Dear all,
As we set in 2023 and take a broader perspective on investing in Tech - in its widespread acceptance in which Tech is much larger than pure “Technology” but an enabler of growth and transformation, I want to raise the following question: How optimistic do we want to feel at this point?
To provide a tentative answer, let’s look at that Tech investing glass in both ways: is it half-empty or half-full?
Let’s start with half-empty first.
We have now seen, almost all 2022 stats being out there, that the last twenty-four months have been characterized by over-investment and a loss of discipline. The pandemic fostered a wave of innovation to deal with a new paradigm in which remote was the new normal in many aspects of our lives, and that resulted in numerous “factor-driven” investments in which the strength of unit economics, which in most cases tell the truth when looked at correctly, were forgotten in a context of a record level of dry powder, free money and intense competition amongst investors. In addition, the FTX scandal and the collapse in public Tech valuations, which have now hit private markets in Tech, have reminded us that discipline is key and that, in all cases, investors must complete diligence. But not in any form (see infra).
Also, for the first time, macro matters may have come to matter in Tech when free money was no longer an option. On this ground, macro news is not excellent – inflation is still around (and should be here for many months, looking at historical inflation cycles), and interest rates might not have reached their peak. But investors have now factored this into their thesis, and while this remains an uncertainty factor, it is not hampering deal-making in our view.
Last, perhaps worse than the macroeconomic outlook, the geo-political outlook is still highly uncertain. The war in Ukraine is a quagmire with implications at many levels, and the suspicion of Chinese balloons in the US is not bringing any help on the international relations side. In our view, geopolitics will be the critical element to watch over the year, on top of the direct implications it brings in supply chain disruptions, the surge in raw material costs, etc.
But there are many reasons why the glass should be seen as half-full too.
First, there is still a long road for enterprise software with further room for increased enterprise workloads in the cloud. Per Gartner, worldwide end-user spending on public cloud services is forecast to grow 20.7% to total $591.8 billion in 2023, up from $490.3 billion in 2022. Many SaaS native businesses that were still at the venture stage only a few years or months ago have reached maturity, and the recent quest for profitability imposed by the new funding environment has accelerated “path to profitability,” turning part of these businesses into ripe Private Equity targets for Growth or buyout operations.
Second, we are in a fascinating period in which innovation is continuing at full speed: generative AI has replaced crypto and blockchain on top of venture capital firms’ priorities, which reflects the forward-looking nature and optimism of the industry. Sure many of the models being created are just “hype,” but this is the implicit rule in Tech and the role that VCs are continuing to play: funding many startups knowing that only a fraction will thrive. In the end, generative AI will probably reach maturity (as AI has actually) and be embedded in strong enterprise use cases.
Last, Tech has for sure reached more maturity, and successful Tech and tech-enabled business models are now built in (better) compliance with Regulation. Innovative business models are even shaping new forms of Regulation as evidenced by the recent Tesla recall (see analysis after), which is a premiere for over-the-air recalls as it applies to software. Also Tech is increasingly compliant with ESG considerations as reflected in the very recent announcement of France’s list of prominent scale-ups which takes a holistic stance at showcasing Tech companies by taking into account climate and gender diversity as a ranking factor.
So will you see the glass half-empty or half-full? Have a great read, and see you soon!