What will 2024 hold for VC and startups?

In early-stage investment, staying ahead of trends and building true convictions are important pieces of the puzzle, behind our day-to-day. The following things will be top of mind as we turn the page to 2024.

An emerging ASEAN – Australia ecosystem and tech corridor

Whilst Australian startups pursuing international growth is not a foreign concept (pardon the pun), we expect the share of startups targeting US and UK markets may diminish as founders zero-in on Southeast Asia. Our conviction in this trend has led us to launch a climate tech fund alongside Indonesia’s largest financial institution, Bank Mandiri. 

First, when compared to Australian investors, in 2022, Singapore VCs invested twice as much capital and Indonesia VCs invested twice as large checks. This trend gained traction into 2023 and is likely to maintain momentum into 2024–especially so, as governments apply energy towards foreign investment and trade. 

Australia’s Southeast Asia Economic Strategy to 2040 maps out ways to ensure corridors of trade remain liquid between regions and some of the suggestions put forward by DFAT's Special Envoy for Southeast Asia, Nicholas Moore AO, are already being put to work. Public sector players (Austrade, Enterprise Singapore) and ecosystem drivers (HaymarketHQ, Greenhouse) offer startups the critical infrastructure required to enter new markets, namely visa access, soft-landing desks, funding initiatives, and access to commercial networks.

Second, when it comes to markets, the opportunity is for Australian startups exporting digital products, deepening integration and connectivity, and tapping into a growing consumer class. 

With the rapid demand on digitalisation of the ASEAN economy we have not scratched the surface of the opportunity for Australian tech exports. ASEAN saw 100 million new internet users over the past three years, hitting 460 million users in 2022. Tech categories such as fintech, healthtech, edtech, agritech, and e-commerce are the best plays because they are most in demand overseas — in particular in Indonesia and Vietnam. Moreover, sentiment toward Australian-made products within these sectors is especially positive and highly encouraged to expand.

Sovereign capital will flow into defence, quantum computing and climate tech

State security investment has traditionally focused on defence-tech, such as ballistics, cybersecurity, robotics, space, and clandestine capabilities. While we think these tech categories will continue to attract funding, we believe the greater opportunity lies in those sectors that are already Australia’s superpowers - dual purpose innovations that can lead to national self-reliance, namely climate-tech and quantum computing. 

Innovation in these two sectors are highly sought after yet not entirely harmful or politically triggering when shared overseas, making them valuable for trade. And leadership in these defence categories empower Australia to reduce dependence on its neighbors, and improve Australia’s regional status and negotiating power.

We have seen government investment from the ground up, with it backing university programs such as the UNSW Defence Trailblazer program, and Climate 10x Accelerator. And from the top down, with the establishment of the National Reconstruction Fund (NRF) slated to invest $15 billion by the 2030 into seven key areas that will foster national security through economic sovereignty.

Anticipating this trend, we model our investment strategy using observations from our Investible Singapore office. Singapore is perhaps our region’s best example of a self-sufficient, well managed, and well protected nation that adopted sovereign tech capabilities to reach self-reliance decades ago. This is evident through the establishment of the National Science and Technology Board (NTSB) in 1991, and the more-recently, the Smart Nation Initiative. Between 1995 and 2020 sovereign investment into the RIE landscape rose by S$17 billion ($18.99 billion), and today remains a cornerstone in Singapore’s development.

Discussing with our partners and colleagues in the Middle East, US and Europe, we believe this trend is a global one.

Increased commitment to gender, diversity in the tech ecosystem

We think this important topic will accelerate next year, as enterprises, VC firms and startups alike consider their structures around diversity and equal representation within the sector. 2022 and 2023’s unfavorable economy has forced many founders and investment directors to think differently. One critical factor for survivability and 'thrive-ability' is high performing and diverse teams by background, culture, and gender. 

Startups that were once considered “good enough” in the absence of any other existing alternatives are now losing traction to solutions that offer specific and tailored results. Diverse teams can more thoroughly understand the jobs-to-be-done and more closely identify with specific customer segments and founders. Data has shown that oftentimes diverse teams produce better commercial outcomes as well. Going into 2024’s mature and tightly contested market, we think Aussie entrepreneurs and investors, alike, may explore introducing diversity into their senior ranks and investment strategies.

This concept is somewhat substantiated when looking toward more progressed venture ecosystems, namely the US. One of the benefits of our small ecosystem is that we have and can continue to catalyse efforts quickly. WithVC firms and accelerators tracking and publishing diversity data, Funds such as the Alice Anderson Fund,ALIAVIA Ventures, and First Nations Capital are actively deploying, and initiatives like the Startmate Women Fellowship, theInvestible’s Women’s Network and Grapevine are driving the sector forward.

Exits and closures will crystallise VC returns

Venture capital bull markets rely on an expanding startup leadership base and, in 2023, market leadership has been exceptionally narrow.

The few startups that did lead the market had minimal effect to crowd-in financing and uplifting the overall sector. Certainly, even less capital has recycled back through the startup ecosystem via meaningful acquisitions. Money was largely held with a ‘wait and see’ approach. In 2024, if the risk-off appetite persists among corporates and some VCs, then investment portfolios may experience a higher-than-average number of company closures this year. 

Unfairly, a countertrend is the likely rise of activity toward exits. We anticipate acquirers have considered (and continue to consider) current market conditions as a chance for discounted buy-out opportunities. And while there may be closures, there may also be a higher than average pace of funding exits that occur. There will be activity.

And so, the final trend we are watching, going into 2024, will be the frequency of exit announcements, and the continued popularity of liquid investment models, such as continuation funds, secondary capital groups, open ended funds, and syndicate networks, like SecondQuarter Ventures, the growing group on Aussie Angels, and our own Club Investible.

Charlie Ill is the Chief Investment Officer for Investible, an Asia-Pacific based venture capital firm with offices in Sydney and Singapore, and one of the region’s most active early-stage investors.