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Navigating the Storm: Market skepticism towards technology companies is high & painful...


Market skepticism makes it all feel very lonely
Navigating the storm: it's a lonely place...

As we enjoy the last few weeks of summer, the private technology sector finds itself in a prolonged 18 month crisis of confidence. I wrote much about this to our investors in 2022 and the negative sentiment continued during the first semester of 2023. One might even argue that it has gotten worse. Pessimism, now bordering on skepticism, has been the story of the first semester of 2023.


No doubt, our industry is hurting. Despite large public technology stocks rebounding significantly during the semester, none of this optimism has yet to flow to small/mid cap public stocks, the closest proxy for privately held companies. As a result, venture backed companies remain stuck in a very challenging environment: capital is scarce, deal volumes are down and exits are virtually non-existent.


Add to this the madness surrounding Artificial Intelligence or “AI” and the picture is even more blurry. Will it be broadly consequential or just one more fad embraced by the tech industry such as Crypto, NFT or the Metaverse to name but the most recent?


For my part, I firmly believe that AI will be transformational, but it will take time. To say that the launch of ChatGPT freaked out the industry would not be an overstatement. It demonstrated the power of Large Language Models but also raised existential questions, many of which are contributing to the current market sentiment.


Things will, of course, get better, they always do. In the meantime, the work we have done in the past 18 months with our portfolio continues to pay off as the leaders of the companies have responded brilliantly to a changing environment. The stars of the portfolio are adequately capitalized and performing well while most other companies are rigorously managing their costs, biding their time. Efficiency, unit economics, cash-flow management and profitability have been the dominant stories of the past 6 months. We expect this to continue well into 2024.


No doubt entrepreneurs are shellshocked and navigating the market skepticism is painful. We are now 3.5 years into a period in which they have had to deal with so much more than just building their companies. From Covid to a significant economic downturn, the last few years have taken a heavy toll. The industry will be paying the price for years to come. Slower growth and more cash tell the story of lost opportunity as most companies come to recognize that everything will take a few years longer.


Of course, it is important to note that the technology industry is operating in a global market and subject to a number of external factors, many of which are beyond anyones control. More specifically, consider the following:


Liquidity


In the short term, liquidity will be difficult. The lack of IPOs in 2023 compounded by a dormant M&A market suggest liquidity constraints will continue in the foreseeable future. While we have a definitive list of salable assets, the current market conditions suggest that little will change before 2024. The rare exception in 2023 will be the vibrant secondary fund market.


Public market “comp”


While large public technology stocks have rebounded significantly during the first half of 2023, small/mid cap stocks, the proxies for privately held companies, have not. Venture backed company valuations will likely not improve until public markets lead the way. While the AI madness may well help the markets overcome their pessimism in the mid-term, patience and superior execution remain the short-term constants.


The labour market


The great Working From Home or “WFH” experiment is coming to an end. Across our portfolio, we are seeing a significant backlash to WFH from CEOs because of perceived loss of productivity. For the most part, these companies are moving to 4 days of obligatory presence. No doubt, this is being facilitated by a soft employment market.


Patience and stellar execution are the story for the second semester of 2023 with 2024 the year when capital and liquity will return to the market. Skepticism towards private technology companies will start to wane this autumn as the small/mid cap public stocks regain favour by demonstrating that they have done what was needed to become profitable growth companies.


The end is in sight, stay focussed on the prize...



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