Sprint Ventures 2022 Investment Trends

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Tristan Latcham
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Last year, we talked about 2 key trends that we expected would shape Australian VC in the second half of 2021. The first was ecommerce, and the second was cleantech.

Both of these industries had strong finishes to the year, with notable investments and exits including Brighte’s A$185m debt note and Airwallex’s A$275m, A$137m double barrel raise.

These are monumental transactions that reflect not only the impressive performance of ecommerce and cleantech, but also the growing ability for home-grown VC companies to rapidly raise large amounts of capital.

Moving into 2022, the Sprint team has reflected on the events of 2021, and looked to the future to identify the thematics that we believe will headline the year-end wrap ups in 12 months time.

Thematics For 2022

  • Web3, Metaverse cross pollination
  • Climate tech (cont.)
  • Food quality and security
  • Deal pressure

Getting Hands On With Web3 And The Metaverse

It is to be expected that in a future-focused blog post such as this one there will inevitably be some reference to the much talked about Web3 and Metaverse developments. Whilst these are not necessarily new concepts, their recent traction has taken these ideas to the forefront of mainstream media. Transactions like OpenSea’s recent US$300m raise, which valued the business at over US$13bn, are making headlines and driving public discourse. Adding further fuel to the fire was Facebook’s decision to rebrand to Meta, in order to orient itself towards a fully digital way of experiencing reality. These moments have in turn created a wave of innovation.

Whilst Web3 and the Metaverse are by themselves potentially paradigm shifting innovations, at Sprint we believe some of the most impactful developments to come from this new wave of tech are the ideas to be found at the intersections between existing industries and these new ones. Some of these crossovers have been in development for several years, and in 2022 we expect these partnerships to strengthen and accelerate.

The healthcare industry has long been a rapid adopter of technologies that are now being dubbed Metaverse-related. In 2020, augmented reality (AR) headsets were introduced to the operating theatre by John Hopkins neurosurgeons, who performed several AR assisted surgeries to great success. Augmedics, the company that created the headsets used in the surgeries, raised US$36M last year. The headsets provide surgeons with a 3D display of their patient’s body scans in their immediate field of view, relative to the area of operation. This augmented vision allows surgeons to more easily access the information that they need, and apply it to the surgery at hand.

We believe that this trend of virtual reality in healthcare will accelerate in 2022.

Whilst augmented vision found a natural home in physical medical procedures, we anticipate that a key area of growth to come from the intersection of healthcare and the Metaverse will be the personalisation of tele-health.

Already, startups like Eucalyptus are showing how powerful traditional tele-health can be if it is marketed correctly. We believe that a natural extension in this space is the incorporation of virtual reality consultations to deliver more meaningful healthcare assessments for people in their homes. Whole industries like physical therapy could be revolutionised by taking a digital check-up call from 2D to 3D. This would enable accessible demonstrations of exercises, patient gesturing to indicate areas of discomfort and perhaps most importantly, a feeling of personal connection. As the Metaverse brings VR into the mainstream, we anticipate to see many great VR healthcare businesses being built in 2022.

Where companies like Augmedics utilise AR technology to provide overlays for the physical world, the Metaverse as a concept is being constructed with a vision of creating deeper virtual experiences. Education represents an industry that could be heavily disrupted by this development with new avenues for student engagement opened up through virtual reality. This possibility was a key component of Facebook’s rebrand, with Meta’s chief business officer, Marne Levine, highlighting how VR could revolutionise the learning experience. In Meta’s original promotional video, a student is shown floating through the solar system to demonstrate the potential of Metaverse based education.

We see the lasting impacts of Covid-19 as a catalyst for the continued digital transformation of the education sector. In particular, we think educators will be more open to the possibility of teaching in a virtual setting after having spent much of the last 2 years operating through Zoom. We anticipate that this environment will be more conducive to the creation of VR Ed-Tech companies looking to make a start in 2022.

A fun case study of Web3 cross pollination seen closer to home is the recent announcement from the Australian Open that the tournament will feature NFTs. This year, viewers can purchase NFT tennis balls that correspond to 19cm quadrants of the AO tennis courts. If a winning shot lands on a given quadrant, the NFT associated with that area will have its metadata automatically updated over the course of the tournament. Additionally, if one of the 11 championship points hits an AO NFT owner’s 19cm square, they will be given the winning tennis ball. Accompanying the NFTs is Decentraland, a Metaverse style recreation of the AO precinct, which will enable people from anywhere in the world to explore the tournament grounds.

