Observation Deck Highlights

May 2024

This Edition of the Tech Ecosystem Watchtower shares periodic highlights on tech news and research related to the Innovation Economy being followed in the world of Venture Capital & Entrepreneurship.

What I’m Reading this Month

Innovation Highlights:

This month, my interest is on the Gartner Emerging Tech Impact Radar, an essential annual resource that identifies and tracks technologies and trends with the potential to significantly alter various industries. It also evaluates the readiness of these technologies for commercial opportunities, with recent inclusions like Web 3 technologies demonstrating growing industry acceptance.

Here are the technology categories that have peaked my interest and will be observed this year:

• Smart World

(1) Spatial Computing (2) Digital Twins (3) Ai Avatars

• Productivity Revolutions

(1) Gen AI enabled Virtual Assistants (2) Model Compressions

• Privacy & Transparency

(1) Decentralized Identity (2) Privacy Enhancing Technologies

• Critical Enablers

(1) Tokenization (2) Web 3 (3) Blockchain

Insights:

Smart World: The most intriguing developments in the smart world segment are Spatial Computing and Digital Twins, often associated with the metaverse concept. While fully realized smart cities are a long-term, capital-intensive goal, more immediate advancements can be seen in the manufacturing, healthcare, and consumer sectors, with applicable use cases for airports, shopping centers, and hospitality. These sectors benefit from incremental integration of spatial data, the last key dataset that needs to be captured and processed in real time to enhance other technologies, promising a significant impact on societal development.

AI Innovations: AI avatars and virtual assistants are rapidly advancing fields. The evolution of these technologies is shaping the futurist concept of one-person companies, likely signaling a shift in business operations and the future of work. I am currently exploring the latest OpenAI release, which adds a practical assistant style dimension like Alexa and Siri.

Web 3 Evolution: Web 3 remains a prominent trend, and several underlining technologies—tokenization, decentralized identity, and blockchain—have evolved into distinct categories. This maturity reflects their broader adoption and increasing commercial viability, marking significant progress from concept to practical applications.

AI Model Compressions: This technology could transform the competitive landscape in AI by reducing cost barriers, thereby facilitating more productive innovation between startups and large established companies. The potential of advancement in compression could be incentivizing for competitive innovation in problem-solving with AI, rather than creating a competitive moat for the incumbents. Similar to the impact of cloud technology on software, which transformed SaaS by enhancing deployment and scalability. AI model compressions could offer comparable advantages, broadening access and utility in AI for startups and smaller businesses.

Market Highlights:

This month's market highlight returns to the LatAm region, focusing specifically on a fintech company based in Brazil. Insights shared on the potential impact of Fintech and this company across three countries, serving over 100 million customers.

Fintech Growth in LatAm: Brazil's Nubank Reaches 100 Million Customers (Original article renamed for English speaking audience.)

Insights:

Nubank, a leading Brazilian fintech unicorn, has achieved a milestone as the first digital bank outside Asia to serve over 100 million customers across Mexico, Colombia, and Brazil. This substantial customer base signals potential middle-class expansion and an economic surge in the formal sectors due to the integration of previously unbanked individuals into the financial system. The introduction of lower fees, faster transactions, and enhanced economic activity could significantly boost consumption and general commerce, benefiting everything from local niche SMEs to P2P services offered by individual proprietors.

This expansion has the potential to enhance buying power on a large scale, creating more economic opportunities. The broader implication for the global SaaS market is the potential increase in businesses and startups able to sell SaaS products at more cost effective offerings, rather than relying on reduced pricing strategies aimed at achieving minimal customer scale.

A recurring challenge in international expansion is the high cost of SaaS, which frequently fails to meet the pricing needs of emerging markets. This mismatch requires rapid scaling to maintain viability at low price points. Companies often target populous countries despite pricing barriers, aiming to achieve sufficient market share to offset market development costs. The issue here is that high populations with low purchasing power necessitate acquiring a larger market share, and this must be accomplished swiftly to avoid the need for additional in-market capital expenditure. In theory as more individuals gain access to banking services, the purchasing power in these markets is expected to rise, potentially alleviating these pricing difficulties over time.

