Some 2023 Predictions
and some accompanying random thoughts on 2023
Programming Update: I’m taking next week off from publishing and will be back with a piece on the 11th.
There’s a happy medium between predictions that are so “obvious of course they are true” and “no way can this ever happen.”
I think most predictions I have seen have this 2023 cycle have been far more on the obvious side.
But that also conceals some sort of danger.
The danger with any prediction is that your mental model is so totally wrong that a bunch of economic and psychological damage gets inflicted because you prepared for a world that doesn’t actually exist.
That may partly explain why 2022 was a year full of mea culpas and uncertainty. Nobody indexed on the Fed hiking rates into the stratosphere and most 2022 predictions were pretty far off with tangible losses in the form of layoffs, bad strategy, and more.
So going into 2023, it appears that everyone is predicting a continuation of the Fed’s current policy. That seems right to me but it does mean that just about every prediction would be wrong if the Fed did indeed signal a reversal.
At the same time, it does seem like there are plenty of predictions that could be right, but also could yield some weird results if the principles underlying the prediction is true.
For instance, here’s Tomasz’s prediction on take-privates, which seems fairly “obvious? if the current Fed environment continues.
It makes sense on its face. There’s an appetite for take-privates, there’s the capital to do so, and stock prices are depressed.
But those facts can also yield a different portrait as that information begins to get priced in.
If there is a large desire for take-privates and you can expect about a 30% premium upon the stock price in a take-private deal, there’s a huge arbitrage implied in the current stock price of just about every public SaaS company with healthy cash flows.
If and when that gets arbitraged away, what happens? Do take-privates get done at larger premiums or is there just less take-private deal activity?
That may mean we are at a bottom in public SaaS with ready buyers for any companies that sink too low. Counterintuitively, it could be a a year in which IPOs resume, stock prices stabilize, and even begin to trend back upwards.
But, absent the Fed doing a complete reversal, I think Tomasz is right on the general 2023 reality, especially in the private markets:
In short, 2023 will be the first year of a new-normal era. The go-go days of 2021 & the pandemonium of 2022 ebb, leaving a year of sobriety at low tide: longer diligence processes, fewer rounds, lower entry & exit valuations.1
So moving more into the private markets, my preferred way to frame the new normal is as the Great Unburdening.
The Great Unburdening
A lot of predictions for this year seem to almost relish in the incoming down rounds as a correction to the hubris surrounding the Covid era.
And that’s probably tonally accurate when we are talking about 10 minute delivery and crypto bubbles.
But in vSaaS land (and really B2B SaaS as a whole) we aren’t talking about those. We are talking about some of the greatest business models you could possibly invest in.
And so while there’s plenty of froth, plenty of valuations that are now out of whack with the macro, I’m out on the hubris narrative and 2023’s theme as a year of trepidation.
I prefer to view the next year as The Great Unburdening for fundamentally great businesses.
After the down rounds happen, investors, operators, and founders will emerge at minimum with a far healthier psychology unburdened by a crazed growth environment and a multiple that doesn’t exist in the new world.
That isn’t to say anyone will relish the down round. But there’s really no reason that vSaaS companies, especially with market penetration, great ASPs, and amazing products should by the end of the year be laden with angst.
And so once the down rounds happen, I think most around the B2B SaaS and especially the vSaaS space will feel freed up. The macro-environment will be far better understood. Most industries will have weathered it and also prepared for the new normal. And the digitization of Every. Single. Industry. will continue in earnest.
So yes you can choose to frame 2023 as the year in which paper returns contract and companies continue to face really tough questions around how to rightsize the business. That’s all true.
But mostly, 2023 will be remembered as the year where great companies took their medicine but emerged unburdened by a macro environment out of their control, with plenty of levers to pull for growth and positioned incredibly well to capitalize on their original thesis.
So with that let’s move into some predictions.
Capital Efficiency returns as the Prime Mandate in vSaaS.
One of the happy byproducts of the Great Unburdening will be the return to form of the great vSaaS companies: capital efficiency.
The solidification of best practices in web development means far better products and dev experiences with smaller teams. The proliferation of fintech infrastructure means faster fintech additions to vSaaS platforms. And the appetite for better software throughout industries means that S&M spend can be highly productive when the right levers are pulled.
PLG continues to be overrated but…
Alright, this is really just an opportunity to take a victory lap on something I firmly believe and have written about in the past.
The problem has always been the that once a strategy is priced in across the entire market, it stops producing the same uplift on growth. That’s exactly what has happened.
With that said, I think PLG will be really meaningful for businesses that can drive growth through network effects not dependent purely upon ad spend. That usually means being located at an important intersection in a vertical ecosystem and in a workflow that is highly visible.
Vertical procurement platforms are hot investments, benefitting from the huge dollars going into supply chain & logistics technologies.
Kojo, StructShare and CoFactr are great examples of what this will look like.
It will be interesting to watch the extent to which these platforms take on more ERP functionality overtime.
Constellation continues to go after bigger and bigger deals leaving the longer tail for a new generation of investment firms. Simultaneously, they enter South and Latin American in earnest.
Earlier this month Constellation (in conjunction with their Lumine Group) acquired WideOrbit for 490m.
Constellation will have deployed roughly around 2B in capital for acquisitions this year.
Between the WideOrbit and Allscripts (in March at 700m) acquisitions, that means roughly 50% of capital deployment will flow into 2 companies.
Large companies are going to be a huge part of Constellation’s capital base going forward and as such, it means there’s plenty of white space for firms to enter into the lower segment and take different approaches to the 60,000 or so vSaaS companies throughout the globe.
Constellation has also started to invest more in Latin America with a focus on Brazil. With their prior investments now producing data that they can feed into their acquisition engine, I think they go all out here in force.
A bunch of vSaaS companies focused on specialty retail emerge.
The thesis here will be something like: concentrated manufacturers and relatively high price points for consumer goods equals a great opportunity for a vSaaS to tackle the nuances innate to the ecosystem.
Revvable (powersports dealers) and Broadlume (flooring) operate as two different examples of what this could look like.
Square moves further into the back office and acquires a company designed to shore up their Square for Bookings offering.
My mental model on Square is that by end of 2023, it’s clear that Toast and other restaurant SaaS companies are going to dominate the vertical.
Resources will continue to go into their GTM but really they will need to cut losses here.
That means developing a moat against a more nascent vertical where no platform is at Toast level scale. And thus, Square goes hard after Bookings.
Vertical Rollups as an initial platform building strategy takes off
Most of these will be built in quiet with a mix of PE backers.
The convergence of AI and geopolitical + macroeconomic factors leads to a generational opportunity to modernize and rethink ERPs.
I’Il write separately about this one at some point.
By the end of 2023, BigLaw starts to see a real threat of disruption risk to the model stemming from great legal software and AI assistants that enable firms of all sizes to compete.
BigLaw has been the single biggest challenge spot for technology historically. We’ve had a string of vertically-integrated failures like Justin Kan’s Atrium.
BigLaw has depended upon a combination of brand recognition, complexity, and the reality of raw inputs (read: pure hours required to do legal work) to thwart most disruption to the model.
By the end of 2023, the raw inputs show signs of being fundamentally transformed by legal AI companies and the legal industry starts to grapple with BigLaw’s future.2
It will be fun to look at what was right/wrong about these at the end of 2023.
It’s been a blast writing Verticalized this year and I’m pretty excited for what this next year holds.
So until then, Happy New Year! I’ll catch you all in 2023.
https://tomtunguz.com/2023-predictions/
BigLaw won’t go away. But, the model will change quite dramatically.