by James F Kenefick, Co-Founder and Managing Partner
Executive Summary
The Bad News: As the dearth of economic information continues to mount, record breaking inflation, public equity dramatic market sell-off, pending food shortage, war in Europe, civil unrest in USA; the Azafran team is constantly pouring through the data, news and trends and our read is that we are in the midst of Super Bubble brewing, now beginning to effect most segments and sectors.
Coupled With Rapidly Changing Workforce Dynamics: From the Great Resignation to employee shortages and challenges across the board including teachers, doctors, nurses, drivers, cooks, bank tellers, hospitality workers- you name it. This dynamic, greatly accelerated by COVID-19, has created an urgent need for business and healthcare to automate as much as possible as the opportunities are upstream.
Azafran’s Silver Lining: Our investment thesis focuses on delivering market-pulled machine learning technologies coupled with + V.I.S.A. (voice, imagery, sensory, acoustics) solutions for the enterprise/B2B/Medtech sectors. These solutions deliver savings of time, labor, communication, and expertise to these markets affected by labor challenges, training, knowledge transfer and technology adoption.
The world is in uncharted waters and a series of compounding crises. However, we see a timely opportunity to invest in emerging companies at great valuations that make it a better world through disruptive, transformational technology.
Deep Dive
As part of our continuing effort to present information on the leading edge, coalescing market patterns into relevant strategies and topics within the context of Azafran Capital’s Investment Thesis, welcome to our latest INSIGHTS Special Series, A Call to Reality and the Silver Lining.
As the dearth of bad news continues to mount, one thing our team realized is that we usually only see the news in one-off stories or in silos, which end up feeling more like canaries in a coal mine. However, the Azafran team is constantly pouring through the data, news and trends and we see what might appear as canaries in the coal mine is actually more like a Super Bubble popping, now affecting all segments and sectors.
To kick off our Series, we’ve culled examples from across the board and including some here:
Insider: 'We're on the precipice': The tech industry is bracing for a historic slump amid VC pullback, looming layoffs, and plummeting share prices
NY Times: The Stock Market, After Soaring for Years, Returns to Earth: “Even after the bleeding stops, stock market investors, who include more than 50 percent of Americans, could face years of relatively meager returns…”
The Information: SoftBank’s Vision Fund Posts $26.2 Billion Quarterly Loss on Stock Collapse
The Morning Brew: Billionaires’ wealth evaporates amid stock market plunge - The fortunes of Elon Musk, Jeff Bezos, and Mark Zuckerberg have each dropped by more than $50 billion as Big Tech shrinks to Medium Tech & the world’s richest 500 people have lost more than $1 trillion in net worth this year, according to Bloomberg data.
PitchBook: Venture capital is particularly susceptible to repricing given its high degree of exposure to young companies that will require significant growth to reach profitability - and given the surge in valuations over the past few years - late-stage valuations decline in Q1 as pressure mounts on VC deal terms
CB Insights: Silicon Valley Slumps - Layoffs have been announced at companies like Cameo, Peloton, and Robinhood. In addition, large tech cos like Uber and Meta have said they plan to slow hiring.
PitchBook: VC investment in the mobility tech space slowed from the blistering pace of 2021, dropping 35% quarter-over-quarter to $13.9 billion and 43% YoY.
Realities of the Situation - Macro Predictions
When we look at these data points alongside the incredible data system (we call it Ametrine) Azafran’s Data Team has amassed over the past 5 years, we then see the following realities and how it will affect VC and investing in general in the coming months and years:
Later-stage investors will see limited exits for their portfolio companies with exits via public markets extremely limited, and PE/later stage suitors focusing more on distressed scenarios - the high valuations even from just months ago, where there were $50M Series Bs, across the board these companies are now laying off employees.
There will be a lot of activity in the secondary market - with an opportunity to buy portfolios or funds at lower prices if they need liquidity.
