Please find the predictions of the Finch Capital team for 2023. Overall we remain bullish about the way technology is transforming the 3 sectors we focus on Financial Services, Real Estate and HealthCare. We expect to see in H2 2023 a recovery in investment momentum driven by reasonable valuation and investment periods running out with all time high dry powder levels. Companies by that time will have also become more lean driven by the wave of layoffs as the rule of 40 has become synonymous for any funding conversation. We also expect to see a boom in M&A as valuations become more digestible for traditional companies that want to use M&A to accelerate their technology transformations. Overall we are most excited about the following in:
Fintech: (i) Consolidation in general, (ii) ESG/Sustainability software with broad applications, (iii) Banking/capital markets infrastructure and (iii) CFO software tools replacing spreadsheets
Proptech: (i) Property & building management and (ii) Tools for construction productivity and efficiency
Healthtech: (i) Supply chain efficiencies, (ii) Practice management particularly in elderly care and (iii) Streamlining hospital admin
Please find below the predictions by each of our investment team members:
Macro
The unconstrained growth decade has come to an end, we now move into a phase with more consolidation to achieve faster scale and on building sustainable companies with valuation levels remaining at 2019 levels. We will see more M&A by the incumbents now that the valuations are more affordable. On the investment side we expect H2 2023 to see a big step up in activity as the pile of dry powder will need to be deployed before investment periods are over.
Fintech
I expect a lot of activity and interest in: Emerging market payment infrastructure 2) Consolidation of KYC and AML software, 3) Wealth & asset management backend digitalisation enabled by AI & Blockchain, 4) Real client use cases combined with consolidation in open banking and 5) ESG and sustainability management and administration software becoming more adopted
Proptech
The landscape of ownership and new building growth will slow down but that will lead to innovation across rental and home improvement sectors and a focus on efficiency particularly in construction and real estate financing.
Healthtech
The 3 main themes I am most interested in for 2023 is the acceleration of platforms to break down borders to increase access and reduce costs for medications, the elimination of friction in expense and capex management in the healthcare chain and software and platforms to boost productivity and efficiency of automating further elderly care.
Macro
Headwinds have probably peaked, and not as bad as perhaps initially feared. 2022 will always remain an anomaly. We should all look to 2019 as the baseline going forward. You cannot fundraise without perspective on the rule of 40 anymore. In Europe in particular, the investment climate feels a lot like 2009-2013 - investment is focused on early/seed as larger funds go earlier or focus on backing clear winners in later stages, and feel there will be a real gap to fill in Series B in particular over the coming year.
Fintech
I am most excited about 2 themes: CFO software and fintech infrastructure. In most cases the SaaS applications in finance will be replacing pen & paper in the CFO suite but also an overall view on cost efficiency and financial management will arise. Fintech infrastructure is maturing, and there are few verticals like BaaS and open banking that will drive maturity in the sector
Proptech
Commercial real estate technology is set to break through as people return to offices - with a focus on technologies driving hybrid working environments. In addition, broader property management technologies across residential and commercial will continue to be adopted with focus on cost/energy efficiency, maintenance and yields
Healthtech
This is a crucial year for health technology coming out of the telemedicine shadows. We will start to see practice management software that becomes much smarter and enables all kinds of value add services for certain niches. Monetization in Europe continues to remain a challenge but focus on building platform business vs. telemedicine will be critical
Macro
2022 was a reality check for the industry! Many of the concurrent disruptive forces of 2022 will undoubtedly bleed into 2023, rising interest rates, spiking inflation, a slowdown in growth and the persistent ripple effects from the conflict in Ukraine. However, it is clear that the outlook is for fertile ground for deal-making and capital deployment in 2023. From a portfolio perspective, the levers for generating value will continue to be around operational/organizational efficiency and reducing break-even points, organic growth and M&A.
Fintech
The proliferation of API has allowed for financial services to be even more embedded in day-to-day customer experiences online and in-app. Embedded finance is a positive sum trend where banks can serve small businesses at scale, software platforms can diversify their revenue, and small businesses can grow more easily. While payments and lending will undoubtedly continue to dominate this arena in 2023, I predict that these verticals will be bolstered by the growth of adjacent value-added services, including insurance, tax, and accounting. The current macro will also be a driving force as these new collaborative models provide cost reductions and risk benefits to companies on top of an improved customer experience.
