Pre-IPO Profits

The Five Hottest Industries of 2023

The Five Hottest Industries of 2023
By Zee Zhong
Date January 17, 2023

Editor’s Note: Our friends at KingsCrowd have been paying close attention to the investment opportunities that await us in 2023. In today’s article (originally published on KingsCrowd), they reveal the top five industries to keep an eye on. We think you’ll enjoy their take.

2022 was nothing short of a roller-coaster ride. As the pandemic was receding into the background of most people’s lives, Americans were hopeful for a full recovery of the economy. However, rising inflation made the Federal Reserve hike interest rates four times, slowing down consumer spending. Russia’s invasion of Ukraine caused a global energy crisis. Many technology conglomerates laid off huge numbers of employees and froze their hiring processes. The U.S. experienced two consecutive quarters of GDP decline. 

Now some experts are predicting the U.S. will fall into a recession in 2023. But that doesn’t mean it’s all bad news for investors. Like the great Albert Einstein once said, “In the midst of every crisis lies great opportunity.” Despite the market turmoil, there are still industries that have huge growth potential. Here are the top five industries investors should watch in 2023. 

1. Artificial Intelligence 

The artificial intelligence (AI) market has been growing steadily over the past few years. The wearable AI market alone is estimated to reach $42.4 billion in 2023. Microsoft reportedly plans to invest $10 billion in ChatGPT, a language and dialogue AI developed by Open AI. Electric car company Tesla debuted the prototype of its humanoid “Optimus” robot in September 2022, just one year after its initial announcement. The strong momentum of AI development will likely continue in both software and hardware. 

One of the most exciting AI models that has been making waves is generative AI. Generative AI utilizes existing data in the form of texts, images, and videos to “create” content and art. One of the fastest-growing generative AI apps, Lensa AI, recorded 1.1 million users in December 2022, up from just 400,000 users the year before. The demand for generative AI has substantially increased thanks to Lensa AI’s success. Despite the economic headwinds in 2022, generative AI startups Stability AI and Jasper received $101 million and $125 million respectively. And I think generative AI will be even more competitive in 2023. 

Another trend of 2023 is that of AI ethics. As expected with almost every powerful technology, AI brings new legal and ethical issues. The White House recently released a “Blueprint for an AI Bill of Rights” to address the regulatory framework of AI technology. Regulatory development is moving AI in a positive direction, building a safe and trustworthy environment for users. So AI companies should experience high growth and heavy investments in 2023.

2. The Metaverse 

Back in 2018, everybody had high hopes for virtual reality (VR) and augmented reality (AR). But the technology never reached an inflection point. Neither the hardware nor the software was mature enough for mass user adoption. VR and AR companies’ valuations remained static. But the pandemic has changed things. More people seem to understand the benefits of a virtual world now. And VR and AR hardware technology has gotten both better and cheaper. Meta’s Quest Store hit $1.5 billion in total revenue in October 2022. Statistics have shown that approximately 170 million people are using VR technology directly and indirectly. 

The metaverse is more than just VR and AR. The metaverse creates a virtual shared space combined with a decentralized digital economy for a true immersive experience. It also builds on infrastructures such as 5G, AI, and spatial computing. Metaverse applications can be found in gaming, remote workplaces, real estate, health and wellness, and much more. 

New metaverse technology and products flourished at CES 2023. Sony released its next-generation VR headset for its gaming devices. Startup OVR Technology developed VR headsets that allow users to smell in the virtual world, further expanding metaverse use cases. The metaverse is primed to continue making waves as the next best thing in digital media. 

3. MRNA Vaccines 

Traditional vaccines trigger our immune response by placing a weakened or inactivated germ into our bodies. MRNA vaccines “teach” our cells the process of making proteins that would generate an immune response. Antibodies can then be created from the immune response and subsequently protect our bodies from getting sick. MRNA vaccines are better alternatives than traditional vaccines because of their high potency, low manufacturing costs, minimal safety concerns, and high adaptability for rapid development. 

The pandemic dramatically accelerated the commercialization of mRNA vaccine products. COVID-19 vaccines are the first mRNA vaccine products with full FDA approval. Pharmaceutical giants are now spurring the development of mRNA vaccines for other diseases. BioNtech has launched human trials on mRNA vaccines against malaria, tuberculosis, and genital herpes. Moderna and Merck recently announced that they have made significant improvements on their phase two trial for personalized mRNA cancer vaccines. Pfizer forecast $10 billion to $15 billion in revenue potential for mRNA vaccine products by 2030.

How can startup investors seize this opportunity? Startups in the mRNA vaccine field are more likely to exit by getting acquired by pharmaceutical conglomerates, which are increasing their research and development efforts on mRNA vaccines. Despite recessionary fears and fewer mergers and acquisitions in the fourth quarter of 2022, research from PwC shows that health services deal volume will increase and stay resilient in 2023. 

4. Cannabis (Recreational Marijuana and CBD Products)

In late December 2022, the first legalized recreational cannabis dispensary in New York opened its doors to customers. The dispensary’s opening signals a pivot in the state’s legislation — from criminalizing marijuana to introducing a sanctioned industry. There will be at least 20 more brick-and-mortar cannabis dispensaries opening in New York in 2023, in addition to online stores. New York is expected to become the second-largest cannabis market when it matures. 

According to IBIS World, the U.S. medical and recreational marijuana market will reach $22.6 billion this year. This market size is supported by stores launching in four more states in 2023 — Alabama, Connecticut, Mississippi, and Missouri. Currently, 21 states (and the District of Columbia) have legalized recreational marijuana for adult use, and this number will likely grow. Investment opportunities in these states are inevitable. 

Another big component of the cannabis industry is cannabidiol (CBD)-infused products, which are federally legal as long as they contain less than 0.3% tetrahydrocannabinol (THC). The challenge for CBD products has been passing FDA regulations for manufacturing and sales. But that’s likely to get easier. In late December 2022, the FDA announced that a detailed regulatory assessment plan for CBD products is underway. Companies that manufacture CBD-infused products will surely benefit from this regulatory development, as it should bring their products to market faster. 

5. Venture Capital 

2022 was a slow year for venture capital (VC) investment activity. Total VC deal count was down by 14% compared to 2021. Total VC deal value in 2022 was $238 billion — 30% lower than total deal value in 2021. However, there are three main reasons why 2023 might look different. 

First, venture funds were conservative in 2022. They now likely have a cash reserve, or “dry powder,” ready to be deployed. Second, the stagnating deal activity in 2022 was mostly among growth and late stage startups. Deal activity for seed and early stage startups is growing and is likely to maintain momentum in 2023. So the total value of VC deals in 2022 may not show the whole picture. Seed and early stage investments tend to have smaller check sizes, so even a high volume may seem to contribute less to the total. Lastly, great companies are often born during recessions. Companies such as Airbnb, Uber, Instagram, and WhatsApp were all founded during the last financial crash. That’s because during a down cycle, entrepreneurs are more determined. They are also more disciplined on hiring, burn rate, business model, and metrics. And they tend to face less competition.    

One trend happening in the startup investing world is a growing interest in alternative financing models, such as the online private market (equity crowdfunding) and revenue-based financing. These funding opportunities give founders more flexibility and open up capital access to retail investors. Fund managers also have more diversified investment options and alternative deal flow sources. 

Between these five industries and a difficult economic environment, investors will have plenty of opportunities to find scrappy founders and potentially lucrative startup investments in 2023.

Top Posts on Early Investing