Venture capital (VC) firms are continuing to pour money into tech firms even as startups consider alternative funding mechanisms. According to a report from Pitchbook, this trend includes a record-breaking increase in pharma and biotech investments. Business-to-business (B2B) tech, business-to-consumer (B2C) tech, and FinTech maintain the momentum that began in late 2020.
Will Venture Capital Firms Investment Spree in Tech Continue?
It certainly seems like a great time to be part of a tech startup.
Wave Capital Partners, an investment banking consultancy that advises tech companies on raising capital, believes the trend will continue into the near future. However, they are quick to acknowledge some concerns about inflation and other factors.
Recently, Garrett Boorojian, managing partner at the firm, participated in a question-and-answer session on this very topic. Boorojian’s insights appear below.
Tech VC inflows have been very strong this past year. Do you see that trend continuing into 2022?
Absolutely! Tech venture capital is a necessity, and the trend of VC investments will continue in 2022 and beyond because “the now” is also “the future.”
Most tech-based companies
In no particular order, Washington state, California, Texas, Florida, North Carolina, New York, Georgia, and Michigan are the U.S. states that most tech-based companies call home.
Diverse tech endeavors
The tech VC space serves a major, perpetual, and holistic role for funding diverse tech endeavors. Launching start-up and early-stage businesses that make positive and life-changing differences in society is the essence of entrepreneurship in any industry, including in the tech world.
The tech VC space also provides the vehicle for scale-up growth of a product, a service, an application, a type of software, a medical device, or any other tech-related capacity. Today’s tech VC investments will create new supply to meet tomorrow’s new demand in the industry.
Right now, what are the areas of tech that VC investors seem most interested in?
Lately, PropTech and FinTech. Other areas where investors have significant “evergreen” interest are in technology that encompasses healthcare, energy, artificial intelligence (AI), information technology (IT), cybersecurity, augmented reality (AR), the internet of things (IoT), and consumer-based products and services.
Technology — the central component
As long as technology is the central component, business models of tech start-ups and early-stage companies must demonstrate all the necessary elements that attract the right tech VC investors to be the companies’ early financial backers.
Strong exec leadership
Suppose investors see that a particular tech-related company has the potential to go public in the future, in addition to its needs for capital and other value-add resources and expertise to grow. In that case, strong executive leadership and advisory board teams have to be running and advising the company from the outset.
What is drawing investors to FinTech and PropTech above many other areas?
Investors are drawn to the practicality, functionality, and monetization of methods and systems that tech companies can provide to consumers on national and global levels. Specifically, investors are aware of the continuous modernization through technological breakthroughs in the worlds of real estate and financial services.
Better ways to manage, save and spend money
Investors, including VC investors, hope to deploy capital in these tech areas if there are indeed smarter, more efficient, and more innovative ways for consumers to live, work, and play. They also want to invest in better ways to manage, save, and spend money.
User-friendly platforms in tech
The accessibility quotient affects how quickly and successfully consumers can connect to user-friendly platforms in a thriving tech environment. It can help to remember that investors in FinTech, PropTech, and other areas of tech are consumers as well.
What macro factors do you see influencing the availability of capital over the next 12 months?
If inflation continues to rise, the Federal Reserve may raise interest rates twice by early 2023. Legislation that U.S. President Joe Biden eventually signs into law will also dictate the availability, or lack thereof, of less expensive capital over time.
Startup founders look for available capital right now
Start-ups and early-stage companies should get in front of VC and private equity (PE) firms simply because capital is available right now. Entrepreneurs in need of VC investments into their businesses can’t allow themselves to think that the money at a cost that’s attainable now will always be there six to 12 months from now.
Entrepreneurs must keep expanding
Thankfully, the economy is still growing strong. Labor and material shortages still exist, but everyone’s hoping that both of these dire situations will be resolved soon. Suppose interest rates rise in the future. In that case, inflation will decrease, but it should not get to the point where companies get deterred from hiring key people to help run and lead their entrepreneurial enterprises. Our economy can’t afford to have its entrepreneurs stop expanding their operations or at least be hesitant to take on more VC or PE capital, or debt of any kind, in critical moments of growth in their businesses.
