We know from Stoicism that when it comes to tackling challenges, what matters most does not reside in their complexity, timing, or even our current skills. What matters most is having the right state of mind. Learning to look at challenges in the best possible light. This approach entails educating ourselves about the challenges we are facing, as well as looking for solutions. So, even if 2022 is under the domino effect of unexpected global disruptions, when we’re analyzing the 5 top global challenges that are affecting how we do business, we are also highlighting key ways in which we are adapting and facing them, as well as further opportunities for startups and the overall technology sector.
5 global challenges in 2022
#1 Inflation has grown, economies have contracted
After two years of disruption caused by the COVID-19 pandemic, national economies are denied a smooth recovery. Instead, they are facing global challenges such as continued supply chain challenges, especially from Asia, as well as new disruptions, starting with a war on Ukraine by Russia that has wreaked havoc in the political and economic order of the world. Supplies of gas and grains are particularly on the line, pouring tension among world leaders and fuelling the rise of energy and food prices.
The big question everyone wants answered is whether the world’s biggest economy is in a recession. While the US’ GDP has contracted two quarters in a row, the National Bureau of Economic Research hasn’t called a recession yet. Instead, other indicators such as job growth in the last months are taken to mean that there is still hope to avoid further economic contraction in the longer term.
Recession or not, governments have been ringing the alarm bell on inflation, one of the biggest global challenges this year. In the European Union, the annual inflation rate was a staggering 9.6% in June 2022, up from 8.8% in May 2022 and 2.2% in June 2021. Half of it was accounted for by the energy price spike, followed by the increase in the prices of food and services.
The threat of surging inflation has forced the European Central Bank to put an end to its quantitative easing strategy aimed to boost the region’s economy. The ECB raised the key interest rate by 0.5 percentage points to 0.0%, and plans for further hikes to slow down the economy and lower prices. Meanwhile, the US is also tightening its monetary policy, raising its key interest rate two times in a row, the last time by 75 basis points.
For businesses, inflation and economic downturns bring up specific challenges such as the need to cut costs, often leading to layoffs, as well as reductions in spending, from marketing and sales to research and development. Smaller companies, in particular, are more vulnerable in a downturn, due to lack of scale advantages and higher risk of business.
Amid concerns about the economy’s direction, stocks have fallen dramatically. It has been one of the worst years for S&P 500 since its beginnings, and an even more brutal wake-up call for the tech sector, not long after seeing trillion-dollar market capitalizations from big techs such as Apple, Microsoft, and Alphabet.
Next steps and opportunities
After a decade of enjoying a bull run, the tech startup world is learning to navigate stormier waters. With borrowing costs increasing and investors becoming more risk-averse, a new fundraising reality unfolds: valuations drop, rounds become smaller, startups are forced to give out more equity, and last but not least, they need to work harder to show their value to investors.
There may be a silver lining. Despite less funding likely available, the money will be split among fewer startups that qualify for investment, putting the ones with “painkiller” solutions (need to have) at an advantage vs. “vitamin” solutions (nice to have).
In the end, this period can also be a golden opportunity for later stage startups to acquire struggling competitors. Such signs of consolidation across markets are already here.
#2 The world is moving away from Russian gas
In 2020, the European Green Deal, a world-leading legislative and business agenda for climate change mitigation, has laid the groundwork for phasing out fossil fuels, but the speed of transition has been sluggish by many accounts. With the war on Ukraine and the subsequent gas war started by Russia unfolding, both Europe and the US are hitting the accelerator on clean energy, as well as lowering existing energy dependencies.
Europe has been importing Russian oil, natural gas, and coal for 25% of its energy use for decades. Since invading Ukraine, however, European countries, alongside the US and Canada, have been sanctioning Russia’s economy. Across several packages of measures, the EU stopped importing Russian coal starting August 11. Previously, it has imposed a partial embargo on Russian oil.
