December '23: Foreword to 2024

Hello and welcome to our final newsletter of 2023.

This time, we’re sharing our highlights from the year and our predictions for the next, as well as our usual reading and listening recommendations.

Also, join us in congratulating Akshat, who has been promoted to Partner, and Jonas, who has been promoted to Staff Machine Learning Engineer. Both thoroughly well deserved 👏.

Here’s our best of 2023:

• How to design the optimal venture portfolio. We ran nearly a trillion portfolio simulations to determine the optimal portfolio construction. Here's what we found. And design your own early-stage venture strategy with our Portfolio Simulator.
• LLMs in healthcare. An exploration of how LLMs will transform healthcare operations, and where we see the opportunities.
• The 10x VC. How we’re using AI at Moonfire to redefine venture and build the era of the bionic VC.
• Moonfire Pulse Summit 2023. Read the key insights from our annual founder and tech showcase event, and watch the sizzle reel to get excited for 2024!
• Redefining B2B sales. The current state of B2B sales, where AI will have biggest impact, and the startups making it happen.
• Overcoming poor data quality when applying ML to early-stage venture. An exploration of why 'How do you apply ML in early-stage venture when there's not enough data?' is the wrong question.

Enjoy.

Mattias and the Moonfire team

🌓🔥

The Snapshot

Here’s a quick roundup of interesting stuff we saw this month:

• Over 40 partners from a16z preview one big idea that will drive innovation in 2024.
• Jeff Bezos talks productivity, space exploration, and the future of humanity.
• Harvard biomedical informatics professor Pranav Rajpurkar discusses a future with generalist medical AI.
• Google unveiled the first iteration of Gemini, their answer to ChatGPT.
• Mistral also launched their model – dropping a torrent link with no commentary.
• Andrej Karpathy’s mini-rant on why hallucination isn’t a problem, and a bunch of links on recent LLM developments.
• Are general world models the next major advancement in AI?

What's Up at Moonfire?

How will 2024 unfold?

Next year will be an exciting, and tough, one for founders. The past two years have ingrained in them the importance of bringing their burn down, driving capital efficiency, pushing revenue growth, strengthening product market fit, improving positive unit economics, and resolving any outstanding issues in their founding and leadership teams. These areas will remain the focus for founders in 2024.

But there are spots of light on the horizon.

Interest rates have peaked, and inflation is receding, with a hard landing having been avoided. This injects a degree of certainty into the market. And while recession remains a possibility, this has largely been priced in already. The first half of 2024 is likely to resemble 2023, marked by slow growth, high-interest rates and inflation, but alongside, we’ll continue to see incredible advancement of AI at a similar pace as last year – new state-of-the-art foundation models and new unicorns.

In this landscape, founders with a strong runway and a strengthening business model are well positioned – this could be the time to push hard to get ahead of your competition. Take some calculated risks that pay off when everyone else is struggling.

Fork in the road

The second half of the year could tell two different stories.

We might see central banks actively lower interest rates, potentially reaching 2% by year-end in the Euro area and 3% in the UK, as they rein in inflation. This would revitalise capital flows and growth, easing fundraising efforts for founders and reinvigorating expansion in the startup ecosystem.

Alternatively, if inflation and interest rates remain high, it will be a punishing period for founders already battling a three-year down cycle. There will be a glut of founders needing to raise capital who have held off waiting for better times, all coming out at once in the second half of 2024. If capital is restrained and VCs are hesitant in underwriting new rounds, we will see one of the toughest periods in decades for founders.

Bur global banking consensus suggests that inflation will drop: UK inflation is projected to fall to 2.8% by the end of the year, with Europe just above 2.5% and the US at 2%. UK growth will remain timid at 0.6% next year, while the Euro area will achieve 1% growth and the US a little stronger at 1.5%.

However, continuing geopolitical conflicts also cloud the global outlook, posing additional challenges to impacting commodity prices, inflation, global trade in goods and services, and financial flows. Escalation of regional conflicts or the emergence of new ones could significantly impact future growth prospects.

Clearing out the misdeeds of 2021

The clearing out of the drag of high valuations and over-financing of startups will continue. Founders will need to work their way to justify their valuations, with investors demanding stronger teams, more progress, and metrics of almost 5-10X what they were in 2021.

In 2021, SaaS companies raising Series A rounds were at $500k ARR. Now, you’re looking at $1.75m to $2.5m ARR. This trend will persist, lengthening the time between funding rounds as founders aim to meet their targets. Consequently, fundraising periods will extend as rounds take longer to materialise.

According to Tomasz Tunguz, the typical software startup used to raise Series A funding 12 months after their seed round at 3.5x their seed valuation. Now, Series A rounds are happening three months later and at 2x the valuation. And while Series B rounds have been repriced dramatically, revenue multiples still remain high. To our mind, Series B remains an overpriced market segment that has not come down enough.

VCs face their own challenges. In 2023, LPs dramatically reduced their exposure to venture. In the first three quarters of 2023 – the latest fundraising data available – 783 funds closed. That’s an annualised decrease of 49.4% from the previous year. These funds secured $85.7 billion, a drop of 53.2% compared to the same period last year.

