Reflecting on BioFuture & value-based care

I had the pleasure of speaking at the BioFuture in New York City earlier this November. During our panel, while discussing ways to innovate commercialization routes in healthcare, we highlighted that there’s a renewed sense of excitement for value-based care. 

Our moderator, Beth Rogozinski, CEO of Oncoustics, a portfolio company of ours developing full liver diagnosis and screening AI solutions, shared that the latest quarterly report from One Medical had some surprisingly positive numbers on their value-based business.

Fee-for-service vs. value-based care

To give a quick background on the matter, U.S. healthcare has historically been based on a fee-for-service model, where healthcare providers get paid based on the quantity and type of service performed. The amount paid to them is more or less fixed by the payors, like private insurers, Medicare, or Medicaid. 

The obvious problem here is that the fundamental system “rewards” the quantity of care rather than the quality of care realized by patients. Because of this setup, costs of care have skyrocketed.

And despite the higher spending per capita than any other country in the world, quality of life is generally tracking very poorly. 

Source: Peter G. Peterson Foundation (2022)

It’s no secret that the U.S. healthcare system is broken. Thus, the drive toward a value-based care model had been in the spotlight for quite some time. Logically, it makes sense: payors would be paying providers based on the quality of care provided to patients. Though practically, it has been a major uphill battle. As of 2022, value-based care only makes up 5 – 15% of medical revenue. 

One Medical, its latest capitated revenue report, and what it means for value-based care

So, what’s exciting about One Medical’s latest financial report? Their capitated revenue, derived from Medicare Advantage managed care payments, grew from 8% to 50% of the total net revenue. This revenue stream rate is predetermined by Medicare; it is a flat fee per patient, therefore encouraging providers like One Medical to optimize for costs while meeting the standard for patient care. Under such a program, providers are less likely to go on a spur to order unnecessary procedures since the expenses will come directly out of their pocket. Vice versa, any “savings” they could achieve will be realized as a profit. On that note, their managed care program has been profitable: expenses were only ~80% of the capitated revenue, leaving ~20% on the table.

The next promising piece of information is that the capitated revenue reported here was derived from only 5% of One Medical’s members, a group called “at-risk” members, who are 65+ and covered by Medicare. The implication here is that the small (but growing aging population; underrepresented in One Medical membership) generates an outsized revenue for One Medical, while the remaining 95% of the membership and others made up the rest.

Stepping back, this may have less to do with value-based care but all the more to do with an aging population and chronic diseases—one of our three core investment theses—but it’s reassuring to see the data all the same.

Source: Rebecca Pifer, HealthcareDrive (2022)

Overall, the trend is certainly encouraging for the value-based care model, though it’s worth keeping in mind that One Medical seems to be an exception to the rule in comparison to the overall healthcare system.

Is the value-based care business model investible?

Now, turning to the obvious next question, would we invest in a company that solely goes after a value-based care model?

It depends, but likely not.

One of our core investment approaches is to invest in a company that addresses the most critical problems that stakeholders are willing to pay for today. While it seems like the market is moving toward value-based care, providers that operate under such a model are still in the minority today and, truthfully, likely still be in the minority in the timeframe we care about.

Turning the table around, I would question why can’t a company start off by going after fee-for-service, where the majority of the market is operating now, and by all means, expand to value-based care when the business is stable enough and has the resources to do so. There may be an exception if the company’s market is disproportionately in the value-based system. In which case, sure, it might make sense, though whether the market opportunity is sufficiently large and therefore, venture-backable needs to be thoroughly convincing.

3 Mistakes to avoid as an emerging manager (TechCrunch)

“While there’s no one right way to go about fundraising, there are a few wrong ways — and failure is a wonderful teacher. Here’s how I learned from my failures in order to succeed as an emerging manager:”

– Champ Suthinpongchai, 3 Mistakes to avoid as an emerging manager

Read the full article on TechCrunch or download it here.

Venture capital geopolitics and China, pt. 2

In addition to COVID accelerating the slowing GDP for China, recent U.S. policy has been made aimed squarely at crippling China’s growth at its core. 