Yet what experts have called negligence with its energy security, has left Europe unprepared to face a potential retaliation from Russia on gas supplies. Last year, Russia supplied 40% of the EU’s natural gas, with Germany and Italy as the largest beneficiaries. Limitations on storing gas and on liquified natural gas infrastructure make an overnight cut from Russian gas impossible to plan for.
Instead, Europe is being forced to pay higher and higher prices for gas (up to 450% higher vs. 2021), while planning to gradually remove dependence on Russia. To do so quickly, Europe is investing in building alternative gas supply routes from Norway, the Netherlands, Azerbaijan, or Algeria, as well as increasing the use of coal and extending the life of power stations that were planned for shutting down. None of this is good news for the environment, yet the argument is that they are short-term action points.
Next steps and opportunities
On the brighter side, plans to build renewable energy capacities and invest in clean energy innovations are also ramping up. Global investment in the low-carbon energy transition increased by 27% up to $755 billion in 2021, with renewable energy taking the lion share. Still, renewables represented only a little over 22% of the energy consumed in the EU in 2020.
Recently, the European Commission proposed increasing the renewable energy target for the EU to at least 45% renewable energy sources in the EU’s energy mix by 2030. And in the US, a recent $369 billion bill to fund climate investment has surprisingly passed despite previous push back. The main objectives include speeding up network effects of renewable energy and electric mobility, with investments targeting solar, carbon capture, low-carbon hydrogen, and EVs. $2 billion will be allocated to national labs for energy research, and $10 billion worth of tax credits will be offered to cleantech manufacturers, thus offering a complimentary funding route to venture capital.
For businesses, the prolonged volatility in energy prices is driving up costs and can cause disruptions in activity. In this context, B2B platforms such as Romanian startup NRGI.ai aim to equip companies with fair energy price benchmarks, using an AI-based forecasting engine, and then to facilitate connections to potential electricity and natural gas distributors.
#3 The chip shortage continues
One of the most prevailing and enduring supply chain bottlenecks, one of the key global challenges, comes from components. The most severe shortage is that of semiconductors, or chips. These critical electronic components are made of thin slices of silicon called wafers, to which elements such as phosphorus and boron are added.
The history of commercial semiconductors started with pocket calculators in the 1970s. Since then, digitalization and electrification have expedited the increase in semiconductor complexity. The largest ones now have more than 50 billion transistors.
One solution to shrink transistors was to manufacture chips in 3D, which makes them much more difficult and expensive to produce. As such, the vast majority of semiconductors are produced by a handful of companies. In fact, the Taiwan Semiconductor Manufacturing Corporation (TSMC) holds 53% of the global foundry market – chip factories based in other countries, while Taiwan-based producers hold another 10% of the share. It does not help that geopolitical relations between Taiwan and China have recently grown tenser.
Some industries such as automotive have been more affected than others. Chip shortages have been causing disruptions in manufacturing, forcing automakers to cancel or postpone hundreds of thousands of orders, and reduce the number of car features offered. Car prices have also increased as manufacturers battle with rising costs. The current systemic transformation of the automotive industry towards electric and automated vehicles further exacerbated the problem as they require more chips.
Next steps and opportunities
As the microchip shortage is expected to continue through 2022, companies and startups should build these expectations into their logistics, production, and risk mitigation plans, with inventory needs clearly forecasted and buffers ensured.
Going forward, countries have recently moved on with providing new incentives for building the next-generation of semiconductors locally and reducing dependence on Asia.
The European Commission has proposed a Chips Act to tackle semiconductor shortages and increase resilience in the technology sector by mobilizing more than €43 billion euros of public and private investments. A Chips Fund would facilitate access to finance for startups to help them develop and scale their innovations, as well as attract investors. Elsewhere, the US has recently signed a $280 billion CHIPS and Science Act, under which $52 billion will be directed toward domestic semiconductor manufacturing.
