We’ve just completed a productive West Coast tour, connecting with pioneering investors in trailblazing companies like Netflix, Uber, Canva, Databricks, and Robinhood. Our aim was to gain insights into the prevailing investment trends and future outlook.
Key Takeaways
💡 Broader Investment Perspectives
- GPs Seek LP Diversification: As US LPs continue to be hit by the denominator effect and private bloating from the increased pace of deployment in 2021 and 2022, U.S. funds are actively seeking European clients to diversify their LP base and foster strategic links with EU corporates.
- Funds Funding Dynamics: The fundraising environment presents a diverse set of challenges for many investment funds. Fundraising is down globally. However, brand name funds and smaller well-managed VC funds are seeing robust demand. Similar to start-ups, we continue to see the top-tier GPs raise oversubscribed funds, particularly when they have already realised DPI for LPs.
- Startups Funding Dynamics: The investment landscape is particularly challenging for hardware startups beyond Series B. This is primarily due to the rise in cost of capital, as debt is usually leveraged to meet the higher Capex requirements. However, it’s noteworthy that exceptional companies continue to secure funding. These enterprises are adept at leveraging a variety of financial avenues, including debt financing and tax credits, to support their growth and innovation.
- Combatting Founder Fraud: Intensified due diligence processes, including comprehensive background checks and financial audits, are being implemented to mitigate risks of founder fraud and ensure investment transparency.
🔍 Detailed Sector Insights
1. General Tech
In our discussions, we explored a range of sectors such as SaaS, fintech, healthcare, enterprise solutions, and cryptocurrency. Among these, two themes particularly stood out due to their current relevance:
- 🤖 Artificial Intelligence (AI): While AI garners significant interest, investors remain cautious due to overvaluation and the need for unique datasets or infrastructure roles, focusing more on AI’s role in enhancing startup efficiency.
- 🪖 DefenceTech: The escalating global tensions have spiked interest in defense technologies, ranging from autonomous systems to cybersecurity, drawing attention from both specialist and generalist VCs, including Andreessen Horowitz.
2. Sustainability and Climate Tech
We were thrilled that our visit coincided with the APEC Summit near San Francisco, where US President Joe Biden and Chinese leader Xi Jinping committed to methane reduction goals. While modest, this pledge marks a hopeful step towards greater collaboration on climate initiatives in the future, and we are excited about the possibilities this opens up.
We engaged with several sustainability-focused funds and observed a keen interest in sustainable investments from generalist funds, recognizing the substantial market opportunities it presents. Our discussions covered a range of significant themes, including recycling, alternative proteins, innovative fertilizer alternatives, rare mineral extraction, geothermal energy, and fusion technology. Two recurring themes stood out:
- 🔋 Electric Grid Modernization: The U.S. Department of Energy, under GRIP, is investing $3.5 billion in grid upgrades, underscoring a significant push towards improving both the physical and digital layers of grid infrastructure. This includes upgrading transmission and distribution lines, transformers, substations, and integrating battery storage solutions to reduce grid pressure. On the digital front, there’s a surge in startups focusing on advanced data analytics and digital processes for more efficient and resilient grid management.
- ✈️ Aviation’s Green Transition: The aviation industry, responsible for 2–3% of global CO2 emissions, is transitioning towards hydrogen-based synthetic fuels. This shift, however, is challenged by the logistics of hydrogen transportation and significant environmental concerns. One such concern is that hydrogen’s release into the atmosphere can deplete hydroxyl radicals, leading to increased methane levels and exacerbating global warming. Additionally, there are hurdles in making Sustainable Aviation Fuels (SAFs) economically viable, with initiatives like the Inflation Reduction Act (IRA) playing a supportive role. Furthermore, hydrogen’s lower energy density compared to traditional kerosene creates space and weight issues for commercial airliners. The industry also faces challenges in synchronizing the development of airport infrastructure with the production of hydrogen-powered aircraft.
➡️ This trip has only reinforced our bullish outlook on technology’s transformative potential and highlighted the value of direct engagement with key investment managers. The insights and relationships cultivated are instrumental in shaping our investment strategies in these rapidly evolving sectors
We welcome further discussions on these themes and invite you to stay connected for more sector-specific insights.
In case you missed it…
General Technologies 🚀
🤖 Air Street Capital has just released The State of AI 2023 Report
In an era where AI dominates headlines, we’ve identified four key trends worth tracking:
- ⚖️ Ethical AI: Researchers at the University of Maryland have developed a watermarking method for language model outputs, enabling algorithms to identify AI-generated text. Similarly, Google DeepMind’s SynthID tool embeds digital watermarks in image pixels, aiding in the distinction of AI-created images. Both innovations address the growing challenge of discerning AI-generated content in ethical and copyright contexts.
- 💡 Real-world Breakthroughs: Language models and diffusion models are revolutionizing life sciences, notably in molecular biology and drug discovery. The RFdiffusion model, leveraging diffusion models and Protein Data Bank data, innovatively designs proteins for various functions like monomers, binders, and enzyme scaffolding. Deep learning is instrumental in elucidating gene interactions, overcoming traditional lab constraints. However, challenges persist in translating laboratory successes to real-world effectiveness, highlighting the gap in practical implementation.
- 👩⚖️ Regulation: The global landscape of AI regulation is characterized by a noticeable divide, with three distinct approaches being adopted across various regions:
- Policy: Last year, the US enacted its strictest export controls to date against China, banning sales of advanced chips and related manufacturing tools, a shift from slowing to actively impeding China’s technological advancement.