The $53 billion CHIP act aims to bring semiconductor manufacturing infrastructure back onshore while the new U.S. export controls bar western suppliers from selling not only chips but semiconductor manufacturing equipment to China. 

Many have pointed out that cutting China off from U.S. chips will only accelerate China’s independence from the U.S. semiconductor ecosystem, but the new export control aimed at its manufacturing capability by barring Chinese companies from being able to build its fab to begin with. Semiconductor fab is one of the most difficult manufacturing technologies in the process. It would be extremely difficult for China to catch up to U.S. chip technology without the fab equipment. 

There is no stability without sovereignty

Most people do not know that the official name for Taiwan is the Republic of China. Without going into the entire history, Taiwan was once a formal part of China, hence the name. In China’s eyes, Taiwan is still part of China; they just broke away when China was economically and militarily weak. 

Taiwan is, therefore, a threat to China’s legitimacy—and subsequently the CPP— because it would require that China accepts a territory breaking away from its sovereignty. The country absolutely cannot do this for fear of other territories breaking away. 

This culminates in Taiwan reunification as a requirement for achieving “China Drew” tied to CCP’s long-standing goals for 2049, the 100th anniversary of the PRC’s founding.

To top that off, there has not been a consolidation of power seen in Xi for decades, possibly since Mao Zedong. Few are in a position to stop him from any rash decision, and a lone man with a multitude of unchecked power is much more likely to start a war than a group of people sharing a balance of power. 

There are three likely outcomes

Knowing what is important to China and the outside forces that continue pushing it toward a less-than-favorable position, there are three likely outcomes:

1 – China is subjugated, and there is no war because there is no point in invading Taiwan. 

China has grown into a global economic powerhouse that could feasibly challenge the U.S. So, while it still lacks in terms of military power compared to the U.S., the economic gap has been steadily reducing over time. China is closing in on the U.S. 

2 – China surpasses the U.S., invades Taiwan, and the U.S. does not intervene.

In this scenario, the geopolitical world ultimately transitions into China’s hegemony. This could happen if China is left unchecked, but obviously, this has not been happening while the U.S. continues doing all it can to keep China in check. 

3 – China and the U.S. force each other into a stalemate.

Should the US and China go into a long battle of attrition, the finale would only come until one side decides to act more aggressively or both sides find a way to peacefully coexist. 

Personally, I believe the third scenario is most likely. Should it occur, it is much more likely that China will be forced to act as they seemingly have more to lose.

Is all-out war inevitable?

It can be argued that we already are in somewhat of a stalemate, with the U.S. having somewhat of an upper hand. Still, this perceived upper hand could change over time, and if it does, we will eventually end up in the second scenario. 

But what is more likely to happen is that China will continue to be at least semi-subjugated to where its economy is suppressed enough for the general public to begin questioning CCP’s strength. The growth required to continue distracting the public under ongoing conditions is much too high. The equilibrium at which China could continue to grow enough to keep its citizens distracted and happy without surpassing the U.S. likely does not exist. 

It’s most likely then that China will go to war, but not as a means of demonstrating sovereignty, but as a means of preventing the total collapse of the CCP. Still, in order for CCP to maintain its power, stability and sovereignty will be used as propaganda to justify going to war. 

The result? The citizens of China remain unified while Xi and the CCP remain in power. After all, war creates a common enemy that binds countries together and a distress situation that requires continuity of leadership. 

What do VCs and founders need to do?

The long and short of it is this: pick a side and build your business and supply chain around it. 

While it is possible that the U.S. and China will eventually figure out how to co-exist together peacefully, current global conditions suggest we are on a long and winding road towards that reality—or a short and fast highway to WWIII hell. 

Until China decides which road to take, however, we are most likely to endure a long battle of attrition between both sides. The geopolitical world will be divided into Team U.S. and Team China, making it impossible to predict the extent to which geopolitics will ultimately intervene with business as usual. For all we know, there could be another export ban in another industry or another sanction might be put in place that increases costs. 

