VC activity remains sluggish, but these 2 markets are poised for huge growth

Though the stock market is looking rosier as of late, the first half of 2023 has felt like an economic downer in many respects. The pervasively gloomy mood has led to a steep decline in IPOs, as the Americas only saw 34 companies go public during the second quarter of 2023, representing a decline of 17%. 

That’s not to say it’s been all bad. Restaurant chain Cava Group recently saw a blockbuster IPO, and some analysts predict that an upswing is on the way. Tea leaves from other sources are also generating positive signs: PitchBook-NVCA’s Venture Monitor report for Q2 2023, released on Thursday, says the current market could even spawn some new category leaders.

“It would be foolish to attempt to minimize the difficulties of the current market,” the report reads. “However, amid these difficulties, there are reasons to remain optimistic. Throughout history, market crunches have often paved the way for the emergence of industry titans.”

The report goes on to mention two specific sectors—life sciences and artificial intelligence—which it says hold “countless opportunities within the present market landscape.”

“[T]here is every reason to expect that the venture industry will continue to be the leading edge of global innovation and the catalyst for building the economy of tomorrow,” the report adds.

Titans from downturns

While the markets did experience a record bull run preceding the pandemic, the last real “market crunches” of note were likely during the 2008-2009 financial crisis, and before that, the dot-com bubble. There were “industry titans” born of those downturns, as the report notes, and it’s a list that could include some of the largest companies on the market today, like Alphabet, Meta, Netflix, or Amazon—firms that did not exist at all or were in their infancy 20 years ago.

But Kyle Stanford, lead VC analyst at PitchBook, says that the current market is different from the financial crisis and dot-com bust markets, primarily because it’s much larger in terms of the pool of potential investors. “The market back then was so small,” he says, adding that in 2009, there were roughly 3,500 unique investors in the VC space.

In contrast, 23,000 unique investors made a deal in 2021, Stanford added.

And as the report points out, there are sectors primed for growth, specifically pointing out life sciences and artificial intelligence. AI is a rather obvious one, as it’s more or less taken the world by storm this year, and is largely responsible for any bullish sentiment in the markets as of late. Stanford says that life sciences is another area in which investors are almost always looking to make a mark, given the ongoing and rising demands on the healthcare system.

But looking forward, and given the current market and economic conditions, Stanford says the next iteration of successful companies will, above all, have solid fundamentals—product-market fit, an ability to adapt, and strong enough cash flows to ride the market cycles.

“In a downturn, there are always companies that will be the next generation’s ‘Ubers’,” he says. They build sustainable operations, “work through and gain customers during a slow market, and when the bull market hits,” he says, “they have the base they need to ride the tailwinds through the next cycle.”

Above all, though, he says the report really drives home the point that investors and businesses have very little wiggle room given the current market. “Investors are being more efficient with their capital, and companies need to do the same,” Stanford says. A slower market means that “investors have more time to do some due diligence—deals are taking more time to get done, and that’s healthy.”

But in the end, he adds, the stronger, more sustainable companies will win over investors. “The winners will get the money.”