In 2023, tech market stocks remain in a fragile state following the depths hit in June as all three major US indexes, the Dow Jones, NASDAQ, and S&P 500 all fell to their lowest level since the COVID-19 pandemic in 2020.

Having seen massive public stock market volatility in the tech sector over recent months, start-ups will be wondering how this instability will affect private investment and access to capital. The data economy has been shaken as the knock-on effects introduce new limitations such as regulatory pressure and chip shortages, requiring more efficiencies amid increasing demand for more data and processing power. However, unlike many startups caught up in the Dotcom crash of the 1990s, modern software businesses are far more fundamentally sound with healthier unit economics, so they’re less likely to experience the same fate.

Inflation through the production process will lead to further stock price decline, unless it is already priced in, and any recession may effectively restrain the public market for a prolonged time.

Start-ups need not panic. The right start-ups, with low burn and high growth strategies, who build their business model on strong, innovative ideas and financial sustainability, will continue to attract investment and new customers and weather this volatile period in the market.

Disruptions to the tech sector and data economy

Start-ups can still find opportunities to secure funding and advice from experienced VCs, but the key is to find a niche, a problem to solve.

As new industries like pharmaceuticals and manufacturing enter the data economy in full force, the advent of 5G, IoT devices, and widespread network coverage continues to increase the amount of available data to use for high-volume processes such as training neural networks. Markets may fluctuate, but high-quality, comprehensive datasets will remain valuable. In a market founded on cycles of growth and caution, laying the groundwork for future upswings is a critical practice.

We’ve seen all of OpenOcean’s portfolio companies either reconsider or begin to test their budgets and plans, making certain that they have the resources and support to weather at least an 18-month storm. As with any long-term issue, it will require long-term planning and patience.

Market uncertainty: what do start-ups need to worry about?

With the amount of dry powder that VCs hold in reserve, the overall attitude of the industry isn’t panic but reasonable caution. Speculation requires confidence in the upward momentum of the market, and when that confidence is lacking, investors will be on the lookout for standout examples, the most likely to succeed.

VC firms are warning their portfolio companies not to overextend themselves. Those that do not heed warnings will experience difficulties, leading to staff movement and sector-wide talent redistribution. But start-ups need to be around to reap these benefits.

In the future, we will see successful start-ups from an increasing variety of regions achieve success and disrupt the industry.

Two-year view: what kinds of ventures will perform well?

Not all start-ups are built equally. That has never been more true than today, as start-ups’ capital efficiency and revenue generation takes a central role in evaluations above exponential growth

It's important to hold board-level discussions to ensure that the VC and start-up are a good match. Knowing that both are on the same page about what needs to be done to secure the start-up’s future is the foundation of healthy working practices.

This alignment will include a realistic view of how current events will impact revenue, what appropriate overheads will be, and an agreement on a conservative plan to consider the company’s financing as a whole. VCs should partner with start-ups not just by injecting capital and hoping for success, but by providing their own expertise as a way to ensure their portfolio company’s upward trajectory.

The VC and start-up ecosystem

With the inter-reliance of the entire VC and start-up ecosystem, the importance of carefully vetting and testing a VC and start-up relationship on both sides to ensure a good fit has never been more important.

Start-ups shouldn’t be afraid of current market conditions. Continued investment is assured if they commit to solid growth principles and ensure that their business is firmly rooted in solving common business problems.