As venture capitalists and startup founders, all we can do is understand the situation and choose the right people to work with. No matter which “team” you are on, it is best to build your critical infrastructure and business relationships within your team or risk your business becoming totally disrupted. 

For all we know, tomorrow’s war could have already started today.

Venture capital geopolitics and China, pt. 1

As Xi Jinping officially begins his third term, the geopolitical tension between the US and China rises to another level. During the 20th Party Congress, Xi used language that suggested a possible accelerated timeline of a PLA invasion of Taiwan, an act that could very well lead to World World III. 

For now, the possibility of a third World War remains slim as the dynamics behind such an event depend on an ever-evolving situation. 

As venture capitalists and founders, this period of uncertainty is a great time to understand the issue in deeper detail so that we can make the right decisions should the global geopolitical climate take a turn for the worst. 

2027 was my original armageddon projection

If you asked me 12 months ago, I would have told you that I expected 2027 to be when World War III started—that is, the invasion of Taiwan. After all, this would mark the end of Xi’s third term, and a world war would be a hell of a good excuse to remain in power. 

Moreover, bringing Taiwan into China’s fold would also mark an accomplishment that would complete Xi’s career and ideals. It would cement his name in China’s history forever.

2020’s pandemic determined that was a lie

It’s no question that the COVID pandemic derailed the world at large, but it truly threw out Xi’s plans for infamy. 

While China seemed to be doing extremely well during 2020 and most of 2021, the country’s lack of COVID policy worked economically until it absolutely didn’t. Outbreaks began to spread in China, forcing the country into a strict lockdown in XX and sending its economy into a downward spiral. 

2022 has been a rough year for China

After the country’s strict lockdowns, China’s GDP growth fell well below the adjusted 5.5% target. 

In 2Q2022, China grew by 0.4%. Then, its 3Q2022 GDP growth data was missing—or rather, delayed—for a week, before officials reported a 3.9 % increase in GDP in one year. 

If you’re left wondering about the integrity of this data, you’re not alone. 

China’s economic decline is right on schedule

Since 1978 when China began to open up and reform its economy, GDP growth has averaged over 9 % per year. More than 800 million people have lifted themselves out of poverty. In the early-to-mid 2020s, its GDP was expected to exceed that of the US. 

Figure 1. China’s Gross Domestic Product between 1995-2027, Statista

Still, China’s growth engine has been slowing down over the past twenty years. By the mid to late 2020s, China’s growth approached that of a developing country. Regardless of covid, China’s growth will inevitably slow down. 

Figure 2. China’s real GDP Growth between 1960s-2020s, Wikipedia

Xi must make choices that keep China unified

As capitalist economies, the US and other western countries generally fail to understand that China’s biggest challenge over thousands of years has always been about domestic stability. 

Imagine for a second that Europe was united as one country. The diversity of each “state”—given the differences in language, culture, and belief systems—would create a tremendous challenge to hold the country together as one. 

China is what that road to success would look like in that it has unified all its lands as one. The challenge of stability amidst diversity is very real to China and has been since 221 B.C when Emperor Qin Shi Huangdi united the country. 

Subsequently, most wars China fought have primarily been civil and domestic in nature, making the primary goal of whoever governs the country to keep its billion citizens from slaughtering each other and ultimately destroying the country as a unified nation. 

Economic growth as a means of crowd control

Simply put, the promise of economic growth is a great way to keep people away from engaging in domestic terrorism or uprising against their government. People will care less about war if they can make money, get richer, and have a better life. 

There is less incentive to kill your neighbor for resources if resources are abundant. 

Economic growth is, therefore, a wonderful political tool that China uses to create and enhance stability. Still, this is a double-edged sword. Economic growth does not actually solve problems within the country itself; it merely distracts its citizens from them. 

Inevitably, every show comes to an end. After all, people can only look the other way for so long. 

3 ways to hire well for your startup (TechCrunch)

“While inflation continues to skyrocket and the Fed pumps up interest rates, consumer confidence remains unchanged, and unemployment sits at a historical low. The business and market financial outlook is grim, but companies are still at the mercy of their employees, who seem to have endless choices for jobs. Big Tech might have released some 10% of the talent back into the market, but those were generally not employees executing core businesses.

