“No winter lasts forever; no spring skips its turn.”[1]
Noa Segre
One of the most known phrases out of the epic HBO series, Game of Thornes, was “Winter is coming”. The battle of power and the reign of empires would come to an end in the winter, which was looming and threating the existence of practically everyone.
Game of Thrones was also a masterpiece of strategy, what do you do, or don’t do when you are at risk. Who are you allies? Who are your foes? And how do you get everyone to follow you (Without having to kill them all, of course…). The strongest force in the series was obviously, given to the leader who had the most dragons, the strongest and fastest force, the weakest was the one who was alone, poor, and deserted at the edge of the kingdom.
Strategy? Force? Dragons (or maybe unicorns)? Alliances? All these terms can be relative to the show, to political science but also to the life of a startup and the life of an investor.
Now it seems that at the end of Q2 2023, “Winter is coming” to our innovation, startup, and investment ecosystem. Some might argue that winter is already here, and some might quote James Carville in his famous slogan of the Clinton 1992 presidential campaign by saying: “It’s the economy, stupid”.
A global overview
In the last 18 months with the world (kingdom) still licking its economic wounds from the pandemic, and with the war in Europe, inflation and recession has been a part of all parts of our lives. It was only obvious that the impact on startups and investors will arrive, like the way it has hit all industries. Leading startup ecosystems like Israel has reported a slowdown in investments and a shirking valuation of companies, as well as a difficulty to attract capital (Difficulty in Israel is a relative term, comparing to other countries and has been due also due to political instability in the country). The US suffered from high rates of inflation causing, what some people might call, a correction in the markets, where valuations were down to “normal numbers” and not “hyped numbers”.
As usual, Europe lagged in anything that has to do with the impact on their own ecosystem. The downsizing and decrease in investments arrived a few months after the leading ecosystems (Of course, Europe is a big continent, and the effect was different in different countries, like the effects of the pandemic itself and past economic crises).
Focus on Italy
In a report published this week regarding Venture Capital in Italy, conducted by Growth Capital and Italian Tech Alliance[2], there has been an impact on investments during H1 of 2023, specifically also in Q2 of the year, in comparison to 2022, which was a record year in Italy, with €1.858 M of total investments (in 340 deals).
However, looking deeper into the numbers of this report, shows a clear trend. There might be less capital invested, but mainly in later stage startups. The total number of deals in H1 2023 was 159 for a total of € 477 M, which compared to H2 2022 is a big fall from the € 792M total investments.
However, the most interesting, and possibly encouraging number in this report, is the changes or differences that we have seen in the stages of investments during Q2 2023. What stages of startups were impacted the most, and which have benefited the most?
The Pre-see and seed rounds constituted 78% of the total investment rounds, in comparison to Q1 2023, the pre-seed rounds grew by 58%.
Yes, it is true, Italy and the Italian Government via CDP (Cassa Deopsiti e presstiti) have focused on creating a network of accelerators to create a more tangible and scalable early-stage funnel. Some might argue that perhaps they have flooded the market with early-stage companies. But the interesting fact in the cited report is that there have not been any mega rounds in the last few months, no bonanza late-stage investments. Is this a bad data point or is this just a reflection of the state of “emerging market” Italy finds itself in?
Making a system (Bad translation from the Italian “Fare Sistema”)
When discussing ecosystems of innovation, and even more ecosystem of investments, we must remember that economies are like waves, they go up and they go down, only to go up again. The way to be able to surf this wave without falling flat on your face, is the creation of your ecosystem, your “system”.
Early-stage investors (in the sense of pre-seed and even before) must create a system in which they are able to not only invest in startups at the beginning, but also in a way that they can be able to support them in further rounds, not necessarily through their own funds, but through the funds of their system. Digital Magics, the leading Italian accelerator has since day one worked hard on creating this system, with the view of creating the highest value for their stakeholders. As such, startups that receive and investment in the pre-seed stage from one of the DM programs, have access to the wider system of Joint Ventures and partnership, granting the opportunity for additional investments. Remember our wave? Well then now the wave is high on pre-seed, but a professional surfer doesn’t want to leave that wave, because they know that it will soon be high on the late stage, and they must be ready to ride it, with a scalable, efficient, and innovative company that can have an impact on a global scale.
Seasons
Thinking of Italy as an emerging market, for the writer of this article is an oxymoron, seeing as Italy has always been the leader in entrepreneurship, small and medium size businesses (and if we go back a few centuries the cradle of art and innovation — just think of Leonardo da Vinci). However, when it comes to technology and tech, things take time. Ecosystems don’t emerge with the snap of a finger but take dedication and a system that allows it to grow (not only for financial return, but for the good of all).
Is winter coming? The calendar says it will (like every year), but in terms of investments and innovation it depends where you are and who are your travel buddies. It might be winter on one side of the world, but at the same time, it is summer on the other side. We need to remember “Empires rise and fall like the abdomen of God. It’s just the universe breathing.” (Wes Nisker, Author).
The only question will be, do you have the right coat and the right wood provider, fireplace, and food to tackle this season? We know we do and we know that after the winter, comes spring.
“As sure as the spring will follow the winter, prosperity and economic growth will follow recession.”
Bo Bennett, Author, Social Scientist, Business Owner, Screenwriter (1972 — — — )
[1] Quote of Hal Borland, American author (May 14, 1900 — February 22, 1978)
[2] https://dealflower.it/come-e-andato-il-venture-capital-nel-primo-semestre-2023/
