A Note From the Scale Team 

It was Scale's first calendar year in 2022, which started as a record year for venture funding to one of the worst dips for investors globally. A year ending in adversity is a superpower for resilient founders in 2023 and an opportunity for new growth. We are kicking off 2023 with a Scale Demo Week (here) to showcase a group of founders who have dedicated their lives to building products consumers love.

🏉 Meet the Scale team here | 🏆 Scale portfolio → here

🤝 Collaborate with funds & founders in our Flyover Tech community (Join here) 

🚨 Scale Cohort IV application here

We asked AI to paint a venture capitalist in 2023; it outputs a Joker in the Illuminati... 🤡

📈 Macro Trend Report

• INFLATION | The consumer price index was still elevated to 7.1% in November 2022, down from 7.7% in October. Even though inflation is still high, we won't know if the Fed's monetary tightening (i.e., increased overnight federal funds rate) was effective until late Q1 or Q2, 2023. The increased rate slows lending --> decreasing demand & prices, and strengthens the dollar --> decreasing demand for exports & prices, but the war in Ukraine continues to cut the food and energy supply --> increasing prices. At this point, it's a balancing game, but some economists forecast wage growth to outpace inflation in 2023.

• TECH EMPLOYMENT | It was tough for early-stage startups to hire tech talent in 2021 and 2022, with big tech and high-profile VC-backed companies attracting the talent. However, it will be the opposite in 2023, as there were 153k tech layoffs in 2022 -- more than in 2021 and 2020 combined. In addition, large public and growth-stage companies have slashed valuations, which deteriorates the value of vesting options, affecting their ability to retain talent.

• HOUSING | Thomvest did an outstanding job outlining the state of the housing market and how it's affecting startups here. U.S. existing-home sales declined 7.7% in November from the prior month and 35.4% from a year earlier (NAR). The ongoing shortage in existing homes and the 20-year high mortgage rates have made the market very difficult for buyers. Over the last twelve months in the US, the number of days a home is for sale has risen from 15 to 37 days, and the percent of homes sold over list price is down 18% to 26.3%. In addition, 21.2% of homes have had a price drop up from 11.2% last year. (Redfin)

• VENTURE CAPITAL | Based on the first three quarters of 2022, we will end the year at or slightly above pre-pandemic funding levels. That said, we will enter 2023 with a record level of dry powder in venture capital ($580B), but with the odds of a recession increased to 70%, the pace will most likely maintain at or below 2020 levels. In addition, some venture investors still believe there is room for valuations to fall further -- nearly 90% of unicorns tracked on Crunchbase hadn't raised since the beginning of 2021, when growth-stage valuations were approaching their peak.

  • 2022 could finish with the lowest level of VC exit activity in the last decade, which could continue into the first half of 2023 as interest rates continue to rise, with the second half experiencing an increase. Pitchbook estimates that Seed deal values, count, and valuations will remain resilient in 2023 as they are insulated from the public markets. Pre-Seed or Seed deals are not driven by multiples but by investors' ownership targets and the startup's capital needs.

  • Fred Wilson, from the reputable Union Square Ventures, is predicting 2023 will be similar to 2015's deal values. Now, 2015 might be a stretch, but there will be some pullback after many founders raised too much capital, leading to irrational spending and increasing the cost of each dollar of growth.

  • To end on optimism, the graph below predicts that 2023 venture capital vintages could produce outlier returns over the next decade.

💰 Midwest Economics

• Chicago-based venture capital fund M25 releases the Midwest tech startup year in review that covers the $5B+ in mega-rounds and $1.5B+ closed by the eight venture funds. In addition, Columbia, MO, won the Midwest Madness tech startup city of the year!!

• Scale announces its third cohort which includes eight companies across six markets.

• Startland News releases its top 10 KC-based startups to watch in 2023.

• Missouri public equities continue to prevail amid the turmoil. They have returned less than the risk-free rate, but not to the point where you call your broker for the first time in five years.

💰 Midwest Deals

• Minnesota-based HistoSonics, a leader in using beams to kill tumors or unwanted cells, raises $85M, led by Johnson & Johnson.

• Indianapolis-based Equinom, an emerging leader in non-GMO plant-based protein processing methods, raises $35M, led by Synthesis Capital.

• Chicago-based Cardiosense, using AI and sensors to detect cardiovascular diseases, raises $15.1M, co-led by Broadview Ventures and Hatteras Venture Partners.

• Check out the 17 deals we tracked this month here!

🐄 Midwest vs. National Macro Trends

• Unemployment in Missouri remains low at 2.7% well below the national average of 3.7% and the Midwestern average of 3.6% ✅

• Midwest Consumer Price Index dropped to 6.8% compared to the national rate of 7.1% ✅

Check out our friends at the Startup Founder Daily, where they do free features on founders👇

🧠 This Month's Recommendations

📚 What We’re Reading

• Keeping up with trends in tech heading into 2023

• Testing free distribution strategies for converting users

• Following M&A lenders' perspectives as we navigate liquidity oppurtunites in 2023

• Why and how to build a financial plan as early as pre-revenue

🎧 What We’re Listening To

• Willy Schlacks, Scale Managing Partner, joins Nick Moran on The Full Ratchet to talk about building a multi-billion dollar construction tech company in Columbia, MO [44 minutes]

• Listen to soundbites from the top 10 episodes of the year on Lenny's Podcast [61 minutes]

• Venture investors and founders Matt Decoursey and Matt Watson talk about how to be a startup investor [45 minutes]

📅 What We’re Doing

• We have started early preparations for the next Columbia Startup Weekend, taking place March 10th-12th, 2023. Check out how our 2022 winner went from idea to raising money from venture capital investors in 7 months.

• The famous InvestMidwest is returning on April 12th, and we are supporting the efforts at Scale as a 2023 channel partner!!

• Our team is helping put on an application workshop for the upcoming Arch Grants applications, opening on February 21st for a $75k equity-free grant.

🎮 Midwest Tech of the Month

• Columbia-based Kremanak Nanotech is building equipment that destroys bacteria within all types of beverages during processing. Their "shredder" can change how all beverages (e.g., beer, milk, coffee, etc.) are produced and maintained in inventory.

🚀 Scale Portfolio Company Highlight of the Month

Brownstone is pioneering affordable community home sharing with pod-style living, which decreases the cost of living by ~75% and drastically improves the quality of living. Brownstone is currently in three California markets (LA, Bakersfield, & Palo Alto)

🛠️ Resources

Give our dilution calculator some upvotes on Product Hunt below 🗳

• Build a financial plan for your next 24 months in under 30 minutes here 🤑

• A spreadsheet to value employee compensation here 💸

• Downloadable database of 5k+ investors by stage, thesis, and geo here

• It's extremely important to have well-thought-out messaging when reaching out cold to investors, so we put together some resourceshere🥶

• Dozens of startup resources here 

Why should you angel invest? Because Venture Capital is the sexiest asset class that improves society while producing outsized returns, duh. Also, venture returns have proven to outperform public equities during a recession. -> If you are interested in angel investing, then sign up here 😇

Keep up with our Medium content here 🔖