How, then, can early-stage founders compete with larger, better-funded companies in this war for talent?”

Champ Suthiponchai, 3 ways to hire well for your startup

Read the full article on TechCrunch or download it here.

Deep tech venture capital investing (EisnerAmper)

” We are looking for things that are commercially viable today and change the trajectory of society.”

James Wang, via EisnerAmper

In this episode of Engaging Alternatives Spotlight,  Creative GP James Wang sits down with Elana Margulies-Snyderman,  Director, Publications, EisnerAmper, and shares his outlook for VC investing in early-stage companies, including the greatest opportunities and challenges, how our firm is embracing DEI and more.

Listen on Spotify, Apple Podcasts, Google Podcasts, Podbean, and more.

Climate change meets labor productivity

A crucial need in building and deploying climate solutions

In his book, How to Avoid a Climate Disaster, Bill Gates puts forth a playbook for a new wave of climate tech funds, investors, and individuals. Through a technocratic worldview, Gates lays out very large concepts of what we “need” to do. His suggestions? Decarbonize buildings, transportation, heavy industry, agriculture, etc. The list goes on. 

Broad decarbonization is crucially important for hitting our climate targets. We need both new and better technological solutions, and we also need to concurrently deploy what already works at a massive – trillions of dollars – scale. However, there is one critical element still missing from the popular conversation: labor. 

If you need to build it, they will have to come

Decarbonization (and avoiding a climate disaster)  means an exponential increase in manufacturing. Everything from wind turbines, batteries, solar panels, and EVs will need to be manufactured. And from there, they will still need to be properly installed.

Unfortunately, there is a massive workforce mismatch between the labor force we currently have available, its projected growth, and what is actually necessary to meet this demand. This labor force is not currently available in the U.S. or the E.U. and has been an oft-cited advantage that China has. Though even China is starting to wrestle with its own labor shortages, and this will be magnified by the demographic consequences of its one-child policy.

The ongoing global push to reshore manufacturing and stop relying on China for these things makes one thing glaringly obvious: we simply do not have the manpower available to keep up with the projected demand for job openings for this level of manufacturing, much less the additional laborers needed to install these renewables. 

The powers that be

Currently, there are some truly outstanding efforts focused on developing the workforce by retraining from other industries and sectors. One such effort, Solar Ready Vets, is a great example of this. As described on their website, Solar Ready Vets is “a program that connects transitioning military service members and veterans with career opportunities in the solar industry.” We need to support these and other efforts to train and equip a new workforce ready to tackle the challenges of electrification and decarbonization. However, it turns out some of the actual jobs may not be all they are cracked up to be.

Still, the demand needed to fill job openings isn’t going to be met by taking one labor force and redirecting it to another. At the end of the day, further automation will be needed for deploying renewables at the global scale we are targeting. We are on the cusp of a climate change and labor shortage nexus—and we’re already endemic in a number of sectors that are being continually exacerbated by demographic trends.

Innovate me to your leader

It’s a serious culmination of ongoing issues, all made even worse by other ongoing problems: a disrupted supply chain, instability in China, re-shoring efforts, and more only further complicate things. Even still, we can more magically “robotocize” production and just “do it that way.” 

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Consider solar for a moment. Many analysts appear to be working under the assumption that the labor costs are fixed—or worse, that they decrease when looking at projected real wage growth.  (Um, hello inflation!) 

Chart, bar chart Description automatically generated

In the example above, we’re only looking at installation labor in this example, not manufacturing. This means we would need to fill 1 million jobs by 2030 for solar in the U.S. alone. None of these numbers are accounting for the manufacturing or transportation of these renewables. 

When we consider our options for filling these roles, we need to be honest with ourselves. There is no magically timed baby boom that will increase populations and our opportunity to fill these roles. There is only automation. 

Automation is coming for these job openings. The idea that Robots are coming to take jobs away from humans is outdated and untrue. Instead, automation is the only way we can improve the productivity of our existing workforce and effectively meet the labor force demands needed for deploying renewables, building massive amounts of low-carbon infrastructure, and tackling climate change. 

