Every year I make a list of predictions & score last year’s predictions.

Here are my predictions for 2023.

1. ML propels SaaS into a massive second wave that increases workers’ productivity measurably. Machine learning models predict code, synthesize images, author blog posts reducing composition time by a factor of 2 or 3. Users grow accustomed to this very quickly & ML becomes a requisite feature in most workflow SaaS.

2. The hangover from web3’s raucous 2022 extends into 2023. Most categories slow down meaningfully, including Defi. More than 100 web3-enabled games launch. Virtual wallets ensconce themselves into web2 applications. Marketing becomes the first broad use case of web3 after Defi, catalyzed by the death of the third-party cookie.

3. The Fed tames inflation. We exit 2023 with inflation below 2.5% but a Fed Funds rate of 5%. Forward software multiples touch 7.0x forward, up from 5.8x today, on the relatively strong growth rates of most public software.

4. Private equity acquires 10% of the 70+ publicly traded software companies by the end of the year. With hundreds of billions of dry powder, plenty of healthy cash flows generated by SaaS publics, & the leverage of the inevitable shareholder lawsuit if a board rebuffs the 30% premium of a tender offer, private equity becomes the dominant M&A option in dollar terms for 2023.

5. The fundraising market thaws, but at materially lower prices than the first half of 2022. The early stage market prices seeds at $10-15m post & Series As at $50-60m post (with about $500k in ARR). The mid-stage market for Bs, Cs, & Ds rebounds but chaos reigns. Some businesses will raise at sensational multiples (as if the market hadn’t changed) ; others will leverage their balance sheets to skip-the-dip & await multiple expansion before raising equity dollars ; yet others will reprice both common & preferred in flat or down rounds. Flat & down rounds surge to 30% of all mid-stage rounds completed in 2023, up from less than 5% in the first half of 2022.

In short, 2023 will be the first year of a new-normal era. The go-go days of 2021 & the pandemonium of 2022 ebb, leaving a year of sobriety at low tide: longer diligence processes, fewer rounds, lower entry & exit valuations.

Scoring last year’s predictions:

Web3 consumer products go fully mainstream with more than 35% of Americans, about 100m people, engaging with them by 2023. Not even close on this one. There are more than 100m web3 accounts on centralized crypto exchanges but the scandals that plagued web3 this year stifled consumer interest in web3.

Data companies continue to achieve astronomical growth. Accurate. Data companies in the public markets continue to trade at premium multiples & record the fastest growth rates. In the private markets, data & machine learning companies continue to raise capital despite the macro-slowdown.

GPT-3 and BERT infuse software massively reducing repetitive work and unlocking huge productivity gains. Perhaps the trend of the year, generative machine learning models like ChatGPT, Dall-E & others have invigorated software founders & incumbents alike - both of which are re-imaging SaaS with ML as an essential product component.

The ML stack folds into the classic data stack. Zero. I believe this will happen the battle between cloud data warehouses & data lakes intensifies, so I’ll hold out hope despite the lack of any material advance in 2022.

The spirit of Silicon Valley continues a spread outward. Correct. Covid accelerated distributed work, which is now a norm. Startup company formation & funding thrives outside the Bay Area.

3 of 5 isn’t terrible. I would have thought the web3 prediction would have come closer to reaching fruition, increasing my score. But 2022 was unpredictable in many ways. War, inflation, Messi’s first World Cup.

The year of sobriety before us provides a potent substrate for startup formation. Boom cycles begin this way. Tougher markets demand better product-market fit from startups leveraging the new technology of the era. This foundation leads to more halcyon days when the promise of technology is realized & the market rewards both customers & founders.