Resulting in VCs in the mid to later stages of the market (i.e. invested $10’s and $100’s of millions or more) required to put more money into their existing portfolio companies and holding them for a longer than normal timeframe.
At the angel and seed stage, companies will struggle with MVP adoption by the market unless they are spot on - increasing the rate of losses.
The Silver Lining - Azafran’s Thesis
Even though we face a number of knock-on shocks (pandemic, war, rising interest rates, and dramatic inflation), when we look at periods of similar magnitude, such as the 2009 Financial Crisis, the highest performing investment vintages are always just after these rock bottom moments.
Azafran’s investment thesis emphasizes strategic efficiency and savings, with huge changes in workforce dynamics due to labor shortages, training challenges, and an aging workforce. Our focus and investments leverage technological efficiencies with voice, imaging, sensors and acoustics, driven by machine learning solutions delivered on the edge in healthcare and enterprise - this is our version of deep tech.
When taken together the following points leave us bullish on Azafran’s market timing and focus on companies & technologies that will improve the lives of communities worldwide through medical advances and helping create modern workflows and processes bolstering front line work and positions with technology solutions. To help bring this dynamic home, some additional data and context from the field:
Goldman’s Equities CIO Interviewed on Bloomberg: “So, themes that we’d focus on, just because we’re talking about innovation, the way we do we do this is we think about how’s the world going to change over the next decade, what are the big themes, and then obviously trying to pick the right companies within those themes…We also are interested in the future of tech, so the technology companies beyond the Faangs, down the market cap around the world. We like the disruptive future of healthcare and how that’s going to change the world.”
Investing in 2022 H2 Early Stage / Post Seed Driven by V.I.S.A.: As outlined above, seed and late stage investments face significant headwinds due to macro forces and a growing hangover from the recent period of frothy, sky-high valuations/investments. Azafran’s focus is on post seed/Early Stage investments where we pick the winners from seed and don’t need IPO/unicorn/hypergrowth baggage of late stage.
Azafran’s investment thesis focuses on delivering market-pulled machine learning + V.I.S.A. (voice, imagery, sensory, acoustics) solutions for the B2B/Medtech sectors. Building on trends outlined below, these solutions deliver savings of time, labor, communication, and expertise to these markets affected by labor challenges, training, knowledge transfer and technology adoption.
This Super Bubble is caused by basic market building blocks including real estate, food shortage, climate change, and commodities. Our strategy is laser focused on B2B, industrial and health-related efficiencies/transitions, investing in and helping scale companies fitting the technology transformation matching the needs of industry, enterprise and healthcare today, also providing a great source for exits.
Changing Workforce Dynamics a Huge Driver: This has been predicted for years, from the Great Resignation to employee shortages and challenges across the board including doctors, drivers, cooks, and servers. This dynamic, greatly accelerated by COVID-19, has created an urgent need for business and healthcare to automate as much as possible as the opportunities are upstream.
Supported by the advancements in technologies and science improving productivity, the benefits here for corporations are numerous. One example is the growing remote work trend (efficiency through less commuting, less or no office space costs. Another priority is the automation of jobs that people are not gravitating towards and offer little career advancement such as order taking, warehousing, logistics, and many other front line lower paying high stress jobs.
As we noted early on in this piece, the Azafran team is data driven, as we look for the trends and silver lining no matter the timing or crises. We have arrived at this prescient juncture not by accident but through methodical visioning and data driven processes over the past 5 years, pouring through the elements of technology, investment stage, macro trends and incorporating our collective experience founding, operating, exiting and investing in companies over the past 30+ years.
Yes - the world is in uncharted waters and unprecedented crises but we see amazing opportunity ahead and remain steadfast in our mission and vision at Azafran to make it a better world through disruptive, transformational technology. Next in our series we’ll take a deeper dive into particular areas and examples of the types of companies we’re investing in and that we see as game changers in the evolution of our society and global economy.