The Current State
Hello everyone… I hope your 2023 has been starting well! Our team is back and already geared up for another tremendous year. But first, a quick look at the current market.
2022 was a tumultuous year with dramatic public market swings. There are now daily announcements of sizable layoffs from technology giants like Salesforce, Amazon, and Facebook. I believe that these foundational companies have firm grasps on their businesses and foresee top line softening in 2023. With those weakening indications, many software companies are now cutting personnel costs to manage 2023 free cash flow. As a result of muted growth expectations, Energize is now seeing public market valuation declines for technology companies find their way into the earlier stage.
Across the technology markets, we are seeing (whether publicly announced or not) nearly every company reduce current workforce by 10-20%. These adjustments are happening through Reduction in Force events, standard performance reviews, or more managerial tactics (return to office requirements, etc.) I personally believe this “trimming” is probably healthy for the market as cost of capital stabilized to more traditional levels and is forcing more focus at every maturity level.
There is also a bifurcation in the market. While technology budgets and valuations are currently under more scrutiny, corporate support for sustainability and energy transition related budgets has grown materially over the past 12 months. Companies with direct exposure to renewables, the electrification of mobility, materials efficiency and the carbon markets are overachieving. The corporate demands in these areas are overcoming interest rate and recession concerns and we expect that these sustainability markets will be rare greenshoots for the entrepreneurial ecosystem in 2023.
The holding horizon for an investment in the venture and growth investing markets is guided to be 5-10 years. With that long duration, great companies compound value in good and hard years. The best companies compound value and maintain cash efficiency so that they can identify the optimal time to create liquidity for shareholders. 2023 is going to a tougher year in the markets and I do not see many liquidity events. But, energy and sustainability will be uniquely positioned to grow amidst the broader macro concerns. I’m both an optimist and a realist and am cautiously optimistic for our portfolio and investment pipeline.