Proptech
Just as fintech transformed and revolutionized the financial services industry, I’m excited by a similar transformation and disruption that the construction sector is currently undergoing. Construction is a trillion-dollar industry and is also one of the most antiquated industries in the world. While covid made the adoption of technology in the industry immediate and urgent, the current macro headwinds (inflation, labor shortages, supply chain issues, etc. ) have forced the industry to leverage new technologies (e.g. AI/ML, reality capture, AR/VR, 5D BIM, etc.) to create efficiencies, help automate processes and remove the need for manual tasks. The adoption of these technologies is also high impact by improving site safety and by optimizing machinery and material usage to reduce carbon footprint and waste.
Macro
Although times are still gloomy, its looks like the (potential) recession will only have limited effects. Given the tight labor market, a redistribution of workforce may actually be welcome. Good companies will be able to continue to hire and execute their strategies, but now at a more normalized cost base. The mindset of growth against all cost (aiming for 300% revenue growth annually), will shift more towards a mix of high quality products and customer relationships, paired with disciplined growth (aiming for % Revenue growth + % Net Revenue Retention + % EBITDA > 200%
Fintech
B2C models (brokerage, BNPL, neo banks, neo brokers, unsecured lending) face a very challenging environment in which funding dries up and customer acquisition becomes more expensive. On the B2B side, I am excited about maturing infrastructure (payments, OpenBanking, BaaS) and adding predictive and automation layers on top. Increasingly security becomes a core part of new products, instead of an add-on feature.
Healthtech
Increasingly entrepreneurs will be utilising big data, predictive models and an increased understanding of the human genome to shift from healing people to sickness prevention on a highly personalised basis. The willingness from insurers to (partially) compensate their clients for the costs will be a major point of focus. Next, XR technology will increasingly find its way to patients and practitioners, driving XR adoption, while reducing healthcare costs across the board.
Macro
I believe the economic slowdown will fuel the growth of entrepreneurship and new ventures being created and bring about the new wave of innovation. The younger generations are maturing and already revolutionising the way we work and live. What happens in the B2C world will be interesting because of revenue volatility
Proptech
Considered to be one of the least loved sectors in the venture world and is one of my favorites. The areas where I see the most innovation are construction site management, building management and data processing platforms, leveraging AI/ML to automate processes and provide insights and recommendations to property owners and managers. The biggest challenge for these new ventures will be to minimise behavioral change in order to maximise adoption of digital solutions.
Healthtech
I believe that we will see emerging local and regional leaders offering SaaS solutions for primary care, secondary care and corporations as well M&A consolidation, especially in the telemedicine, mental health and healthcare workforce management sub-sectors.
Macro
2023 will be a crossroad. Hard to say this in a prediction) but I think no one knows what 2023 is going to bring. In 2022 we saw a lot of rounds being postponed to Q1 '23. This will create a big catch-up effect and no margin for error in fundraising. Very curious to see if the funding engine will start rolling again or that we will experience a complete stop.
Fintech
2023 is going to be the year where Fintech has to come in on its big promises. Neobanks will experience a crucial year with interest rates rising; their business model is improving, but also the competition of traditional banks. Most lending tech and BNPL models need to reinvent their models and see how customers react.
Proptech
Times changing of rising rates and rising material cost real estate development will go in a new era. I expect that continental governments will play a more active role in the development and that ESG-building compliance will become a big theme.
Healthtech
A big question is if the industry will lose or continue the momentum from Covid. Furthermore, we see experienced founders flocking towards health tech and are curious to see what they can deliver. Besides this, incumbent players will feel the heat and will start to collaborate more with startups.
Macro
I am optimistic about the macro environment for tech and start-ups in 2023 as a new wave of startups will emerge from the mass layoffs globally. Founders are also going to be more focused on quality of growth rather than merely the pace of growth resulting in more resilient, sustainable business models and investors will follow a more rigorous due diligence process than the past which will impact valuation and pace in a healthy way.
Fintech
I expect Fintech to continue to be well funded despite the slowdown but the focus to shift to Regtech and Climate Fintech. This is driven on the back of regulatory complexities and the need for stronger compliance standards and increasing consciousness of and willingness to adopt environmentally sustainable practices will encourage growth in this space.
Healthtech
A shortage in doctors and medical staff across Europe will force hospitals and clinics to become more efficient thereby making practice management software companies more relevant. By simplifying the administrative and operational processes, these companies will enable doctors and medical professionals to focus more on taking the best care of their patients