hoping to grow into profitability using the funds they raised when venture firms were dishing out cash. Thriving in 2023 could mean watching your competitors get acquired or run out of cash.
“I have peers who are asking me ‘what do you think about managing a bridge loan or convertible debt,’” said Andrew Casey, chief financial officer at Lacework, a cloud security services provider that announced $1.3 billion in growth funding, at a valuation of $8.3 billion, in November 2021. “There are companies that aren’t as well-funded, some in our space, that will run out of cash.”
Lacework is hoping to replace these competitors, Casey said, and bring the company “to the forefront” in 2023. The company has enough funds to invest in its products and try to top this sector for three or four years, he said.
Lacework stumbled trying to move quickly after its largest funding round: The company laid off a fifth of its staff in mid-2022. In November, it hired Casey as its new CFO and brought on a new chief marketing officer.
Casey said the layoffs were a “small reduction in force” caused by hiring too quickly on marketing and sales.
Looking beyond 2023
Growing in a shrinking overall market has some executives setting their sights past 2023 as the time to go public. This coming year could mean growth amid broader instability, ideally building market share for a better economy, startup executives say.
“Whether it’s the current climate of cost consciousness or the threat of a recession, businesses have always tried to do more with less,” said Kelly Ahuja, chief executive officer of Versa Networks, a secure access service edge vendor. “In this environment, they see migrating to cloud and adopting more cloud services as a significant way of achieving that cost reduction but also operational efficiency.”
Versa this year secured a $120 million round of funding from asset manager BlackRock and Silicon Valley Bank.
Ahuja said that Versa should be seen as uniquely positioned to capitalize on that pull-and-push of an IT market being tightened by inflationary pressures, however the window for taking his company public could be 18 months away.
Global IPO sentiment overall is fragile, according to PricewaterhouseCoopers’ Global IPO Watch, which tracks companies going public. IPO proceeds in 2022 were at $138 billion as of Sept. 30, according to PwC, unlikely to match the $607 billion reaped in 2021. The Renaissance IPO index, which follows performance of newly listed U.S. IPOs, was down 3.2% since June 2022, compared to the S&P 500 overall, which was up 7%.
Others in the network security space garnered investments this year. Cymulate, which works in extended security posture management, grabbed a $70 million Series D investment from One Peak, Susquehanna Growth Equity, Vertex Ventures Israel, Vertex Growth and Dell Technologies Capital in September. The company has raised $141 million to date.
However, analysts are concerned that if overall IT spending decreases, it could mean slower growth for IT. The pull on the markets is set to come from broader forces. Global inflation in 2022 may cool in 2023, but analysts worry a recession will come late in the year and prompt businesses to spend less across the board.
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