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Council Post: Three Trends For A New Year With New Obstacles

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Chon is the founding partner of Berkeley SkyDeck Fund and an experienced Silicon Valley engineer, entrepreneur and investor.

The technology industry is no stranger to uncertainty. It embraces it. Whenever someone abandons the stability of full-time employment to build a new company or introduces an industry-redefining technology, they embark upon an unmarked and unknowable path. Still, there’s a line where things start to feel uncomfortable. Dicey, even.

As we enter 2023, that invisible demarcation point feels incredibly close and real. The economic and political norms we took for granted now feel like a distant memory. It’s a lot to take in.

Here are three things we’ll be keeping a close eye on.

1. Sino-American Technological Decoupling Will Accelerate

It was the bang heard around the world. In 1999, the People’s Republic of China finally joined the World Trade Organization, igniting an economic transformation that would lift billions out of poverty and transform the Middle Kingdom into the world’s factory.

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In the years since that momentous event, China has transformed from a nation that manufactured relatively trivial consumer goods—like toys, furniture and clothing—to a high-tech powerhouse. For example, it developed advanced manufacturing capabilities in semiconductors, consumer electronics and electric vehicles.

But given tumultuous Sino-U.S. relations in the past few years, the country’s tech industry is set for a massive backslide. The Trump and Biden administrations have imposed restrictions on the nation’s burgeoning semiconductor industry, limiting the export of designs and manufacturing equipment and placing specific Chinese foundries (namely SMIC) on punitive “Entity Lists.” These restrictions will limit China’s ability to achieve true technological independence in the short-to-medium term.

This short-term pain will be shared by Western semiconductor industry stalwarts, most notably ASML, the Dutch manufacturer of high-end lithography equipment. But nature abhors a vacuum, and China will redouble its efforts to build a competitive domestic semiconductor industry. It will take time—decades, even—but it will happen.

Other sectors of the Chinese technology industry will look at the semiconductor industry as a cautionary tale about what happens when you rely on foreign technologies and components. It can be a source of competitive advantage, but it can also be a weakness.

For these reasons, we’ll see a greater emphasis—both from the Chinese government and private sector businesses—on domestic alternatives to Western technologies. America and China will no longer be so tightly integrated.

2. The Death And Rebirth Of Crypto

Let me put my cards on the table, I’ve never been a fervent crypto believer. I question the utility of many coins and Web3 projects. The valuation of tokens like bitcoin has always struck me as somewhat dubious.

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You’d naturally think that I’d feel vindicated following the crypto sector’s pummeling during 2022. The spectacular collapse of FTC is the most recent example of an industry that, from the outside, is rife with fraud and corporate misconduct. 2022 also witnessed the implosion of Terra Luna, an algorithmic stablecoin that was anything but, and the evisceration of crypto “unbank” the Celsius Network.

I don’t see these events as a total failure, however. The year 2022 wasn’t the year when crypto died. It was the year it changed course, moving from a speculative investment to something that could deliver real value to individuals, businesses and investors alike. I still believe NFTs have no value. But smart contracts have a utility in the traditional economy.

Instead of financial products designed and priced in backrooms, the future financial system will allow risks to be quickly and fluidly captured, priced and transferred. That’s precisely the role of the capital markets as a whole. Decentralized finance will continue to be a massive story in that ecosystem.

It helps that the technology necessary to operate sophisticated smart contracts at scale is now within reach. Recent advances within cryptography—namely Queryable Encryption and Zero Key Proofs (ZKPs)—can be game changers. They have the capacity to make smart contracts faster and simpler to build while eliminating many security and privacy risks.

3. The VC Emperor Wears No Clothes

For many venture capital firms, 2023 will be a bloodbath of historic proportions, with the dot-com crash of the early 2000s the nearest historical parallel.

We’ll see the closure (or spectacular failure) of many firms. Some will go quietly into the night. For others, the implosion will be a spectacle retold in lurid detail on the homepages of TechCrunch and Bloomberg News.

The most likely casualties will be those invested in crypto-centric businesses—particularly those focused on the speculative aspect of the Web3 world. Many newly minted crypto millionaires chose to invest their wealth in VC firms. As these funds seek fresh capital over the coming year, they’ll find a smaller pool of investors.

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In regular times, this isn’t necessarily a death knell. General partners (GPs) have a few options here. They could sell off “secondary assets” to other willing investors. But these aren’t regular times.

As the crypto world further declines, however, those “willing investors” will be fewer and farther between. Remaining limited partners (LPs) will see their accounts re-priced and be asked to take more ownership of the investments already made. LPs will stamp their feet, complain and refuse to fund their commitments.

In the non-crypto space, things will seem a little more normal—although undeniably tough. We won’t see 2008-style institutional investor strikes. Capital calls will be respected. As their war chest becomes increasingly threadbare, however, many firms will find it increasingly difficult to fund future rounds.

It wouldn’t surprise me to see a mass exodus of VC investors during 2023. If someone built a tracker that scraped LinkedIn for people with a VC role today, they’d likely find at least one-third have “moved on” to other projects by the end of next year. For many businesses, 2023 will be a year of unfathomable challenges. But there’s always hope. Challenge often breeds opportunity.


Forbes Finance Council is an invitation-only organization for executives in successful accounting, financial planning and wealth management firms. Do I qualify?


Source: Fox Business

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