2024 will continue to be a difficult time for VCs to raise funds. 15% of LP respondents to the State of European Tech stated an intention to decrease allocation to venture capital over the next 12 months. Funds with limited DPI or younger funds unable to show off a strong track record will be particularly hard hit, meaning more funds closing shop or being mothballed, their GPs spending their time managing their current holdings while not raising new funds. That is bad news for founders.

What will happen in our core focus areas?

Gaming, Community & Leisure

Generative AI has yet to really affect studios’ creation pipeline but, the long term, it will upend the way we think about game development and publishing. You can already use GPT-4 as a co-pilot to help you develop a simple game, even if you don’t have that much experience as a developer. Eventually, we’ll see AI powering more immersive, deeply interactive digital worlds and gaming experiences based on each individual’s preferences.

AI is also having an impact in ways that most people don’t notice. Roblox has been using it for the last couple of years to improve personalisation in game discovery, voice and text monitoring, asset monitoring, and real-time natural translation.

Over the next year, we’ll see AI applied to the more immediate concerns of smaller gaming studios, like user acquisition, live operations, personalisation and analytics, and asset variation (rather than creation). Startups in this space could use these initial use cases to get buy-in from the ecosystem and as a stepping stone towards more technically difficult applications like 3D asset creation.

Health & Wellbeing

AI has the potential to transform healthcare operations, but the biggest hurdle is the industry itself. For example, the lack of integration between LLMs and digital health infrastructure (like electronic health records) currently limits their scalable use in clinical practice. The problem is compounded by the misaligned incentives in the industry, particularly in Europe, where there is no incentive for providers or payers to adopt these new tools.

The focus in 2024 for healthcare will be on tackling mundane administrative tasks and legacy bureaucracy for healthcare providers – through both AI and non-AI tooling. Healthtech-1 is already helping to automate admin tasks in primary care, and Awell making it easier to build tailored clinical workflows. We’ll also see more personalised self-care applications for patients, paving the way for more significant transformations in future.

Capital & Finance

Fintech startups like Flagright are already using AI to help detect and prevent fraudulent activity and automate issue reporting. Others are using AI to help analysts and portfolio managers understand – and act on – financial markets faster.

In 2024, AI will continue to be used to help humans understand complex problem spaces and make better decisions faster, whether that’s battling fraudulent activity or managing portfolio risk. Outside AI, we’ll see continuing interconnection of the financial ecosystem, creating a more unified view of the customer for businesses and more tailored products and services for customers.

Work & Knowledge

The big wins from AI in the workplace will come from rethinking how an entire process works in an AI-native way and redesigning roles and processes from the ground up with both AI and human roles in mind. But there’s a lot of work to get there.

We believe 2024 will see people get more familiar with using AI tools for day-to-day creative and analytical tasks and more processes and companies being built with an AI-native approach. We’ll also see companies make more use of proprietary data and siloes broken down as data access and orchestration becomes more unified. In an API-first world, data calls are easier than ever, and the ability to amalgamate and probabilistically weigh external and synthetic data alongside your own will play a big role. Give AI models access to the right data and allow them to take interesting actions.

– – –

We live in a rapidly evolving tech environment which demands forward thinking to take on the opportunities it provides. It will be a tough year for founders as the squeeze continues in lieu of the excesses of 2021. But the green shoots of a soft landing, with inflation coming down and interest rates receding, give us hope that by the end of the year, we may be in a very different place.

This will allow more capital to enter the system, easing the way for the high-growth ambitions of our founders. It will still take longer to raise the next round, but the valuation ambitions will return to the mean and be more like 2018. Founders need to brace for a year that, while unpredictable, holds the promise of significant rewards. If you see green shoots and you can sense the economy is turning, this could be the time for you to take some calculated bets to create a gap between you and the competition.

– Mattias & Akshat 🌓🔥

Podcast of the Month

“Odd Lots: China Made a Chip Breakthrough That Shocked the World”

Interesting discussion about how China, despite – or perhaps owing to – export bans and other hurdles, is making strides in its domestic chipmaking capability.

This strikes right at the heart of legacy automakers, because semiconductors – accounting for 30% of the cost of an EV – are where a big part of the money is made on next-gen vehicles.

Listen now

Good Read of the Month

“'Poor Charlie’s Almanack: The Essential Wit and Wisdom of Charles T. Munger' edited by Peter D Kaufman”

First published in 2005, this is a compilation of 11 talks by the legendary Berkshire Hathaway vice-chairman.

Drawing on his encyclopaedic knowledge of everything from business to physics to ethics, it introduces the latticework of mental models that underpinned Munger's rational and rigorous approach to life, learning, and decision-making – all delivered in his inimitable style. Will ensure you go to bed a little wiser than when you woke up.

And, as usual from Stripe Press, it’s a masterclass in physical design.

Have a listen to John Collison's interview with Munger, too.

Buy it now

That's all for this year. We hope you had a happy, healthy, and fruitful 2023 – and here's to the same for 2024.

We wish you a Merry Christmas and a Happy New Year.

Warm regards,

Mattias and the Moonfire team.

🌓🔥