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It’s been an up and down year for tech. Between a looming recession, mounting layoffs and the rollercoaster that is market volatility, 2023 isn’t looking any calmer.

Amid the chaos, Los Angeles VCs are trying to read the tea leaves on where to write their checks and how to guide their portfolio companies through the storm. Dot.LA spoke with four LA investors on the trends, industries and issues they’re keeping an eye on as the tech industry stares down an unprecedented market in the coming year.

Blockchain and DTC are in for a rough year

2022 wasn’t particularly kind to blockchain companies, and that trend will likely continue into the new year. Solomon Hailu, partner at March Capital, said that, while blockchain technology has a lot of potential with the right applications, investors spending big (and eventually losing big) amid price speculation made crypto’s hot streak “hard to maintain.” In other words, rebuilding trust among investors won’t be easy.

On top of that, the collapse of FTX, in November, once valued at $32 billion and backed by some of the biggest investors in tech, may make things worse in the next year for Web.3 companies trying to raise funding, said Eva Ho, general partner at Fika Ventures.

“I'm a long-term believer of crypto, but I think in the short term there's going to be quite a bit of pain,” Ho said. “It's human nature to react to a lot of bad news this way. There's going to be a pullback, but I'm hoping it won't last more than a year or two. It’ll recover in due time.”

Direct-to-consumer companies will also likely be on the struggle bus. The pandemic gave e-commerce and DTC companies massive tailwinds in the past few years, said Adam Struck, founder and managing partner at Struck Capital. As the economy contracts and consumers tighten their purse strings, that rapid pace of growth is bound to slow down and drop below pre-pandemic levels.

“I think you're already seeing signs of it, with all the ‘Buy Now, Pay Later’ companies that are just getting absolutely slaughtered in terms of enterprise value,” Struck noted.

The warning signs spell trouble for L.A.’s tech industry specifically, as both sectors have strongholds in the city. E-commerce and DTC-related companies like Fashion Nova, Whatnot and Tapcart consider L.A. home. And crypto startups, celebrity investors and NFT businesses from art galleries to restaurants have made L.A. a blockchain hub.

AI and climate tech are poised to soar

Hype around machine learning and AI mounted this year, as seen in the big-ticket funding rounds that AI companies snagged and the buzz around generative AI with the rise of DALL-E. With so much untapped potential, Struck called AI “recession-proof.”

“There's massive opportunities still for core technology innovation in AI,” he said. “AI is not going to have a hard time at all.”

Minnie Ingersoll, partner at TenOneTen Ventures and host of the LA Venture podcast, said that AI is exciting to investors as a “speculative big bet.”

“It's still undefined, so there's so much opportunity there,” Ingersoll said. “I think money has moved into that space which might have previously been invested in something like the crypto space.”

Another area with lots of potential is climate tech. VCs understand that climate investments need to happen now if there's any chance of meeting carbon reduction and net-zero targets set by states and countries, Struck said. Clean energy and EV deployment are already making headway on decreasing emissions (both of which have major footprints in L.A.). The next growing frontier of climate tech is reversing the damage that’s been done, Struck said.

“CDR, or carbon dioxide (removal), essentially cleans up a lot of the mess that we've made,” he said. “I think there's a huge opportunity for that.”

Investors are getting pickier

Consumers aren’t the only ones keeping a watchful eye on their wallets. Amid the economic uncertainty, the pace of VC activity dropped 50% year over year in the third quarter of 2022. It’s only going to get slower from here, Hailu said.

“[VCs] really want to make sure that you know, there's less room for experimenting, and we just want to see more focus in terms of a product roadmap,” Hailu said.

Rather than being pressured by founders to close a deal to get in on a funding round in a matter of a few days due to fear of missing out. VCs, according to Ho, in recent months have started taking two to three weeks to do their due diligence before deciding whether or not to write a check.

“We treat every deal like a marriage,” Struck said. “It is weird to me that some of the major funds were so lax with diligence and getting into deals without really knowing what they're getting into.”

Valuations for growth stage companies may take a tumble

Valuations are dropping for growth stage companies amid a “public market correction” after several years of them being inflated, Hailu said. Now that the expectation for profitability has skyrocketed, companies that were considering going public in the next year are more likely to shelve those plans, he added.

As valuations drop, founders need to be comfortable with flat funding rounds, Ho said. “It’ll allow you to survive another day to solve what you want to solve.”

The story’s a little different for seed stage companies. While valuations aren't going down, companies between seed and Series A aren’t as anxious to go to market, Ingersoll said. Rather than taking their product to market in a time when no one’s buying, companies are raising secondary seed rounds to keep their valuations from dropping.

“Flat is the new up,” Ingersoll added.

Founders need to focus

2023 isn’t going to be forgiving to companies that don’t have a clear vision of what their company is and could be. If founders aren’t taking their companies to market, they need to focus on building something that will sell when they do, Hailu said.

They also have to remember that “the VC is not the customer,” Ingersoll said. “People are trying to reverse engineer what they think will get funding as opposed to going back to their vision and what they truly believe is best for the company,” she said.

And if founders are trying to raise capital, they should be doing so in a way that’s actually sustainable for their business trajectory, rather than inflating their valuation, Struck added. “Every post-money valuation that you've garnered, that's now a new bar that you need to leap over in terms of KPIs that you need to hit to justify a subsequent round of financing at a higher valuation.”

All of which is to say, it’s not going to be an easy year for tech. “You have to face the reality of the situation that things aren’t going to be better in the next three to six months,” said Ho. “Plan for 12 to 18 months of bad market conditions, and understand the things that are in your control that you can adjust so you have the best chance of making it through.” – Nat-Rubio-Licht