Also, from a macro perspective, natural disasters and other unpreventable life-altering events could restrict access to capital and affect anyone’s financial portfolio on Wall Street or Main Street.
Could rising rates or tax reform lead to a tightening of VC availability?
Yes and no. The Biden Administration proposes an increase to the tax rate on long-term capital gains for Americans making more than $1 million and the corporate tax rate and ending the carried interest loophole.
There’s a division that relates to the overall hypothesis within the VC community of whether or not these proposed changes will slow down VC investment.
Capital gains tax rate increase?
Along with PE groups, many VC firms who supported President Biden during his presidential campaign oppose the capital gains tax rate increase. They believe this increase will hinder long-term investment opportunities and slow down economic growth while our nation tries to recover from the pandemic.
Others in the VC world — although in the minority — believe these legislative proposals won’t stop investments in start-ups and early-stage companies if enacted into law. President Biden’s agenda and other investors are not surprised. In fact, they had already anticipated ongoing conversations amongst the president and Congressional leaders in Washington, D.C.
Moving beyond inflation issues
Regardless of political preferences, nobody wants to see inflation rise to the level where acquiring capital becomes more expensive. Higher inflation would cause significant decreasing returns and dwindling profits for VC investors. An increase in inflation would cause less competitiveness in many sectors across America, potentially in the tech space as well.
If higher inflation does occur — no matter the challenges — VC investors would still have to be available to invest in and help grow tech-related businesses.
If tech companies expand and profit enough to go public, our economy benefits when these new public companies raise even more capital to create more job opportunities.
A slight increase in inflation is sustainable, but not to the point of overvaluing any sector of the economy. VC investors are part of the bridge that helps a start-up find its way to becoming a major public company. Overvaluing would crumble that bridge.
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Fintech Kennek raises $12.5M seed round to digitize lending
London-based fintech startup Kennek has raised $12.5 million in seed funding to expand its lending operating system.
According to an Oct. 10 tech.eu report, the round was led by HV Capital and included participation from Dutch Founders Fund, AlbionVC, FFVC, Plug & Play Ventures, and Syndicate One. Kennek offers software-as-a-service tools to help non-bank lenders streamline their operations using open banking, open finance, and payments.
The platform aims to automate time-consuming manual tasks and consolidate fragmented data to simplify lending. Xavier De Pauw, founder of Kennek said:
“Until kennek, lenders had to devote countless hours to menial operational tasks and deal with jumbled and hard-coded data – which makes every other part of lending a headache. As former lenders ourselves, we lived and breathed these frustrations, and built kennek to make them a thing of the past.”
The company said the latest funding round was oversubscribed and closed quickly despite the challenging fundraising environment. The new capital will be used to expand Kennek’s engineering team and strengthen its market position in the UK while exploring expansion into other European markets. Barbod Namini, Partner at lead investor HV Capital, commented on the investment:
“Kennek has developed an ambitious and genuinely unique proposition which we think can be the foundation of the entire alternative lending space. […] It is a complicated market and a solution that brings together all information and stakeholders onto a single platform is highly compelling for both lenders & the ecosystem as a whole.”
The fintech lending space has grown rapidly in recent years, but many lenders still rely on legacy systems and manual processes that limit efficiency and scalability. Kennek aims to leverage open banking and data integration to provide lenders with a more streamlined, automated lending experience.
The seed funding will allow the London-based startup to continue developing its platform and expanding its team to meet demand from non-bank lenders looking to digitize operations. Kennek’s focus on the UK and Europe also comes amid rising adoption of open banking and open finance in the regions.
Featured Image Credit: Photo from Kennek.io; Thank you!
Fortune 500’s race for generative AI breakthroughs
As excitement around generative AI grows, Fortune 500 companies, including Goldman Sachs, are carefully examining the possible applications of this technology. A recent survey of U.S. executives indicated that 60% believe generative AI will substantially impact their businesses in the long term. However, they anticipate a one to two-year timeframe before implementing their initial solutions. This optimism stems from the potential of generative AI to revolutionize various aspects of businesses, from enhancing customer experiences to optimizing internal processes. In the short term, companies will likely focus on pilot projects and experimentation, gradually integrating generative AI into their operations as they witness its positive influence on efficiency and profitability.