➡️ This report is a must-read for anyone interested in the future of AI. It also touches upon computing power, the macro environment, and defense technology, and includes predictions for 2024, among other topics. Whether you’re a seasoned AI expert or just starting to explore the field, you’ll find valuable insights.
🔗 Dive into the full report here: Link to the State of AI 2023 Report — Air Street Capital
🎙️ Podcasts
The Tech world has been shaken by two main events this month:
🎙️ Inside the Coup at OpenAI — The Daily — Dive into the whirlwind five days at OpenAI, one of the most prominent AI companies in the world.
🎙️ WeWork: From $47 Billion Unicorn to Bankruptcy — WSJ — Listen to the dramatic story of how a once high-flying startup faced financial woes and market challenges.
Sustainability 🌍
👩⚖️ Navigating Challenges: American Clean Energy Startups in the Wake of the IRA
The Inflation Reduction Act’s (IRA) nearly $370 billion allocation for climate and clean energy, is a significant step for the U.S. clean energy sector, but its implementation has been bumpy for some startups:
🧨 Awaiting Specifics on Tax Credits: There’s uncertainty about qualifying technologies for IRA tax credits, especially for companies in the hydrogen and low-carbon fuels sectors.
🪫 Struggles and Bankruptcies: High construction costs and interest rates have pushed several startups towards bankruptcy. U.S. electric truck manufacturer Lordstown Motors and EV technology manufacturer Proterra are examples of firms that have filed for bankruptcy amidst these challenging conditions.
🐭 Impact on Smaller Entities: Smaller firms, unlike diversified giants, struggle to sustain operations amid funding delays. Notable cases include Li-Cycle, Plug Power, and NuScale Power facing severe financial challenges.
📈 Funding Dilemma: The IRA’s loan conditions create a Catch-22; firms need progress for funding but struggle with high costs and interest rates.
Despite these hurdles, there’s a silver lining: The American Clean Power Association noted a significant increase in clean energy investments, up to $270 billion between August 2022 and July 2023, exceeding investments of the previous eight years. This suggests the IRA’s positive impact is beginning to unfold.
To learn more ⬇️
🎙️ Canary Media Podcast — Catalyst with Shayle Kann
📰 Reuters — Every country needs an Inflation Reduction Act
📰 OilPrice — Clean Energy Start-Ups Are Struggling as They Wait for Government Aid
✈️ Exciting News in Aviation: Virgin Atlantic’s Historic SAF Flight
Virgin Atlantic’s groundbreaking transatlantic flight, powered solely by sustainable aviation fuel (SAF), just touched down in New York City. This historic journey demonstrates the potential of low-carbon options in aviation, despite SAF currently making up less than 0.1% of global jet fuel usage.
Virgin’s Boeing 787, equipped with Rolls-Royce Trent 1000 engines, completed this milestone flight, emphasizing the industry’s commitment to reducing emissions. While SAF can cut emissions by up to 70%, challenges like high costs and limited supply persist.
🚧 Challenge Ahead: This flight underscores the need for innovation and government support to make SAF more accessible. Aviation accounts for 2–3% of global carbon emissions according to IEA, making decarbonization vital. This achievement was made possible with regulatory approval and collaboration among partners, including Rolls-Royce, Boeing, BP, and others.
➡️ Further advancing the field of sustainable aviation, Breakthrough Energy Catalyst has committed $75 million to Infinium’s Project Roadrunner, which focuses on converting waste CO2 and renewable power into SAF, potentially reducing lifecycle GHG emissions by around 90%. Keep an eye out for more on the subject. It’s a step toward a greener aviation future.
Blockchain & Crypto 💸
⚖️ Regulations
In the US
- The SEC charged Kraken with operating an unregistered securities exchange, broker, dealer, and clearing agency.
- The SEC has filed charges against SafeMoon and its executive team for alleged fraud and conducting an unregistered offering of crypto securities.
- The SEC was reported by the Government Accountability Office for not following the Congressional Review Act in implementing a rule — affecting US banks’ ability to enter the digital asset custody market — giving Congress until December 31 to possibly reverse it.
In the UK
- The FCA approved Paypal to offer crypto services in the UK.
In Singapore
- The MAS introduces tougher rules aimed at limiting crypto speculation in Singapore.
🏦 Financial Institutions
- Blackrock and Fidelity filed for a Spot Ethereum ETF.
- CBOE Digital plans to introduce Bitcoin and Ether futures with margins on January 11, 2024.
- The SEC is engaging in discussions with Grayscale about transforming their GBTC product into an ETF.
📈 Crypto Exchanges
- Binance agreed to a $4 billion DOJ settlement, leading to CEO Changpeng Zhao’s resignation and a $50 million personal fine.
- Ex-NYSE President’s Bullish aims to reboot bankrupt crypto exchange FTX.
- Kraken is exploring a way to launch their own Layer-2 blockchain.
- Coinbase Financial Markets now offers U.S. traders the ability to engage futures trading.
- Backpack obtained a license from Dubai to launch a regulated exchange.
🔎 Research
🏗️ Matti (Zee Prime Capital) discusses how digital assets and networks are challenging traditional notions of ‘real’ assets, reshaping value and consumer behavior in the digital era.
💰 Nic (Castle Island VC) decrypts the exaggerated claims about Hamas’ crypto fundraising, revealing through blockchain analysis that the alleged $130 million figure is unsupported.
🎙️ Podcasts & Videos
🎙️ Vivek Ramaswamy sat down with Nic Carter (Castle Island VC) to discuss his crypto stance
📹 Bankless discusses takeaways from Solana Breakpoint
📹 Full livestream of the Network State Conference 2023
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