[33] Confirming Azafran's Thesis & Timing: Deep Tech + Stage + Geography

by Kristina Ivancic

Azafran Investment Analyst

The current global slowdown in venture capital funding is a significant shift after the record-breaking levels of investment in 2021. Nonetheless, there is considerable dry powder in the market, and investors, like Azafran, that are still keen to make deals. While it is certainly not business as usual, numerous factors are reinforcing Azafran's investment thesis and market timing.


Azafran has identified gaps within the investment landscape - the lack of established Series A funding across much of Europe, and an expanded geographic landscape including the need for a bridge between North America and Europe at the Series A stage. Azafran is also focused on technologies that solve real-world problems and provide a clear value proposition via increased efficiencies and knowledge transfer.


The current market predictions are signaling an oncoming market correction which provides the opportunity for mission-critical technologies such as voice, acoustics, and imaging technologies developed by mission-driven founders to establish themselves in their growing markets. Azafran’s pipeline is focused on providing impactful solutions for the IoT, B2B Enterprise & MedTech markets. For specific examples of these investments please see the Azafran Deep Tech Investment Use Cases article below & link to the full article.


Caution In Decision Making


Despite the current cautious approach to investing within the VC market, we are facing numerous opportunities that were previously not present. Both investors and founders are being reminded of the 2008 financial crisis. Although there was also slowed funding during the past financial crisis, a new wave of technological advancements was created through seed funding as a result of the cloud and mobile transformation. Many leading VCs proved their resilience and earned great returns through investments during the 2008 crisis. Like today, startup valuations were lowering, and purchasing trends slumped yet many startups were born as a result of the lows. Examples include sharing economy companies Uber, Lyft, Airbnb, Whatsapp, Slack, Venmo, etc.


Currently, our entire society is being transformed by advancements in AI, IoT, and especially B2B Tech. As the goal of venture capital is investing in transformative ideas that produce long-term results, the current crisis can shine a light on many resilient companies. The current situation also allows for an arbitrage opportunity where we will see great companies fetching a lower valuation, allowing investors to capitalize on the current opportunities while serving as long-term partners. Long-term partnerships are a significant factor when investing in Azafran due to our hands-on approach offered through our Catalyst Platform (link) which focuses on market timing, product traction, and team development to accelerate growth and minimize risk.


Series A Gap


According to Crunchbase “there are many companies in the seed through Series B phase that are well positioned to survive (and potentially even thrive) as the labor supply opens up and competition diminishes. Many investors have already created their shortlist of these companies and are waiting to pounce when the moment is right. These investments will be their marquis positions moving through this downturn and into the next wave of growth, high valuations, and froth. Instead of chasing the hottest deals, they’ll be able to sit back and watch their positions grow into mature, highly profitable companies that have proven their ability to survive the worst the global economy can muster.”


During an interview with Sifted, Sonya Iovieno, Head of Venture and Growth Banking at Silicon Valley Bank stated “we’re starting to see some of those experienced seed funding investors raise funds to go into Series A, that are thinking about how they continue to support companies into the next stage,” she says. “This is a great sort of evolutionary path and very much mirrors what we saw from the most experienced VCs in the US several years ago. So already we can see that trend taking off in Europe.”


Moreover, while comparing funding in the US vs Europe, Crunchbase data also shows that “from Series C onward in 2021, the typical European startup raised more, both in terms of average and median round size, than its U.S. counterparts. That shift comes as overall venture funding to European startups in 2021 grew 159 percent year over year, compared to 92 percent in North America. In 2021, the gap in the size of the typical capital raise between European and U.S. startups was most pronounced at Series A. In fact, the median and average Series A round sizes for startups in Europe were around two-thirds of what U.S.-funded startups raised at the same stage.”


European Value


European startups have also come a long way in the past decade. The European venture sector has matured and gained sophistication. Europe has over 200 domestic unicorns and has proven its ability to create market leaders. Capital efficiency has also proven to be impressive in Europe with companies having healthier valuations yet still delivering outsized returns. According to Pitchbook “in the first six months of the year, Europe saw 30 VC-backed startups exceed a $1 billion valuation — over half the total number that did so in 2021. Meanwhile, the US and Asia saw a slowdown in unicorn creation, with just 118 and 35 companies exceeding the threshold valuation, respectively; both figures are less than half the previous year's total.


As discussed in the analysis by Simple “more US influence also means more knowledge and expertise in conquering the all-important US market, something that European startups have frequently found hard to do. But with US investment currently limited to de-risked propositions in Series C onwards, this leaves a huge opportunity from Seed+ through to Series B, where a number of European VCs are developing their sweet spot and where family office funding can have a huge impact.


