Where VCs will put their cash in 2023: And it’s not in crypto or groceries

Artificial intelligence and gaming are the sectors that could see investors earn a strong return in 2023, say these VC businesses.

Crypto’s lost its attractiveness for investors.

Artificial intelligence and gaming are in, crypto and grocery delivery out, according to venture capital funds as they plan where to deploy cash this year.

AirTree was interested in cybersecurity and data infrastructure enterprises, said the fund’s partner, Jackie Vullinghs.

“We’re also keen to invest in software that improves productivity for employees by helping them do their work faster and to a higher quality than ever before. Everything from developing architecture plans, to writing secure code,” she said.

Those performing poorly included “start-ups with slow cash-conversion cycles, without recurring revenue, or that require a large amount of capital to get to a scale where the unit economics become sustainable,” she said.

The AirTree Ventures team.

Local venture capital has not had experience investing during a sustained economic downturn, Ms Vullinghs said.

At Ten13 – a syndicate that hopes to reach $100m in funds under management this year – it is e-commerce, fintech and education on the radar.

“Given our investments in the space, we’ll start to see if they start to take fruition in our in line with our expectations,” said Ten13 managing partner Stew Glynn.

Ten13 would predominantly focus on emerging markets – in particular health and insurance.

“We have a slightly different focus to some of the Australian VCs where half of our deals are actually international. We invest mainly into emerging markets such as Africa, Southeast Asia and India,” he said.

“We have a view that in a lot of the emerging markets, things like fintech and healthtech infrastructure are core areas that are still yet to be built out. They are sort of like the plumbing and sewerage rather than the sort of fancier deep tech or deep ecology plays.”

Ten13 was also interested in the AI space. “This is probably the first true emergence of the technology,” he said.

Ten13 managing partner Stew Glynn.

Mr Glynn said the thesis most people had was that AI would come after blue-collar workers first and then move into the white-collar space, taking on administrative roles, finance and finally creativity.

“It’s almost going the opposite way which is quite interesting to see. We’re starting to see some incredible and very fast moving kind growth in the AI space particularly around content generation, whether it’s written or actual media,” he said.

“I think there is capital still available for the right entrepreneurs.”

AfterWork Ventures, a more recently established fund, has a different view.

Its principal, Jessy Wu, said this was the year that start-up founders should be scrutinising their backers.

AfterWork Ventures’ Jessy Wu, Alex Khor and Adrian Petersen. Picture: John Feder

“As VC funds re-evaluate their strategies, they will inevitably run up against trade-offs,” she said. “The decisions that funds make during this time of pandemonium will betray their character and values more starkly than those they made during the hay days – when the dominant strategy was clear.”

These decisions, however, should not go without criticism, with founders encouraged to speak up when their old capital source closes their wallet. “Discerning founders should scrutinise the actions that VC investors are taking now, not the marketing they put out earlier,” she said.

The types of early-stage start-ups that did well were those who could adapt swiftly. Others with cult-like followings also came out on top. One business was Lyka, a pet food brand that allows customers to create meals with supplements, Ms Wu said.

“Lyka’s growth accelerated significantly in 2022 – it has now served over 10 million meals and raised a $35m Series B,” she said.

AfterWork also has its eye on start-ups in the field of generative AI – applications which can product text, images and code – as well as those surrounding new payments platform which allow for instant payments.