Tightrope 2023 Growth Trends

Tightrope’s focus is helping scaling businesses and investors unlock untapped potential and help shape their next horizon of growth. In 2022, post-covid, our main focus with the growth trends was on adjusting to the new normal, making sure the rapid shift to more online experiences was executed well to ensure brands were able to build lasting relationships with customers. Pent up demand and a slow recovery of the global supply chain meant that 2022 was a good year for most businesses with high demand for products and services, and an appetite for growth investment.

As the year progressed, the optimism started to be replaced by caution, with high inflation driving up interest rates, significant drops in the share market (mainly for tech stocks), and uncertainty about the economic outlook.

As we look into 2023, we focus our trends on the opportunities that come with economic tightening, and a potential looming recession, to still achieve growth and come out stronger with a more sustainable business. While significantly harder to navigate than a boom period, the next year will create opportunities for those businesses and investors who take the right approach to growth!

Achieving growth in an economic downturn

Before we get into the trends, let’s set the reality straight. Uncertainty will drive caution and conservativism with companies so where the headlines in 2022 where around big funding rounds, the lack of talent, new unicorns, and a thriving M&A landscape to achieve fast growth, we will probably see more headlines the coming months of large scale redundancies, scaleups running out of capital before being able to reach the profitability stage, and investors tightening the access to capital and declining valuations for companies. As seen in previous shifts from a boom period to declining economic performance, this context also creates the opportunity for new growth, for new innovation, and for businesses to scale in a more conservative but sustainable way. We’ve built up our 2023 trends around this opportunity.

With the right strategy we believe 2023 is a year of opportunity to achieve new sustainable growth, powered by 4 key trends:

• Trend 1 - Accelerated pathway to profit

  Scaling businesses will be forced to balance growth with profitability targets. The winners won’t bunker down & cut costs but ensure the runway is used to reach profitability and grow sustainably.

• Trend 2 - Market Consolidation

  Where some businesses will realise growth, others will run out of runway, creating opportunities for in-organic growth at valuations where more growth can be created. We will see M&A activity pick up significantly in the second half of the year to monetise this opportunity.

• Trend 3 - Downturn Innovation

  Economic downturns have historically always led to spikes in innovation. These innovations can be grouped into two main buckets. (1) Accelerated transformation: Businesses are forced to innovate and take bold strategic moves to survive. Innovation is focused at making things better, easier and more affordable. (2) Customer driven: Game-changing technology enabled offerings are developed that address some of the challenges of society, tailored to changing customer expectations. Historically, recessions deliver some of the most resilient new business models and companies, this will be no different in 2023.

• Trend 4 - The Next Tech Frontier

  Key emerging technology is reaching a maturity stage where the commercialisation and applicability to develop new business propositions will drive a lot of innovation and growth. AI, Automation, VR/AR, blockchain and others are moving out of the experimentation phase with disruptive new companies emerging that completely change the way things have been done before.

As we step through these in a bit more detail, we see that 2023 will be a year of opportunity for businesses and investors who have the right strategy, the right focus and significant investment to monetise the opportunities that come with the economic downturn.

Trend 1 - Accelerated Pathway to Profit

In 2022, we already saw a big shift in companies ability to get funding and extend their runway towards profitability. We saw the end of the increase in company valuations and a shift towards a more cautious investor landscape. In 2023, the will mean two key things for scaling businesses:

1. Make no mistake, there is still a large amount ($Billions) of capital to be deployed and the right companies (good product, good talent, proven market position) will still be able to get access to funding at market rate. however, investors will be more cautious, which means that they will be doing a more rigorous due diligence and reduce their appetite for risk, to ensure they are confident of a positive outcome. Definitely for technology businesses, this will mean a shift away from having access to funding just with a solid idea and a founder team, to have to prove a lot more to attract the right level of investment to scale.

2. For those that completed a funding round in 2021 or 2022, it will probably mean a shift in strategy away from targeting customer growth over anything, towards a more balanced strategy of trying to achieve growth, while moving towards profitability faster. If there is high uncertainty about where (or when) the next round of funding will come from, the focus shifts to making sure the runway is extended and focus shifts towards becoming self-sustaining faster. Controlling your own growth destiny will be key in 2023.

Investors will want to see the short to mid term path to profit before funding additional growth plans. This might mean some businesses will have to cut costs to extend the runway to get there, for others it might mean new projects will be put on hold and the focus will be on realising the current growth strategy.

Trend 2 - Market Consolidation

A recurring consequence of economic downturns is that there is an increase in M&A activity and market consolidation. In 2023, we will have companies with access liquidity or significant funding runway that will be able to seize the opportunity of lower deal premiums to make strategic investments for growth. An analysis of evidence from the global financial crisis shows that companies that made significant acquisitions outperformed those that did not.

Organisations with a shorter financial runway might be forced to explore a sale to ensure they make it through the downturn. With a lot of uncertainty around the impact of the economic downturn, the timing of more M&A activity will be hard to predict and currently caution is dominating the behaviour so most likely activity will pick up the second half of the year.

It’s not too soon for executives to start considering M&A activities and think strategically where there might be opportunities for inorganic growth as the deal process will most likely take longer than historically was the case due to the increased caution in making acquisitions.

