Mindset Ventures’ Perspectives for 2023

Mindset Ventures
10 min readApr 5, 2023

The quote “the market suffers a downturn every ten years” might be one of the most recurrent expressions whenever volatile moments emerge. Whether it happens on average every ten, eight, or however many years it is, investors should not just prepare themselves to navigate these scenarios properly — they should be ready to take advantage of it.

Since mid-2022, we have been living in a volatile moment that may have scared those who were not foreseeing the current scenario, but that, at the same time, has been offering multiple unique opportunities for those who were preparing to take the most out of it as soon as the first signs of adjustment came up.

With that in mind, we would like to share our perspectives for this year and the opportunities that venture capital investors may come across throughout 2023.

Fundraising should exceed deployment

The valuation adjustment that the venture capital market experienced last year (and that is still going on up to a certain point, especially at the later stages) was perceived by many venture capital funds much more as an investment opportunity than as negative news. The fact that companies faced more challenges to raise capital in 2022 doesn’t mean that funds ceased fundraising. On the contrary, investors became more cautious with the valuations and decelerated capital deployment by more than 20% worldwide. On the other hand, they have accelerated fundraising to take advantage of adjusted valuations (a movement we have also observed during the pandemic). As a matter of fact, the venture capital fundraising activity in the US reached a new record in 2022, exceeding the total capital raised in 2021 by nearly 6%, according to Pitchbook.

However, it is also true that the accelerated fundraising activity and decelerated deployment increased the dry powder, which at some point must be deployed as funds commit with investment periods. It seems a consensus that 2023 will not hit a new record in terms of investments; nevertheless, it is hard to determine when exactly the capital deployment gate will open, which will likely increase valuations once again.

In our opinion, it is wiser to allocate in solid companies while investment conditions are already attractive than to take the risk of waiting longer for valuations to possibly depreciate even further, but then miss such sweet spot and consequently have to deal with exaggerated valuations once again when the market gets back on track. The additional upside gained by hitting potential lower valuations is minimum compared to existing market conditions and does not justify the risk of missing it and having to deal with higher valuations once again. This is exactly why we have already started investing our fourth fund and continue participating in follow-on rounds through our third fund.

Nevertheless, not all venture capital funds have been able to attract the attention of investors. Despite the opportunistic moment for investments, LPs seem averse to taking additional risk by investing in first-time funds, a movement that has already been observed during the pandemic, but through a much softer reaction. In 2022, first-time American funds couldn’t raise half of what was raised in 2021 without even hitting the amount raised in 2020.

Such movement reinforces trends we have been observing since the start of the 2022 valuation adjustments: venture capital investors (which comprises funds and LPs) continue to observe opportunities to emerge. Yet, they have become more cautious about allocating capital. This trend should remain throughout this year and has enabled investment conditions to shift in favor of investors. Recently, PitchBook created a dealmaking index that measures whether investment terms are more favorable to investors or entrepreneurs, considering how frequently anti-dilution protections, liquidation preferences, and other investment terms appear in investment contracts. The chart below perfectly illustrates this point.

Fundamental analysis will acquire strength

The closer a company is to going public, the faster it reacts to market corrections. Late-stage startups tend to suffer adjustments more quickly than early-stage ones whenever valuation volatility occurs, and seed-stage firms tend to face corrections much later when there’s space for such. A few weeks after the public markets started shaking in 2022, we observed several late-stage startups cutting valuations, an effect that took longer to reach their early-stage counterparts, which can be observed in the graph below. Although the chart refers only to the American market, the same phenomenon is valid globally.

When the market is booming and certain industries are hyped, most investors tend to be influenced and behave more carelessly during analyses, overlooking characteristics that could prevent them from proceeding with the investment. But when the market derails, venture capitalists seem to remember how fundamental analysis is critical for maintaining the resilience of the investments even amid turbulent moments.

During these periods, the founders’ track record, market potential, solution consistency, and several other aspects take place in investment discussions. Thankfully we have adopted fundamental analysis as a tenet since our first fund, which has made a huge difference and proved crucial for navigating rough seas. It doesn’t mean that we are not tempted to follow certain hypes, but with a robust investment process strictly followed and more than 70 criteria to be assessed during the analysis of each potential deal, it’s hard to fall into a trap. As a result, our funds continue to perform resiliently even in such a volatile moment.

But the changes that emerge when turbulences emerge are not only on the investors’ side but also on the founders’. In moments when capital becomes scarce, only those companies with solutions that tackle primary issues and with solid operational plans are able to raise resources, which creates a natural selection and consequently transforms how founders create and operate their firms, aiming at generating real results and reaching break-even as fast as possible instead of relying on subsequent fundraising rounds to cover unnecessary outlays used to grow at any cost. In fact, according to the Startups Magazine, half of all the current Fortune 500 companies were created during recessions, which perfectly complements how crises tend to be beneficial for the ones willing to put money to work. On the next page, you can find some examples.

