Last year saw a sharp drop in global venture capital funding for startups, with Crunchbase finding a five-year low in VC activity in 2023. Manufacturing was one of the higher performing industries in terms of investment, seeing less than a 20% drop, but the sector still experienced a year-on-year fall in funding.
Is this the new normal? How can manufacturing startups maintain a competitive edge to secure funding? What are the technologies and innovations that will bring investors back?
These are some of the pressing questions we explored at the Sixth Sense Summit in London earlier this year, including during a roundtable session on how to fundraise in a challenging climate.
Participants in that discussion included Jean-Laurent Pelissier, Managing Director, Head of Enterprise Software at HSBC Innovation Banking UK – a subsidiary of HSBC which supports the innovation economy, providing commercial banking services, expertise and insights to the technology, life science and healthcare, private equity and venture capital industries. We spoke to him to find out more about what the future fundraising landscape may hold.
What was behind the worldwide drop in VC funding across all industries last year? What impact did this have on the innovation economy?
Jean-Laurent Pelissier: I think 2023 was a reset year for the VC industry and the innovation ecosystem. People had to get comfortable with new valuations and new ways of operating, with a much greater focus on efficiency.
When the markets took a dive in 2022, we saw a lot of companies pause and rethink how to manage their business and boost efficiency. We also saw investors re-evaluate how to value companies and become cautious about deploying funding, focusing equity on existing portfolios instead. However, I think this has now stabilised.
Are you optimistic about the future of startup fundraising? Can we expect 2024 to see a marked improvement or are we in a ‘new normal’?
Jean-Laurent Pelissier: I don’t think last year is where we’re going to be forever. From an economic perspective there’s more stability (at least in Europe and the US) with more bullishness from investors to deploy funds and some early green shoots of positivity in the public market [IPO markets reportedly showed early signs of recovery at the end of Q1 this year].
So from what we’re seeing on the market, I am cautiously optimistic for 2024 – I expect to see more activity.
In terms of the new normal, I think companies are coming to terms with embracing valuation resets. We saw companies listing in the public markets demonstrate this approach, which I think reflects the broader ecosystem’s new reality. When this trickles through I think we’ll see more funding rounds.
Forbes recently listed 3D printing, smart factories, sustainability, advanced materials, AI and blockchain as the top six innovative opportunities for manufacturing startups. Do you agree this is what investors are looking for?
Jean-Laurent Pelissier: Against the backdrop of companies needing to become leaner and more efficient, I think AI is going to become increasingly important. Many of the large enterprises we speak to at HSBC Innovation Banking want to adopt AI at some level, harnessing it to improve efficiency.
Beyond that, I expect to see more investment in frontier tech. We’ve seen a lot of activity in this area over the last 12 months and I think this is tightly associated with the demand for AI, which requires chips, processors, and computing to power and boost efficiency.
Another key sector is climate and sustainable tech. There’s been a lot of investment across a spectrum of sub-verticals and this will become more important for investors as the attention on sustainability and drive to net zero ramps up.
Alongside investment, connecting agile and innovative startups with the resources and networks of large corporations can also help them to scale. What tools should start-ups leverage to stand the best chance of securing funding?
Jean-Laurent Pelissier: The fundraising environment is much more competitive than it was two years ago, so it’s vital to have the right network. Startups must proactively create relationships with investors ahead of fundraising, building that trust and track record.
This is important across life stages. In the early stages, it’s about choosing the right accelerator, angels, or seed funds that complement what’s missing and provide the right connections. In the later stages, it’s about building that VC network and cap table in a smart way to aid expansion into larger markets.
Lastly, it’s important that startups surround themselves with the right banking partner, lawyer, or accounting partner that also helps with connectivity and networking. This is a lot of what we do at HSBC Innovation Banking; working with companies all the way from early pre-seed to IPO, focusing on what value-add we can provide.
Finally, when it comes to boosting efficiency, it’s crucial that startups establish exactly what type of company they are and what end user they are catering to; making sure to identify, track and maximise the right KPIs for their business. The reason being, these are the kind of metrics investors are going to want to look at and understand.
Thank you, Jean-Laurent, for sharing your insights and perspective with us.