As new technology and innovation continues to disrupt industries, market leaders will be forced to continue to look at in-organic growth opportunities to acquire the right technology capabilities and prevent disruptors challenging their leadership positions. One example here we’ve seen in recent weeks was the investment into generative artificial intelligence - a type of AI that involves creating original content, be it text, images, audio or data - with Microsoft’s stake in ChatGPT and Google quickly responding with increased effort to ensure they don’t fall behind (more on this in trend 4). This shows the importance of first mover advantage to reach scale which will be even more important in an economic downturn. Businesses will want to invest but will want to have confidence the investments will be core to the future success of the business, taking a more balanced view of risk vs reward. Businesses and investors will turn to partners to help them assess acquisition opportunities beyond traditional financial due diligence with a broad assessment across technology, market/customer positioning and organisational capabilities.

Trend 3 - Downturn Innovation

When things get tough, people are forced to innovate. It’s been proven time after time with some of the greatest business innovation emerging during economic downturns or disruptive times. We’ve seen a lot of the innovative leaders of today (netflix, Airbnb,…) emerge from the GFC recession, and similarly, there was a spike in innovation during COVID where for different reasons customer behaviour quickly changed and created opportunity to disrupt and innovate. Economic crises have always been catalysts for deep change and innovation, and 2023 will be no different.

There is a double movement that happens during an economic downturn. Initially, there is budget tightening across most organisations and innovation investment is usually one of the first items on the list that is scrapped. The focus is on business continuity and cutting costs. But while this is happening, most organisations are reviewing their longer term strategy and identify what will be needed to not just get through the recession, but come out the other end, stronger and more resilient. This means that fairly quickly, strategic investment in innovation that is core to the survival and growth of the business starts picking up again with two major themes of corporate innovation:

1. Accelerated transformation: Economic tightening forces businesses to innovate and make bold strategic moves to survive, to become leaner and more effective and efficient at what they do. There is usually a renewed focus on the core services and propositions to ensure they are set up not just to survive but take advantage of the post-recession growth opportunity. There is a return to simple & affordable solutions: innovation to just make things better, easier and more affordable. While disruptive game-changing new propositions make headlines, for most companies the focus is on optimisation and simplification of existing propositions to ensure they continue to deliver a profitable service to customers. Businesses will look to innovate and streamline processes, move closer to their customers to ensure they meet customer expectations with core features and service, not bells and whistles.

2. Customer driven: Disruptive, game-changing offerings are developed that address some of the challenges of society, that respond to the needs of changing customer behaviours. The most documented example of this is AirBnb, whose business model would have been considered ludicrous before the GFC (do you really want to stay are a stranger’s house when visiting a new city?) but in that context is was the right proposition responding to a clear customer need. In 2023, we will again see businesses innovate to meet customer needs through a continued push into subscription business models (avoiding a larger one of purchase), direct to consumer innovation (cutting out the middle man), and other propositions helping customers get more value for their spend.

The key thing for businesses will be to prioritise investment wisely, trim the overall portfolio but select the right initiatives to go after with the required focus.

Trend 4 - The Next Tech Frontier

I don’t think I have seen a set of growth trends in the past 10 years that did not have disruptive or emerging technology on the list, so at the risk of sounding all to repetitive or generic, we had to put it on the list here again. I think 2023 will see a few factors come together that create the perfect storm for some of these emerging technologies to break through and enable truly disruptive mainstream proposition to emerge.

As mentioned in the third trend, tightening economic circumstances can be the additional pressure that is required for some technologies to move from experimental to enabling and powering mainstream propositions. It creates a context where consumers are willing to try new things if it saves them time or money, companies are looking for ways to drive efficiency and propositions that can develop and grow a customer base during a recession are typically well set up to than grow from that in the post-recession boom period.

There has been major progress across a number of technologies so I won’t go in a lot of detail here but I expect we will mainly see AI, Blockchain and AR/VR innovation being leveraged to develop game-changing propositions. The market opportunity for AR and VR to support learning & training, immersive experiences for retail, real estate and travel and other use cases is huge. One of our clients is leveraging VR to research ground breaking mental health therapy, placing patients in safe, controllable, immersive environments having great impact compared to traditional methods.

Beyond the decentralised financial industry use cases around Crypto and the much discussed NFTs, blockchain is at the breakthrough moment across a number of other use cases helping with the traceability, security and accessibility of information. A few that stand out for me with some very compelling new propositions: IoT and cybersecurity technologies, smart contracting solutions, healthcare/patient data solutions and logistics solutions.

The most obvious emerging technology in the spotlight is the generative AI discussed in trend 2, where with the launch of ChatGPT has created a rapid shift from being considered half fad, half innovation, to being propelled as the main technology that will see a lot of VC investment and attention in 2023.

I think the technology is still in its infancy but it will already start to deliver benefits for organisations to augment the capability of humans across content creating jobs. It’s the next horizon of automation to increase human productivity, so I’m sure we will see some disruptive propositions being launches this year.

Like many of you, I’ve been playing around with it so thought it was best to also ask what it thought the top 5 business trends were for 2023. Judge for yourself if they are any good. A bit 2022 focused and quite generic if you ask me but definitely not too different from what we have set out above 🙂

Conclusion

So while we all have the sense that an economic downturn is upon us, it will come with opportunity for those that are well set up to go after it. It should not necessarily slow innovation and while the risk appetite for investors and scaling businesses will reduce, it will mainly result in a repositioning of the priorities with those who do the right level of analysis coming out on top. We are optimistic that 2023 can be a year of growth and are excited to continue helping our clients go after those opportunities.

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