The history of humans is a history of innovation, starting from fire and wheel to mobility and artificial intelligence.
In modern times, the world has journeyed through four distinctive phases of innovation, starting from the industrial revolution of the 1800s, followed by electricity and assembly lines in the early 1900s. The third phase started in the 1970s with electronics and computers, and now we are in phase four, industry 4.0, driven by digital technologies, artificial intelligence and robotics.
There is no doubt that the fifth phase will also commence within a few decades. Technology advancement has now become an undeniable truth, and the pace of advancement is only accelerating.
The VC landscape: There is no looking back
The innovations and afterwards the adoption and commercialisation of innovations have always required capital. Prior to the first world war, it was the domain of governments and wealthy families. The innovation of automobiles and aviation started venture capitalism which expanded significantly after the second world war.
In 1926, Daniel Guggenheim created a US$2.5 million fund to promote “the whole art and science of aeronautics and aviation”. Laurance S. Rockefeller did multiple VC-like investments during the great depression in aviation, including military aviation, which became immensely profitable during the years of the second world war.
The second world war resulted in an accelerated advance in technology, and by its end in 1945, the investor’s interest in technology-led opportunities was at an all-time high. This gave birth to the modern venture capital industry eventually, when the electronics revolution arrived, the VC industry was all set to bankroll it.
Between 1968 and 1975, VC firms invested US$747 million, which increased to US$1 billion in a single year in 1980 and US$3.9 billion in a single year in 1987. In 2021, the global VC investment reached US$681 billion.
Although it declined in 2022, it was still at US$445 billion. The electronics and computer-led innovations were built through VC funding, and the digital and robotics revolution of current times is also being built through VC funding.
It is critical to understand this history before looking at the yearly landscape of VC funding. Venture capital and innovation are highly correlated and may also be called synonymous. The VC investment numbers in one particular year may go up or down, but structurally the pace of innovations has never been so fast in human history and therefore venture capital investments are also set to continue soaring.
Given the unhindered march of technology innovation, the current challenges driven by high inflation, increasing interest rates and geopolitical uncertainty may cause a short-term investment deacceleration, but in no way can it result in the reversal of a trend that is extremely structural and ingrained in the civilisational level.
As far as 2022 goes, it was a year of stabilisation after the trailblazer year of 2021. The global VC funding remained in the range of US$300, US$320 billion between 2018 and 2022, and then it soared to US$ 681 billion in 2021.
The US$445 billion global VC investment size of 2022 was still significantly higher than any of the years prior to 2021, confirming that the investment trendline remains in a significant upward trajectory. The VC industry is also sitting at a record-high dry powder of US$580 billion and continues to raise new capital of more than US$150 billion. Just to put this in context, this dry powder is like what VCs had at the beginning of 2021.
Singapore continues to remain extremely resilient, even in the wake of the global decline in 2022. Singapore has been ranked seventh in Global Innovation Index, and this has improved in the recent ranking. It is a major innovation hub, and it is consistently increasing its share of VC investments.
The total VC funding in Singapore in 2021 increased to US$11.3 billion from just US$4.1 billion in 2020, and in 2022, the VC funding again clocked a value of US$11 billion, almost like in 2021. Singapore’s focus on creating the best-in-class ecosystem for startups, especially in deep tech, will continue to result in relatively higher growth in comparison to the world.
AI and the future
In the recent past, the top technologies which have attracted the highest amount of VC funding include fintech, mobility tech, e-commerce, health tech, cloud infrastructure and clean tech. The fintech revolution across the world is still being catapulted by VC investments along with mobility and e-commerce, and these top three areas have accounted for more than 70 per cent of total VC investments in the recent past.
But now, the attention is shifting to newer areas as well, especially the application of artificial intelligence, machine learning, robotics and blockchains across industries. In terms of industries, healthcare and green energy are likely to increase their relative share vis – a – vis fintech mobility and e-commerce. The new investments in 2023 are likely to catapult health tech and green energy into the top three.
Today, the technology advancement has brought us to a stage where we have a credible chance to solve our biggest challenges, such as food availability, universal access to healthcare, climate change and disaster relief. The venture capital investments are likely to also mirror the efforts to solve these long-standing problems and increasing investments in health tech and green energy is a testimony of that.
Developing technologies to reduce carbon emissions across industries is another frontier that is likely to be scaled through VC funding. There is also likely to be higher capital allocation to solve agricultural production and supply chain challenges which are termed agritech and supply tech. So overall, this portfolio shift is likely to start in 2023 and accelerate in the coming years.
Final thoughts
The venture capital industry is at an exciting state right now with huge dry powder, high levels of entrepreneurship and accelerating technology innovations. We expect 2023 and this decade to be the most impactful in terms of innovations, and venture capital will play an extremely critical role in not only enabling the innovations but also ensuring the adoption of such innovations, solving problems, and increasing our standards of living.
–
Editor’s note: e27 aims to foster thought leadership by publishing views from the community. Share your opinion by submitting an article, video, podcast, or infographic
Join our e27 Telegram group, FB community, or like the e27 Facebook page
Image credit: Canva Pro
The post Exploring the evolving VC landscape: An insightful outlook on venture funding in 2023 appeared first on e27.