Elections in Israel and Brazil will not affect our activity

In a matter of just a few months, we experienced government shifts in Brazil and Israel. Coincidently, the elections in the two countries generated a lot of friction, and both elected candidates had already governed their respective nations for consecutive years in the past. In Brazil, protests against the results are still taking place on a small scale, and in Israel, around 80 thousand people protested against the government plans a few weeks ago. In practice, even though some friction was generated with the first few signs given by the president and the prime minister, the episodes should not significantly affect the venture capital market in the medium- and long-term and, therefore, our activity.

Considering the essence of the venture capital market to the Israeli economy, it is hard to believe that decisions that jeopardize the segment would take effect at any point in the country. In addition to that, the venture capital industry suffered no effects of negative measures taken by the government when Benjamin Netanyahu governed the country from 1996 to 1999 and from 2009 to 2021, which makes us induce that no surprises should come up this time.

In Brazil, the new government seems more open to the international market, which may facilitate the entry of foreign companies into Brazil. As part of our value creation efforts involve helping companies expand internationally, we may be positively affected by this movement.

Comparatively, the 2020 US presidential elections had a much more relevant effect on the technology industry than the two other countries, as Big Techs started to face important obstacles related to transparency and compliance with privacy rules.

The most promising venture capital segments

As technology constantly evolves and the venture capital market continuously matures, new tech-related niches emerge year after year. Some end up proving just hype and disappear after not presenting real value to the industry. Others generate real value for specific use cases and are absorbed by larger, more mature segments. Finally, there are a few that completely disrupt the industry and become a new segment their selves. Among the three most promising venture capital segments for this year, the first one has just started to disrupt our market in a way we have never seen before.

Generative AI: We have been using artificial intelligence for quite a while now to help us with operational tasks that would demand too much effort and be subject to operational human failures. Regardless of how useful AI solutions are to us (and all of us have already become used to dealing with them every day), our interaction with them tends to be somewhat robotic due to the comprehension limitations behind the algorithms.

But things started to change quite a lot recently, so it became almost impossible to perceive if we are dealing with a person or a robot on the other side of the screen. Generative AI consists in using artificial intelligence to create new content using previously created content, and not only execute tasks to which that solution was specifically designed. In other words, generative AI is an enormous shortcut to automate creative activities and may be one of humanity’s most significant achievements of how close we are to enabling software to work almost like a human.

Given the success that some generative AI solutions have been having throughout the past few months and their power to disrupt artificial intelligence as a whole, it is hard not to believe that a number of other generative AI-based solutions will emerge this year and work as a base for the evolution of this technology for multiple use cases in the next few years.

There’s no better way to understand the real potential behind generative AI than to test it. ChatGPT is a free, intuitive-to-use, and powerful tool that represents very well how far AI can get. To try it out, click here.

Web3: Last year, we wrote an article about the main concepts and perspectives behind Web3, which can be accessed here. In a nutshell, Web3 is the natural evolution of the Internet, enabling users to more efficiently preserve their privacy when navigating and giving a hard time to companies that capture or acquire personal information on the Internet to propel marketing campaigns. While Web2 is basically managed by a few giant companies that have access to the information present there, Web3 enables interaction among users who own their proprietary information without being subject to what is determined by larger organizations.

The migration from Web2 to Web3 is already on course, but it may still take some time for it to be predominant over Web2. Still, the amount of Web3 companies emerging every day is staggering, a trend that should remain throughout the next few years.

Software as a Service: We have been investing in B2B SaaS companies for a long time, but the segment has become increasingly more representative in our funds. This is not because other segments became less representative in our deal flow but because the quality and variety of SaaS firms evolved a lot, as well as our knowledge and comfort in investing in this type of startup. Until the end of the year, SaaS firms will remain as important as they already are for our activity and will continue to represent a relevant part of our deal flow.

To conclude

All in all, the venture capital market should behave in 2023 very close to how 2022 ended. We don’t foresee significant economic hiccups in the venture capital industry or an abrupt acceleration of capital deployment. In our opinion, valuations should remain adjusted for several months (possibly until the end of the year) until the first signs that the investment activity will recover its pace emerge, which leaves us a wide room of opportunities to invest at reasonable valuations and favorable conditions.

Since the beginning of the current turmoil, bridge rounds and extensions have become increasingly popular as startups avoid having their valuations cut after raising equity rounds. However, these fundraising methods demand agile and flexible investors who make the investment decision quickly and accept investing through convertible notes, SAFEs, and similar instruments, which are only sometimes trivial for larger funds. This is the perfect scenario for us since competition is decreased, deal conditions are in our favor, and deal flow remains intense.

While part of the market prefers to wait until valuations reach rock bottom, we like to make sure to reach the target and have already started to take advantage of excellent investment opportunities that arose in the past few months. This way, we replicate the successful strategy we adopted during the pandemic, exponentiating the potential upside for investors without ceasing the investment activity and using the time factor in our favor.

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