AI Is Now


A new forecast from the International Data Corporation (IDC) Worldwide Artificial Intelligence Spending Guide shows that global spending on AI, including software, hardware, and services for AI-centric systems, will reach nearly $118 billion in 2022 and surpass $300 billion in 2026. The ongoing incorporation of AI into a wide range of products will drive a compound annual growth rate (CAGR) of 26.5% over the 2022-2026 forecast. This is more than four times greater than the five-year CAGR of 6.3% for worldwide IT spending over the same period.


The disruption provided by the COVID-19 pandemic has accelerated the adoption of AI in enterprises. Organizations are seeking to maximize AI systems to help their organizations work more efficiently and successfully. By deploying the right AI technology, businesses can automate and optimize tasks in every sector. Augmented AI technology can also help support mundane activities and improve the customer experience through the current widely adopted tools such as conversational AI, machine learning, and image processing.


Marcin Hejka, Co-founder and General Partner at OTB Ventures, a fund specializing in deep-tech investments, told Sifted that companies with a strong technology component tend to be a good bet during tough economic times.

“Difficult times are often the best times to make efficiency improving efforts on the enterprise side, which you cannot do in the 21st century without applying deep-tech,” he says. “No one is immune to macroeconomic trends. But actually, the deep-tech space, especially early deep-tech, is probably the least impacted part of the venture capital market. I would even say that early-stage deep-tech investing is actually anti-cyclical.


“Alexa - should my business introduce voice tech?”


Voice and speech recognition technologies have already been implemented and present in our lives for a good decade. There have been some learning curves while adopting it into daily user life, however, voice & speech has now become a common technology that can have numerous, if not infinite technology uses. Modern consumers have become more tech-savvy than ever and due to the surge in household penetration of smart speakers, consumers are beginning to demand the ease provided by voice technology from enterprises.


According to Forbes, a recent study found that, despite significant security fears, 85% of businesses expect to use voice technology in the next year. Voice biometrics technology allows for secure and seamless integration of voice into businesses. The notable advances in software and integration have made voice recognition capabilities available to businesses of any size, which has accelerated the adoption of voice and speech in enterprises.


The Metaverse


According to the Markets Herald interview with Mrs. Rim Mathlouthi, Licorne Gulf Board Member, “ this year, many businesses varying from startups to large technology organizations as well as venture capital and private equity companies have already allocated over $120 billion for the metaverse. However last year the metaverse managed to attract up to $13 billion in funding from private equity. But in 2022 investments into the metaverse market have doubled in comparison to 2021 and are expected to further increase in 2023.”


A wise long-term investment for Med-tech companies is the investment into augmented reality solutions. According to GlobalData, the global AR market is estimated to be worth $152 billion by 2030 with enterprise AR making up 65% of total revenue. Augmented reality technology is becoming widely adopted as an educational tool for students and healthcare professionals. The technology can also be used from the patient perspective to be guided through the doctor's diagnosis. Globally, a staggering 310 million major surgeries are performed each year; around 40 to 50 million in the USA and 20 million in Europe. Source There is extensive training involved and institutions are seeking to enhance training to assist in surgical proficiency and planning.


Med-Tech


Healthcare is a sector that can thrive even throughout recessions due to the demand for health services not relying on the state of the economy. However, the high cost of healthcare services creates demand for cost-efficient and time-efficient technologies to enhance performance. Even though the healthcare sector is not immune to financial hardships, digital solutions which enhance the sector will be provided with opportunities to prove they are market leaders.


The COVID-19 pandemic amplified the digitization of the healthcare sector and provided opportunities for many med-tech and health-tech startups. Digital health had a breakout year in 2021, with startups raising an eye-popping $29.1 billion across 729 deals, according to Rock Health, a venture fund dedicated to digital health. Even though overall funding slowed in 2022, numerous market indicators still prove the value of med-tech and health-tech. This past summer, Amazon acquired One Medical for $3.9 billion and re-confirmed the trend that Big Tech companies plan to participate in the digitization of the healthcare industry. Other examples include Apple further expanding its health-focused capabilities via Apple Watch, Microsoft expanding its offering of cloud services to hospitals and pharmaceutical companies, and Alphabet providing data storage and analytics to address interoperability challenges and enhance clinical research.


Conclusion


All in all, the market timing and technology trends are a reassurance to Azafran Capital Partners' investment thesis. The pace in the market will likely further slow down, and startups will seek focused investors and partners. Companies that are true market leaders rather than followers and “me-too” companies will have the opportunity to stand out. The bar for investing will certainly be higher and require resilience from both founder's and the investor's standpoint. The market will recognize solutions for solving real-world problems and transformative technologies such as voice and the metaverse. The startups that have strong valuation propositions and solid ROI will be able to thrive.


For additional detail, see the Azafran Deep Tech Investment Use Cases article below & link to the full article.