We believe that the AO’s investment into Web3 and the Metaverse will act as a signal of authenticity for these new projects, and prompt other organisations to consider similar experiments. Sports teams and event organisers are constantly looking for new ways to keep pace with the latest trends in order to bring in new revenue and improve their brand presence. In 2022, we expect that the AO’s investment will spur on a wave of similar projects in the sports industry. For an example on the near horizon, we anticipate that the 2022 Soccer World Cup will feature a Web3 or Metaverse related project of some kind.

We are excited by these developments that represent innovation driven by the crossover of great ideas from new and emerging fields. We expect this trend to continue into 2022, with new ways of applying the advancements from Web3 and the Metaverse to existing industries being discovered at an increasingly rapid pace.

Heating Up Climate Tech VC So We Can Cool Things Down

Last year we talked about green technologies, and this year we are still talking about them because they resonate so strongly with our passion for building a better future.

More specifically, we expect climate tech to continue to be a mainstay of VC in 2022. As a refresher, climate tech is anything that provides solutions to climate change and its associated problems. This can be directly through emissions reductions technologies, or indirectly through technologies like satellites that allow us to better understand meteorological patterns.

Climate tech now accounts for 14 cents of every dollar invested by venture capital firms, world wide. As we discussed last year, this is not a new cycle, and many investors will be wary of piling into the industry that produced many failures in the early 2000s. Despite this, we still believe that climate tech is a trend worth backing, and the signs from the market are overwhelming in the same direction. VW’s recent announcement of a US$355m fund exclusively for decarbonisation projects is further evidence of this accelerating market theme.

The market evidence behind decisions like VW’s is compelling. Energy Impact Partners maintains a climate tech focused index of publicly traded companies, and for the last 2 years it has consistently outperformed the Nasdaq by a healthy margin.

Source: Energy Impact Partners

This is evidence of the profitability to be found in the climate tech space. Gone are the days when a company like VW would back in green technologies solely for good PR – it is now approaching economic necessity. We expect this green trend to continue this year, and we are committed to finding the best companies with the most dedicated founders in this space.

An area within this space that we are particularly excited about for 2022 is water.

Water startups span the full cycle of capturing, retaining, managing and distributing. These companies fit into the climate tech space as a reaction to the growing temperatures induced by global warming. There are strong connections between drought frequency and intensity, and global warming, and this in turn means that water will become an increasingly precious commodity.

As a result, we expect that effective water management will become an increasingly critical area of technological development, and this represents an opportunity for impassioned entrepreneurs to help preserve our most basic necessity. We proudly champion our portfolio company Leakster within this space, an AI driven startup that is tackling the problem of water leakage in large scale water transport infrastructure. In 2022, we hope to find additional businesses like Leakster that is working to build a better future within the climate tech space.

Food Supply Chains Are Stopping Us From Eating The World

Last year in late November, Svein Tore Holsether, CEO of Norwegian chemical giant Yara International, spoke at COP26 and warned of an oncoming food crisis.

He pointed to highly inflated fertiliser costs, driven by increased gas prices, as the cause of the problem. Developing economies have so far been hit the hardest, with many independent farmers left unable to afford sufficient quantities of fertiliser to tend to their crops. Nepal is one such country that has struggled as a result, with many expecting that the impacts of the current crisis will affect crop production into the middle of this year.

The propagation of events from gas prices all the way to food production in Nepal speaks to the degree of interconnectedness seen in the modern food supply chain. Moreover, this sequence highlights the weaknesses that can be bred from an over-reliance on imported production inputs. This is a message that was reiterated throughout many industries last year, as Covid-19 tested our backup plans when regular shipping partners shut their doors. We believe shifting consumer sentiment towards home grown produce and reliable delivery lines will make food quality and food security key focus areas for Australian VC over the next 12 months.

In particular, some of the most innovative work to be done in this space will come from changing our relationship with groceries. A number of startups have already gained significant traction by cutting out the traditional grocery retailer and providing rapid food delivery with goods sourced directly from local suppliers. The Dutch startup Crisp is one such business that promises fresh groceries and low fees and last year Crisp raised €30m in a new wave of “ultra-fresh” food delivery. Meanwhile, Italy’s Cortilia raised €34m under the masthead of being Italy’s “first online agricultural marketplace”. These services improve supply line reliability, as each new startup brings with it a wave of investment into ensuring that fresh produce can seamlessly be collected from farmers and delivered to consumers.

So, Where Does This Leave Australia?

Australia is somewhere between six to twelve months behind Europe and the US when it comes to the trend of supermarket disruption. We already have several pure-play grocery store delivery startups that are attempting to replicate the success of international giants like Gorillas and GoPuff; companies that offer on-demand grocery and snack delivery services. Voly, Geezy Go! and Send all launched last year with a view to capturing a share of this market. However, until these players are able to establish their own supply chains, they are still reliant on the likes of Coles and Woolworths.