The do’s and dont’s of sharing proprietary information

Due diligence comes naturally to investors—or at least it should. For our team, investing in early-stage companies means due diligence on proprietary processes and data comes second nature to us. 

One of the most common questions we hear from founders at this point is how to balance sharing their unique solutions while simultaneously guarding their how-to. Having invested, co-founded, and mentored many IP-based startups, I recommend taking these three do’s and don’ts with you into your pitch:   

DO: Start with non-confidential information

As your diligence kicks off, stick to sharing the big picture. Investors first need to understand what problem you’re solving, the market potential, and the solution. 

When it comes to pitch decks, I’ve seen founders—especially technical founders—start to put their guard up as soon as they get to slides that focus on their solution or their technology. The fear of being “scooped” can be overwhelming but fear not: during introductory meetings with potential investors, it’s generally acceptable (and often preferred!) to leave out confidential information. 

DONT: Overshare while it’s still early

If you’re in an introduction or early meeting with your potential investors, stick to the absolute need-to-know information. Investors want to know how your solution would be exceptionally better than the ones that are already available and how defensible it is. Don’t overshare and stick to letting them know why your solution has not been done before, how you are in the best position to tackle it, and how defensible your solution is.

If you cannot hit all these points without touching on your core confidential information, take a step back and rethink your approach before you have meetings. This perspective will teach you what most founders fail to learn early on: most of what you consider to be your most valuable secrets have very little meaning and implications on the decision to move forward with the diligence at this stage. 

DO: Consider the appropriate point to introduce an NDA

After a few meetings, when the diligence moves to a more in-depth discussion, some investors will want to dig into the how-to. This is when all the points you previously discussed on a broader term get unboxed. Different firms have different policies, but specifically for us at Creative Ventures, we would want to understand the core technology and its mechanism, so we can come to our own conclusion on how unique and defensible your solutions are. 

That being said, when doing a deep dive, we’re cognizant that certain information is confidential for a reason, and we’re very much open to entering into a non-disclosure agreement (NDA) with companies later in the diligence process. 

There’s a balance here, while most firms (us included) won’t be willing to sign an NDA just to get your investor deck, more are likely willing to enter into one when they’re taking a serious look at the opportunity. Count that as a good signal.

DONT: Gatekeep your proprietary information without reason

While it’s important to reveal your proprietary information at the right moment, it’s equally important to consider what any red tape is conveying to potential investors. 

From an investor’s perspective, if we are willing to enter into an NDA but a founder insists on keeping too many pieces as black boxes, it raises a major red flag. We will begin to ask questions like, “Is this solution actually real?” or, “Am I about to invest in the next Theranos?” 

As I shared earlier in our blog post, especially in deep tech, empirical data and its how-to speak volume. While it’s one thing to ask your investors to “trust” in the vision, core technology and quantitative evidence need to be shown, not told.

DO: Prioritize your own due diligence on investors

As a start-up, your company and solution are not the only elements that should be heavily considered. As much as investors are doing diligence on your company, so should you on them. NDA is an enabling tool, but it’s essentially a downside protection. 

Seek answers to questions like:

  • Are there any existing investments this potential investor has that can be considered my competition?
  • If so, does this investor have prior experience investing in competing opportunities, and how do they handle the dynamic?
  • Does this investor come off as trustworthy?
  • What reputation does this investor have? 

DON’T: Shy away from asking hard questions

When doing your diligence, some questions may be harder than others to answer. You may find answers while you do your own research, but for questions you need more information on, you’ll have to reach out to other folks.

One option is to ask your investors your questions directly. Another option is to ask a third-party reference, either from their existing portfolio companies or companies they have looked at but did not invest in. This is where being part of startup ecosystems helps give you invaluable insights.

Final thoughts

It should bring you some peace of mind to remember that all institutional VC’s business model is to invest in companies, not rebuild or downright copy what you are doing. It’s just simply not what we do. If you have done your diligence and everything checks out, withholding too much information, again, will raise some red flags. 

Throughout the diligence process, investors are just trying to be diligent and understand what it is exactly you are building and how it relates to their investment scopes. 