Goldman Sachs’ Cautious Approach to Implementing Generative AI
In a recent interview, Goldman Sachs CIO Marco Argenti revealed that the firm has not yet implemented any generative AI use cases. Instead, the company focuses on experimentation and setting high standards before adopting the technology. Argenti recognized the desire for outcomes in areas like developer and operational efficiency but emphasized ensuring precision before putting experimental AI use cases into production.
According to Argenti, striking the right balance between driving innovation and maintaining accuracy is crucial for successfully integrating generative AI within the firm. Goldman Sachs intends to continue exploring this emerging technology’s potential benefits and applications while diligently assessing risks to ensure it meets the company’s stringent quality standards.
One possible application for Goldman Sachs is in software development, where the company has observed a 20-40% productivity increase during its trials. The goal is for 1,000 developers to utilize generative AI tools by year’s end. However, Argenti emphasized that a well-defined expectation of return on investment is necessary before fully integrating generative AI into production.
To achieve this, the company plans to implement a systematic and strategic approach to adopting generative AI, ensuring that it complements and enhances the skills of its developers. Additionally, Goldman Sachs intends to evaluate the long-term impact of generative AI on their software development processes and the overall quality of the applications being developed.
Goldman Sachs’ approach to AI implementation goes beyond merely executing models. The firm has created a platform encompassing technical, legal, and compliance assessments to filter out improper content and keep track of all interactions. This comprehensive system ensures seamless integration of artificial intelligence in operations while adhering to regulatory standards and maintaining client confidentiality. Moreover, the platform continuously improves and adapts its algorithms, allowing Goldman Sachs to stay at the forefront of technology and offer its clients the most efficient and secure services.
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UK seizes web3 opportunity simplifying crypto regulations
As Web3 companies increasingly consider leaving the United States due to regulatory ambiguity, the United Kingdom must simplify its cryptocurrency regulations to attract these businesses. The conservative think tank Policy Exchange recently released a report detailing ten suggestions for improving Web3 regulation in the country. Among the recommendations are reducing liability for token holders in decentralized autonomous organizations (DAOs) and encouraging the Financial Conduct Authority (FCA) to adopt alternative Know Your Customer (KYC) methodologies, such as digital identities and blockchain analytics tools. These suggestions aim to position the UK as a hub for Web3 innovation and attract blockchain-based businesses looking for a more conducive regulatory environment.
Streamlining Cryptocurrency Regulations for Innovation
To make it easier for emerging Web3 companies to navigate existing legal frameworks and contribute to the UK’s digital economy growth, the government must streamline cryptocurrency regulations and adopt forward-looking approaches. By making the regulatory landscape clear and straightforward, the UK can create an environment that fosters innovation, growth, and competitiveness in the global fintech industry.
The Policy Exchange report also recommends not weakening self-hosted wallets or treating proof-of-stake (PoS) services as financial services. This approach aims to protect the fundamental principles of decentralization and user autonomy while strongly emphasizing security and regulatory compliance. By doing so, the UK can nurture an environment that encourages innovation and the continued growth of blockchain technology.
Despite recent strict measures by UK authorities, such as His Majesty’s Treasury and the FCA, toward the digital assets sector, the proposed changes in the Policy Exchange report strive to make the UK a more attractive location for Web3 enterprises. By adopting these suggestions, the UK can demonstrate its commitment to fostering innovation in the rapidly evolving blockchain and cryptocurrency industries while ensuring a robust and transparent regulatory environment.
The ongoing uncertainty surrounding cryptocurrency regulations in various countries has prompted Web3 companies to explore alternative jurisdictions with more precise legal frameworks. As the United States grapples with regulatory ambiguity, the United Kingdom can position itself as a hub for Web3 innovation by simplifying and streamlining its cryptocurrency regulations.
Featured Image Credit: Photo by Jonathan Borba; Pexels; Thank you!