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Venture capital (VC) saw a lot of innovation in 2023, especially in the artificial intelligence (AI) space with the spread of large language models (LLMs). Even established apps such as Grammarly, DuoLingo and Amazon’s Alexa started using generative AI to try and enhance the user experience.
Yet what lies ahead in 2024 for investors? Below, our team at Bure Valley Group outlines five trends in venture capital (VC) – particularly in the startup ecosystem – for investors to watch over the coming months.
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#1 Interest rate stabilisation
Since late 2021, interest rates in the UK have risen 14 times to try and counter higher inflation. Recent meetings by the Monetary Policy Committee at the Bank of England (BoE) have held rates steady at 5.25%, with hints that cuts could happen in the coming months.
Higher rates have not been great news for the UK’s startups and early-stage businesses. Borrowing has become more expensive and difficult (e.g. via business loans from banks), making it harder to fund expansion plans.
Conversely, this environment has made other financing options more attractive to startup founders, such as angel investors (who typically ask for an equity stake rather than repayment of debt). This might start to change later in 2024 if rates come down.
Another byproduct of lower rates could mean more investors turning to early-stage companies in pursuit of higher returns as they abandon the lower rates offered by debt instruments.
#2 Greater AI regulation
AI has enjoyed a high degree of unrestrained growth in 2023 (from a regulatory perspective). Looking ahead, the legal landscape could change as policymakers seek to harness the productive potential of AI whilst attempting to guard against its potential abuses.
The UK government, for instance, published its plans to regulate AI in March 2023, titled “AI Regulation: A Pro-Innovation Approach” (by The Department for Science, Innovation and Technology).
The government recently published its response to the consultation in early February 2024, arguing for a two-category approach to AI. This contrasts with the risk-based categorisation in the EU’s AI Act. Further regulatory guidance is expected later in the spring.
Of course, VCs and angels who are invested – or looking to invest – in AI-powered startups will want to watch these developments closely. It seems unlikely that the UK government will adopt a “strangling” approach to AI as it attempts to position the country as a “hub” for AI innovation, competing against the EU. However, certain startup processes may need to adapt to new laws.
#3 Reinforcing supply chains
Since 2020, with the arrival of COVID-19 and increasing regional conflict (in Ukraine and the Middle East), many states have recognised the need to strengthen their supply chains to mitigate against future disruption.
In the US, for example, many companies have been onshoring their supply chains, such as in the electric vehicle (EV) space. This has opened up new opportunities for employment, innovation and sustainability initiatives.
A similar trend can be seen in the UK’s manufacturing industry as higher costs permeate international supply networks. There are some concerns that this could lead to less choice of goods and services for consumers in shops. However, from another perspective, this could provide fertile ground for UK startups to move in and fill the gaps.
#4 Rising unemployment
The UK labour market remained remarkably “tight” last year, with unemployment staying low even as firms advertised a high ratio of vacancies. However, many forecasts are expecting unemployment to rise in 2024.
This is partly a natural byproduct of falling inflation (expected later this year), which the Phillips Curve correlates with rising unemployment. Whilst nobody wishes for a recession, higher unemployment could be a boost to startups as opportunity costs are lowered and visionaries engage in entrepreneurship.
#5 Continuing semiconductor issues
The world has experienced significant fluctuations in microchip supply and demand over the last four years. Encouragingly, the global market for semiconductors continues to enjoy a forecast compound annual growth rate (CAGR) of 6.30% between 2023 and 2027.
Both the EU and the US have responded to recent global shortages with various “Chips Acts”, attempting to shore up domestic production and resilience. The UK has assigned £1bn towards boosting its own industry, which is a step in the right direction (although some argue that this does not go far enough).
Recently, rising interest rates, high inflation, lower consumer confidence and stock market retreats have taken a toll on global market capitalisation. We expect that supply chain disruptions will improve in 2024 compared to previous years, but are unlikely to be over.
Semiconductors could be an interesting area of startup innovation. This might include AI-powered tools which design more efficient chips for manufacturers. Another area could be the collection and analysis of test and yield data, identifying new ways to combine devices and components within the Internet of Things (IoT).
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