If disclosing your confidential information makes you so vulnerable that your business is entirely at risk, ask yourself if your business is really that defensible. Most scientific papers cannot be reproduced easily, even when the methods are all laid out. There’s always a trade secret somewhere. There are many aspects of building a business, and what you have should give you a heads-up. If larger companies decide to spend an unlimited amount of money to re-engineer your solution, ideally, it will take them too long and/or too much money that they would rather just acquire you.

Investment opportunities in steel

It’s no secret that Climate Tech is experiencing a renaissance year, and the recent passage of the CHIPS and Science and Inflation Reduction Acts has brought even more attention to the sector in the past few months. And while certain technologies and subsectors like solar and batteries are getting the bulk of the public’s  attention, emissions associated with industrial activities comprise more than a third of global carbon emissions. At Creative, we have been looking closely at several of the most pollution-heavy industrial processes—an analysis that has already resulted in our investment in Terra CO2, a low-carbon cement. The company recently closed a $46m Series A, which was backed by Creative, Breakthrough Energy Ventures, and others. 

We’ve now honed in on the iron and steelmaking industry, which accounts for approximately 8% of global CO2 emissions. What follows is a summary of our research and thought process.

What’s so special about steel?

As Creative has described in-depth, we invest in technologies that are market-driven. In industrial sectors, this typically means the pertinent industry is experiencing rising challenges due to raw materials shortages, is in search of a cost-driven process change, or is subject to new geopolitical or macroeconomic considerations that make the status quo hard to maintain.

We have started to see a movement toward (and investment in) green (i.e. less carbon dioxide intensive) iron and steelmaking around the world, indicating that investors see potential to decarbonize this sector at a commercial scale. So what’s at play with the movement toward greener iron and steel? And does any white space remain? 

Raw material shortages aren’t driving the green transition 

The inputs to primary steel are iron ore, metallurgic coal, and limestone, but global shortages don’t appear to be causing the accelerating transition to alternative methods of production. These materials experienced shortages and price fluctuations during the pandemic, but so did many other materials. Shortages also corresponded with a decrease in demand for steel products, largely due to slowdowns in the construction industry. Still, the transition toward greener steel doesn’t appear to be due to actual raw material shortages or any corresponding price fluctuations. 

While coal has a bad reputation in the climate movement, that furor is primarily directed at thermal coal (coal used to generate power) and not metallurgic coal, which is used in the steelmaking process for its carbon content, and comprises a small portion of the overall coal market. Indeed, a new metallurgic coal mine recently went online in West Virginia and China has continued to invest in new blast oxygen furnaces, which are heavily reliant on coal. Clearly, nations around the globe see coal continuing to play a role in steelmaking at least for the next several decades. And while they receive less attention from an environmental standpoint, it’s worth noting that iron ore and limestone also don’t appear to be limiting factors in steel production over the next several decades.

Steelmaking process changes are mostly about electricity

As mentioned above, a host of institutional steel companies and startups are piloting lower-carbon approaches to steelmaking in order to bring green steel to commercial scale. The leading approach uses hydrogen in lieu of natural gas to reduce iron, which is then processed into steel in an electric arc furnace. Steelmakers have understood the potential for hydrogen-based production for decades, but the price of hydrogen has only recently dropped enough to make widespread production viable. This is largely due to the high quantity of electricity needed to produce green hydrogen.

Another process, called molten oxide electrolysis, is being developed by Boston Metal. The company alleges they can circumvent using coal and furnaces during the steelmaking process entirely. These advancements would be fantastic for our planet, but what all of them have in common is that their degree of “greenness” largely depends on the source of electricity powering both the production of hydrogen and/or the steelmaking process itself.

To put it into context, experts calculate that Europe would need to build 50,000 additional wind turbines to power a full transition to green steel. Thus, decarbonization is not a steel problem so much as a renewable energy problem, which brings us to the economic incentives at play. 

Economics and politics are driving the decarbonization of steel 

While a multitude of factors is pulling the steel industry toward lower-carbon operations, policy-driven macroeconomic factors remain the primary driver.

