Is a renewed focus on frontier technology the silver lining to the tech sell off?

Stoic VC

Software, particularly the fintech sub category, has been the darling of the venture capital markets for some while. Unrealised returns have been good, funds have been easy to deploy in repeated large tranches, and there has been a good pipeline of capable founders flowing through to emerge as start ups.
However, the dramatic and high profile tech sell off in the public markets is now impacting the venture capital sector. New data from Cut Through Ventures shows that dollars raised per round (also a proxy for valuations) are down. And, after a record quarter in Q1 2022, funding volumes fell in Q2, below the total capital raised in each quarter of 2021. This meant that there was a 26 per cent downturn in number of deals funded over the last year. In dollar terms, there was a 59 per cent decline in the average fund-raise for seed stage just in the last quarter (end-March to end-June 2022).
The age-old maxim is that fashionable investing does not deliver sustainable returns.
For the investors in Buy Now, Pay Later or software companies like Canva, they will now see much poorer performance in their portfolios (in Total Value to Paid in Capital (TVPI) terms). But the question is, where will they go next with their money? Could this be the point where social benefit dovetails with the need for financial returns?
The sector that will benefit from the move away from the fintech sector is deeptech, principally healthcare and life-sciences. Deeptech is not as sexy as the sugar rush of a new form of credit (or design package) for the Gen-Z-ers. However, the truth is that the demand for healthcare and new medical drug innovations, and in fact deep tech generally, is less subject to economic volatility. Consumers spend a more stable amount of their budget on healthcare than more discretionary industries – its ‘recession proof’. The trend in healthcare spending across the globe will also be inexorably upwards as the largest demographic, Boomers, age. However, healthcare and life-science are heavily regulated industries, with significant technical risk, so it is not easy for the founders or the investment markets.
Around half the investee companies in our portfolio are healthcare and life-sciences, and the fund is 100 per cent university-intellectual property deep tech and ethical investment. That is unusual. The risk and valuation difficulties of these sectors are a barrier to entry for many investors. But, it is just possible that the post-pandemic, resurgent inflation, ‘search for yield’ environment will now encourage others to jump the technical risk barrier, and a greater pool of funds will be unlocked for these innovative and socially important sectors.
Our fund has never followed fashions or the herd. We believe in prioritising the long-term payoff for our investors, and that is why we have always searched for the ‘deep value’ and built such strong partnerships with like-minded investors, such as Uniseed. We hope that this new environment will teach a new cohort of venture capitalists the value of what can be done with more patience. We hope that more great healthcare innovation will come to life in the next few years because more venture capital investors learn to accept and manage technical risk – ‘win win’.