Year in Review: Finding a Footing in Private Markets

Written by: John Napier and Nate George, Venture Capital Co-Leads at Cumberland

Enough people have waxed intellectual about how tumultuous 2022 was, and we don’t feel the need to recapitulate how valuations were unattractive, lockup periods were pessimistic, and product market fit was less top of mind than we all might have hoped. Instead, we’d like to take a moment to share reasons we are optimistic about 2023, with specific focus on some of the themes we’re enthusiastic about.

Back to Basics

The major theme of venture markets in 2022 seems to have been remembering lessons we’ve already learned: raises that reflect thoughtful roadmaps composed of achievable near-term milestones designed to validate or falsify theories about product market fit are the most attractive and defensible for savvy investors. Furthermore, not every product is a moon shot: there are sustainable, well-understood business models that can be materially disrupted by a Web3 offering. These types of business models are extremely attractive to investors who can reason clearly about product market fits, realistic valuations, defensible timelines, and the fitness of the founding team’s skill sets.

To that end, we expect to see more of the following in 2023:

1. Smaller raises: Runway should be a function of aggressive, near-term milestones specifically chosen to quickly validate product market fit while demonstrating the delivery capabilities of small, nimble, cohesive founding teams.
2. Strategic cap-table construction: Early round investors should not be silent partners, especially if they have overlapping experience in the industry verticals of the companies they're invested in.
3. More deliberate and tailored vesting, lockup and token distribution strategies – with increased transparency around their effect on the product’s ecosystem.

Ultimately, competitive deal terms and strategic alliances will attract investors who are excited to advertise their participation; who feel no buyer’s remorse when times get tough; and who have enough stake in the game to provide consistent feedback, even when critical. We expect investor quality to become more of a competitive differentiator for founding teams in the upcoming market cycle.

Looking Forward

Like many others, we see decentralization as the best hedge against the corrupting forces that brought the most troubling events of 2022 to bear, and accordingly, we expect DeFi to pick up major tailwinds in 2023. We anticipate this will first require rebuilding trust and confidence, which will be done via a return to mature risk management, better underwriting due diligence, more transparency of auditing, and a safer and more rigorous developer experience.

We expect to see these implemented more effectively across the following product offerings:

1. Credit and Derivatives: New entrants utilizing dynamic risk systems, timely liquidations with networks of reliable liquidators, beta-aware collateralization requirements, sophisticated (cross-)margining and tamper-resistant pricing oracles.
2. Exchanges: Startups experimenting with exchange architecture and the decoupling of the inherent risks of a consolidated stack of custody, clearing, and matching.
3. Improved Developer Tooling: More powerful language-level abstractions, better IDE integrations, optimizing compilers, and improved runtime stability all contribute to a smoother and more consistent delivery of reliable software.

While 2022 was a series of large-scale course corrections, on a long enough timeline, these are inevitable; and, at the risk of sounding cliché, we are optimistic that 2023 will see founders and investors alike better capitalizing on the opportunities to re-establish trust, competency, and the ethos that drove so many to crypto in the first place.

Read Part 5 of our Year in Review series, “The Exchange as a Marketplace (And Nothing More).”