In the past two years, the world’s leading steel companies—ArcelorMittal (Europe), Baowu Steel (China), and Nippon Steel (Japan)—made commitments to achieve net-zero emissions by 2050, which will have both decarbonization and bottom line implications. To dramatically simplify, these companies are hedging that present and future carbon credits, increased reticence from financial institutions to finance new coal mines, and geopolitical conflicts that lead to energy price fluctuations will devalue their firms if they continue business as usual and don’t decrease their environmental impact. And in the United States, the Inflation Reduction Act will undoubtedly speed up the movement toward greener electricity and thus greener industrial processes like steelmaking, in addition to supporting other Climate Tech advancements.

These actions and carbon targets align with commitments set in their respective regions and countries. This shift is happening now because scaling green steel takes a long time, given the capital expenditures required to build or retrofit plants, so steel companies are making a bet that green steel will eventually be necessary for them to remain competitive. While some of these challenges may impact steelmaking more heavily than other industrial sectors, the basic premise is the same across the board in capex-heavy industries. So what then, are the unique investment opportunities in steel decarbonization?

Steel has an infinite recyclability

A little-known fact is that steel is the most recycled material in the world. The potential for a circular steel economy presents unique investment opportunities. Indeed, the world will eventually have all of the steel it will ever need and can then recycle it as needed. This may sound far-fetched, but it’s important to remember that we are already witnessing a rise in steel substitutes that could alleviate some of the demand. In fact, the world’s tallest timber skyscraper just opened this summer, demonstrating that steel alternatives are becoming viable for larger infrastructure projects.

Unlike primary steel, secondary (recycled) steel has the potential to become essentially zero carbon. In contrast, the most cutting-edge, low-carbon primary steel technologies appear to pencil out around 100-250 kg of CO2 per ton. Scrap steel is also a critical component for geopolitical security, and countries are becoming more protective of their scrap. China, for example, imposes a 40% export tax on iron and steel scrap, and the conflict in Ukraine led to a spike in scrap steel prices in the US. 

Despite these challenges, the United States (and to a lesser degree, Europe) are already well primed to create robust circular steel economies given their higher percentages of steel produced using electric arc furnaces (which are best equipped to handle scrap steel) and status as late-stage economies. The latter point is important because steel can be locked up for years as building infrastructure or in cars. Developing countries, in contrast, still tend to be building much faster than steel is being recycled. 

However, one of the bottlenecks of scrap steel is that it often contains traces of other metals that must be removed in order to reprocess it into high-grade steel, which is commonly used in cars and other high-tech steel products. Removing impurities can be done by manual sorting, but that is a labor-intensive and slow process. And some steel products, like galvanized steel, must have their metal coating stripped off in order to be recycled. Another problem is that metal processors currently lack the technology to remove metals after the scrap has been melted down. Copper is one such metal that can lead to brittleness in steel. Thus, steelmakers must currently add additional virgin iron to the scrap steel mixture, in order to lower the ratio of trace elements. The added bonus to improving the impurity removal process is that many trace metals in steel scrap, unlike primary steel inputs, are experiencing supply constraints, so recovering them from steel scrap will have additional cost benefits to steelmakers.

Technologies in this space all appear nascent, from advanced automatic sorting to AI-based sensors that can detect metallurgic impurities, to chemical-based processes for purifying melted scrap. As more and more countries start to shift toward electric arc furnaces and break down aging infrastructure and cars, ensuring that steel can be recycled at the highest rates and with the fewest impurities will be critical to creating a circular economy and reducing the need to compete for imported scrap steel. We’re excited by what’s to come in this corner of the deep tech world. 

If you are working on a company that fits our thesis, we would love to hear from you. 

Where is the money when the money is everywhere?

2Q2022 carried out gloomy performances from 1Q, especially on late-stage deals, as the macroeconomic downturn roared on alongside continued conflict in Ukraine, high energy prices, and a rebounding supply chain. IPO windows remained closed, and exit values remained depressed. 

And when you see the result on paper? Ouch, Klarna. 