In our view, the value that can be found in this space is in the revitalisation of farmer to consumer relationships through technology. The fresh delivery networks championed by the aforementioned Crisp and Cortilia are needed in Australia, in part to destabilize our domestic grocery duopoly, but mainly to return power to agricultural communities. A competitive market for direct access to farmers will provide farmers with more autonomy, and in turn create incentives for the continued production of local produce. This will not only strengthen domestic supply chains, but also increase our food security by keeping farmers in business with healthier margins thanks to the degradation of Coles and Woolworths’ market power.

A business case with hugely positive externalities, supported by IoT tech solutions, is bound to draw attention from budding entrepreneurs.

Right on queue, Sydney-based startup Milk Run launched late last year and recently closed a $75M round. Milk Run sources produce directly from Australian farmers and delivers goods to customers via their team of e-bike riders. We expect this trend of farm-to-the-family to accelerate in 2022, providing local farmers with more options, and strengthening domestic food security prospects.

The US VC Market Is Feverish, And We’re Next Up

On the other side of the deal table, we expect that in 2022 the Australian VC market will become increasingly competitive. This expectation is driven by the activity we are seeing in the US market, which has historically been a useful indicator for how the Australian VC industry might progress.

So what are we seeing abroad?

US venture funds are now fiercely competing for deals, as opposed to seed stage companies competing for investment. Last year, VC funds in the US raised $96bn, the largest ever amount raised. Going back just 4 years to 2017, this amount was $45bn. This rapid increase resulted in the average amount of capital raised by seed stage companies increasing from $2m in 2020 to $2.7m in 2021. This represents a 35% YoY growth rate, nearly double the historical average of 18% over the last 8 years. Even more alarmingly, across the same period early stage and late stage deal sizes increased by 43% and 65% respectively. In short, the US is awash with capital.

Source: PitchBook

This rapid capital growth is leading to American VCs shortening their due diligence timelines, and accepting higher valuations, as they try to compete with other VCs and land good deals. Job van der Voort, co-founder of Remote, recently raised an incredible US$150m on a $1bn+ valuation. He spoke with CNBC late last year and said that he “could have named almost any number and we would be able to raise the amount of money”. In a similarly concerning vein, TX Zhou, co-founder of US VC Fika Ventures, stated recently that he had heard of funds “making decisions after a 30-minute call with the founder”.

When term sheets are being passed around after an initial meeting, things begin to look bubbly. This is clearly a fantastic period for innovative companies in need of capital, however it does paint a concerning picture from the outside looking in.

What Does This Mean For Australia?

While we are a ways away from the fierce competition seen overseas, it is almost certainly an unavoidable future. The recent success of home-grown unicorns like Canva, AirWallex and Go1 will undoubtedly lead to the foundation of more domestic VC firms. The fly-wheel will begin to spin faster, and deals will become funded more easily.

Contributing to this acceleration is the expectation that US venture firms will begin to take their capital abroad in search of cooler markets with more reasonable deal cycles. PitchBook, the US based private company data vendor, expects that in 2022 more US investors will take their money overseas than ever before. It is our hunch that a chunk of that money will make its way to Australia. This is a natural extension of the activity we saw last year. For instance, Octopus Deploy’s US$172.5M raise from Insight Partners showed the appetite of deep-pocketed American investors for Australian startups. We expect this kind of activity to continue.

At Sprint, we welcome this change, as it means that the best companies will be able to more easily find the capital they need. Moreover, these conditions will hopefully encourage more brave individuals to take the plunge and start what could be the next Dropbox, Airbnb or Twitter. However, it will also mean that as timelines inevitably shorten, high quality due diligence will become increasingly important. In response, this year at Sprint we are very excited to be growing our investment team so that we can continue back great founders with bold ideas, even as our backyard market starts to heat up.

Sprinting Into 2022

Turning away from what might be, and instead focusing on what we can control, this year we will continue to maintain an unwavering focus on our mission: finding great founders and helping them to create the next wave of generational companies.

With our Expansion Capital Fund continuing to attract investors seeking Alpha, we are excited by the prospect of deploying this fresh capital.

This year, we will aim to lead more investments, and continue to provide follow-on funding for the game changing companies that are already in our portfolio.

More than anything, we are looking forward to mentoring and supporting the great founders and their teams who we are so lucky to work with. We are at the starting line of an incredible year, and we are ready to sprint!