Investment Highlights:

This months investment highlights are:

1. Canada's Capital Gains Tax-Budget 2024
2. Venture Fundraising Projections
3. Corporate Venture Capital Canada

Insights:

1. Capital Gains Tax Changes in Canada and its Implications:

The proposed revisions to Canada's capital gains tax could pose challenges for startups and venture funds by discouraging Limited Partners (LPs) from reinvesting in Canadian funds. These changes may also affect angel networks, pushing investment strategies to favor global engagement similar to trends in the crypto and DeFi markets.

Furthermore, Canada's Tech Network Budget 2024 Consultation Report reveals a significant rise in founder taxes—182% higher than in California and 821% higher than in Texas. This prompts a crucial consideration: might relocation to lower-tax jurisdictions be a feasible strategy for the future of Canadian investors?

For more details, visit: How Canada’s Capital Gains Tax Changes Might Impact Canadian Tech .

2. Venture Fundraising Projections:

According to PitchBook, venture fundraising is projected to undergo a slow recovery, potentially not returning to previous levels until the end of the decade. In 2024, VC firms are expected to raise less than $200 billion, a 48% decrease from 2021. Furthermore, the annual growth rate is expected to remain at a modest 2.9% through 2028, significantly trailing other private capital strategies.

Given the macroeconomic factors, a downturn in fundraising is unsurprising. However, to attract more capital, those seeking funds may need to refine their investment thesis and explore new geographical markets. Fundraising challenges are not uniform across all markets; the global economy presents diverse opportunities. This projection underscores the necessity for adjusting strategies to align with market conditions.

Venture fundraising may not recover until end of the decade - PitchBook

3. Corporate Venture Capital in Canada:

The corporate venture capital (CVC) landscape in Canada is witnessing a downturn. From 2019 to 2023, seed and early-stage deals consistently accounted for 79-86% of all transactions. However, in 2023, there was a significant 40% reduction in CVC involvement in Canadian-headquartered VC deals, with foreign investors, who traditionally spearheaded these activities, either withdrawing or shifting their focus elsewhere. Currently, only 30 active domestic CVCs are present, indicating a preference among these entities for limited partner (LP) positions in funds with direct investing rights, rather than making direct investments in startups.

This situation creates a challenging environment for emerging managers and necessitates a strategic reassessment for startups and LPs monitoring capital deployment. Stakeholders must decide whether to intensify their commitments or reduce their losses in response to the prevailing market valuations and recent VC fund performance trends.

The significance for founders is that they might be better off focusing efforts on other funding channels and according to the chart below, foreign CVCs might present a better opportunity for acquiring funding as well as a liquidation path.

Conference Summary:

• NACO Canada

This was the first in-person conference from the National Angle Capital Organization in Ottawa. Much of the conversation was focused on the 2024 budget announcements. It was a good event to connect with some less than familiar markets and angel groups across Canada.

• Canadian Venture Capital & Private Equity Association | CVCA

The annual Invest Canada Conference took place in Montreal this year. It had been a few years since my last attendance, and it was refreshing to meet colleagues and new faces from the venture and private equity sectors. A recurring topic of discussion was the potential impact of the proposed increase in the Capital Gains Tax to 67% as outlined in the 2024 Budget, particularly concerning its implications for Canada’s investment and innovation landscape. Concerns about the economy's negative productivity, along with discussions on how competition and innovation might adapt moving forward. Notably from one panelist, there was an observation that the SMB market could be contributing to lower productivity levels, suggesting a need for more large firms and increased digitization from the ground up. Despite these challenges, there was also some optimism regarding potential rate cuts this year. Overall there was excitement about technology investments, but cautious optimism for risk capital incentives in Canada for both investors and entrepreneurs.

Investment Sentiment:

The central discussion at both conferences focused on the investment climate in Canada and the potential effects of the Capital Gains Tax. The overall sentiment indicated that the short-term investment outlook in Canada is likely to be challenging.

Upcoming Conferences & Events Attending:

Collision Conference 2024

Beyond Blockchain: Driving Digital Markets:

Candid Capital Podcast Highlights:

Innovator's Forum Hybrid Event Recap:

The Candid Capital Podcast Presented "Tokenomics for Startups & Investors: Navigating the Web 3 Future."

Full Playback is available via Candid Capital Channels.

Candid Capital Podcast Spotify

Upcoming Episode:

Stay tuned for the next episode you can learn more about the Candid Capital on the LinkedIn Page?Candid Capital

Thank you for reading and share your thoughts on topics in the comments!!