#4 Weather forecasts point to a prolonged crypto winter
Cryptocurrencies have taken a major hit this year. In June, the crypto market capitalization plunged to less than $1 trillion. Since its peak in November 2021, the market has lost $2 trillion in value. Fast forward to August 2021, the market cap sits at $1.16 trillion. And at $24.6K, Bitcoin is down 64% since its all-time high of close to $69K.
Promising projects such as TerraUSD, the former third largest algorithmic stablecoin, have shut down, and even large crypto exchanges such as Coinbase have suffered, cutting staff to stop further bleeding, after they lost revenues and their shares plummeted 75%.
While this is not crypto’s first bear market or “winter”, some particularities set it apart. First, cryptocurrency has become closer to mainstream since the last time Bitcoin crashed. 55% of Bitcoin investors in the US started in the last year. As such, movements in crypto markets have more widespread influence. While cryptocurrencies were partly meant to serve as a hedge against inflation and central bank policy, they started trading in closer correlation to other risk assets, such as stocks.
Additionally, investors started building highly leveraged positions through decentralized finance (DeFi). While the infrastructure for DeFi and its regulation are still under development, certain issues in the underlying design of its components – including lack of transparency and dubious incentives for investors – have led to disasters such as the collapse of stablecoin terraUSD and its cryptocurrency sister luna. After their crash, traders have been shifting away from investments linked to decentralized finance, fearing similar outcomes.
Next steps and opportunities
Fear has been a key factor driving the forced selling that led to luna’s collapse, alongside poor knowledge of the movements of financial markets. Going forward, more regulation is expected to help support an increasingly sophisticated system and bring back confidence to investors.
The “winter” period, if used right, can serve as a time for increased focus on education around the intricacies of the crypto world, and deeper research into meaningful investment opportunities. For projects in the sphere, it will mean less chances of survival if they are not building something of value.
#5 Climate change progresses unabated
Talking global challenges, this summer we hit new temperature records everywhere around the world. In June and July 2022, heatwaves struck Europe, North Africa, the Middle East, and Asia. We have severe drought and fires in Greece, Portugal, Spain, and parts of France. Meanwhile, glaciers are melting in Italy.
Despite the pandemic temporarily slowing down global industries, greenhouse gas emissions rebounded quickly. Overall global fossil CO2 emissions are back to the levels of 2019. Energy-related carbon dioxide emissions even reached a new record in 2021 at 36.3 billion tonnes, 6% higher than 2020. Coal accounted for more than 40% of this growth.
Meanwhile, the economics of climate change point to dire consequences for businesses. If global temperatures rise 3.2°C by 2050, the world is set to relinquish 18% of global GDP. Even with all targets met, global GDP will still lose 4% and Europe 11%. Climate-related events are already perturbing the activity of more than 1 in 4 organizations globally, according to Deloitte Global’s report. Top five ways in which climate change affects companies across the globe include operational impact, such as workforce disruption, scarcity and cost of resources, regulatory and political uncertainty, increased insurance costs, and reputational damage.
Next steps and opportunities
On a hopeful note, new money has been committed by world leading economies – the Glasgow Alliance for Net Zero Financing launched at COP26 activated $130 trillion to reduce the emissions of assets sitting within the hands of hundreds of different financial institutions.
Going forward, technology can play an important role, but only if it is implemented at scale, in the real economy. This requires capital to develop and test new solutions such as decarbonization tech. 2021 was a strong year for climate tech companies; startups raised $53.7 billion from venture capital and private equity, with almost half of that going to the transportation sector.
Investing in climate has challenges of its own: ESG criteria used to screen investments based on responsible business practices lack standardization and have been under scrutiny recently regarding their effectiveness in directing money towards climate mitigation.
For businesses there is also the challenge of developing an integrated view on costs related to climate risks, which is where climate science comes in. Engaging an entire value chain on the topic of sustainability is not an easy task, but it’s one that can be broken down into manageable steps, and for which plenty of tools are available.