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VC is not Broken, When You Make It Right

In his compelling essay "What Happened to the Future" (Fall 2022), Bruce Gibney of Founders Fund takes a closer look at the current state of venture capital (VC) investment. Gibney observes that over the decades, VC has experienced a decline in average revenues, which have been negative since the early 2000s. Once a driving force behind game-changing technological breakthroughs that created entirely new industries and cultural shifts, he views today's VC as funding what can be described as "app features," something far from disruptive.

Let’s see whether VC is that broken.

Does VC underfund crucial industries?

Gibney believes that several major industries are underfunded: aerospace, transportation, biotech, AI and robotics, cheap energy, to name a few. These sectors promise breathtaking shifts in everyone's lives and could be funded more consistently: "...these technologies never received the sustained funding lavished on the electronics industries." Thus, he compares their funding to computers and communication technologies, the industries that he presents as receiving generous "sustained funding."

The end of 2022 saw AI making a huge leap acknowledged in the public space, and it can hardly be considered stagnant due to the lack of funding. The way AI integrates into our lives is truly exceptional.

However, let's also examine other industries. We can agree that we are still waiting for major advances in these fields, but it is not technically accurate to say that they are underfunded. For example, in the US, between 2013 and 2022, the IT hardware industry received $52 billion in VC funding. Compare this with some of the industries Gibney labels as "underfunded": the transportation sector receiving $66 billion, pharma & biotech receiving $189 billion, and healthcare services, systems, devices, & supplies attracting $166 billion during the same period (PitchBook-NVCA Venture Monitor, 2023).

These industries have indeed received substantial funding. The reason we are still waiting for breakthroughs is that these challenges are genuinely difficult, and humanity has naturally encountered significant obstacles. Recall the development of AI: for decades, mankind struggled with advancing it, without any progress visible to regular people. Now, we see AI on the brink of passing the Turing test, where one cannot tell if they are chatting with a human or an AI. For the general public, this was rather unexpected, but experts have observed this evolution and the slow accumulation of knowledge that preceded the AI explosion in 2022.

Perhaps other industries are like that as well, not "stuck" in place but making small steps to suddenly leap forward. We don't believe that humanity as a whole could "overlook" potential shortcuts so easily. The need to do the hard work, accumulate data, and acquire knowledge to fuel this leap is something we must go through.

In the meantime, let's, as a VC fund, focus on what we do best: funding the future yet to come. I will briefly outline the strategy that we follow at Joint Journey to achieve that.

Investment Strategies – How to?

Let's take a look at some of today's examples of "good" venture deals in the market, the kind of investments that are moving humanity forward with ambitious and market-disrupting tech. Microsoft's investments in OpenAI are a prime example. When Microsoft started investing in OpenAI in 2019, it was a wildcard. But today, OpenAI has proven to be a disruptor by packing a complex technology into a product accessible to many. There are other good examples out there.

So, what's the right way to bet on a good horse? One thing to start is that betting on just one horse is a surefire way to fail. As a high-risk investment, venture capital naturally demands that you diversify your risks and embrace failure as part of the process. Not all products and companies will succeed, we should consider that. Take Meta's Reality Labs division developing AR/VR, which lost about $13.7 billion in 2022 and now is laying off thousands of employees. Still, the extended reality market size is expected to grow. However, this short-term "failure" is just one of Meta's many projects, some of which may be moonshots.

Another part of our strategy, vision, and conscious choice is investing in long-term game-changers. The hype of the startup environment tempts many investors to play on the temporary growth of ephemeral, over-valued products and features, on market bubbles, hoping to fix overwhelming profits before the bubble bursts. Even if not to talk about how this way of action destabilizes the market, we don't see this as a valid revenue-gaining strategy. It won’t bring you long-term revenues. We believe that the essence of venture capital is still looking for technology that can truly shape everyone’s habits and change the future in a meaningful way.

Technological Companies to Choose

When it comes to choosing technological companies for venture investments, I like the criteria Gibney suggests:

  • The best targets for investment are unpopular, partly because their technologies are difficult to assess. Investing in popular companies is, on the other hand, more expensive.
  • The proposed technology is risky to some point, in a sense of the risk of failure. A lack of risk is often associated with a lack of ambition.
  • Successful technologies have the potential to create entirely new markets, and uncover previously unknown global demand.
At Joint Journey, we evaluate startups strategically, focusing on either their potential for disruption and game-changing impact or in their solid operational functionality. While the recent crypto winter, military conflicts, economic crises, and layoffs in large IT companies discourage some investors, we believe it's still worth investing in companies that work towards long-term solutions for overcoming economic downturns. In the toughest times, there are always teams and solutions with the potential to make a real difference.

Granted, making investment decisions in today's rapidly evolving technological landscape is more challenging than it was decades ago. The complexity of technology and the complications of online service delivery have made business models even more intricate. However, despite these challenges, sound venture deals continue to happen, and tomorrow's breakthroughs continue to be funded. While every investor has their own goals, we firmly believe that if there's an opportunity to change the world for the better, it's essential to seize it.

Anyway, VC investment is the fuel on which progress takes off. And it requires the inspiration of entrepreneurs, VCs and scientists' time. And you can see how much time, effort, and enthusiasm of entrepreneurs and scientists were invested in making AI breakthroughs happen in 2022. We should take big time cycles and look further. Super-cycles are emerging, and there's a super-cycle of web3 and AI, and then there's biotech, IoT and robotics - we're expecting a lot of change there.