Figure 1. Top 10 Valuation drops; Pitchbook

Both growth and early stages are feeling the pain. 

Late-stage investment deal value continues to drop for the fourth straight quarter from 3Q2021’s high. Deal size remains high, which translates into a drop in the number of deals; valuation remain at a plateau. Early stage is seeing a similar trend, but with a 20% increase in deal size QoQ alongisde record high valuation.

Figure 2. Late stage deal activity; Pitchbook, 2Q2022.

Figure 3. Early stage deal activity; Pitchbook, 2Q2022.

Money is everywhere

It’s a poor excuse if a VC says they don’t have money to deploy. Maybe they are at the end of their investment period or are in between funds, but more than likely, they do. “They” here means a lot of them, not just a few. If they’re telling you they don’t, we’re willing to bet they just do not want to deploy right now. 

In 2021, VC funds closed a total of $142.1B—a nearly 80% increase from 2020, which slightly beat  2019, which also slightly beat 2018, and so on. The deployment pace between 2019-2021 tracks the amount of fundraising. So clearly, there is capital to be deployed; it just hasn’t been deployed. 

One would think that maybe VCs are having a hard time fundraising because LPs have stopped showing up in light of macroeconomic concerns. But that is also not true. Venture capital is on track to register its largest fundraising year on record despite the market correction; the first six months have garnered almost more capital than the entirety of 2021. 

Figure 4: While the market slumps, venture fundraising soars, Pitchbook

Some LPs show up because they need to go big to go home 

It’s disheartening to find that state pensions can be likened to drunk gamblers on vacation in Vegas. 

In 2021, state and local pension funds were fully funded, meaning their assets were equal to the lifetime benefits they promised to pay out. In 2022, that ratio dropped to 75.5%—even with a 25% return in its banner year —and it is poised to drop every further during 2022’s selloffs in stocks and bonds.

The silver lining lies in the return that alternative assets can generate. At CalPERs, PE allocation increased by 9% to $54 billion in the first five months of 2022. Together with real assets and private debt, its private holdings exceed 30%. Venture capital is part of the private equity allocation and is likely to have seen its share increase proportionally.

In other words, pensions have no other way to service their debt except to swing for the fence, and VC is one of the few ways it can do so. 

What happens next?

Well, it’s anyone’s guess. 

One thing is certain, however. The capital that is contracted to be deployed will be deployed. The parade won’t end until most of this capital has dried up, and that could take a while. 

What ultimately happens after that will depend on two main variables: rates and GDP. There are three ways this could go:

  1. VCs wrap up their 3-year-long vacation and finally come back to work, unleashing a war chest at a valuation that disconnects from market fundamentals. Rates stop rising at their current pace, and the economy doesn’t crash and burn. Everyone makes money, and we are all happy. This is a win-win-win scenario; or
  2. VCs wrap up their vacations and put their money to work; only in this scenario, rates continue to rise, prompting LPs to shift the allocation to risk-off assets. The economy tanks, and companies’ fundamental greatly disconnect from their valuations, ultimately resulting in a crash. This is a lose-lose-lose scenario.
  3. Finally, the most likely scenario is mixed between good and bad. VCs wrap up their vacations and put their money to work. Rates continue to rise, and the economy suffers some damage, shrinking both the capital availability and market opportunity. 

Verticals with sky-high valuations driven by an abundance of capital (such as B2B or SaaS) could really see returns hampered because their upside is more connected to a capital market that is much more sensitive to rate rising and GDP outlook. The actual increase in rates or decrease in GDP growth might be marginal, but the capital market might react much more substantially as it has done in 2022 so far. 

Other verticals that are less dependent on capital injection and capital market (such as deep tech), however, would be less impacted so long as economic fundamentals do not collapse. 

In a highly uncertain environment, pricing discipline is extremely crucial. But when the uncertainty is driven by a rising rate environment that affects capital allocation, portfolio companies that are less capital intensive and have ways to reach cash flow positivity will be better position to survive and thrive. 

Being greedy when others are fearful

All three scenarios above all have one thing in common: VCs have to end their nonstop vacation and make their money work. We can anticipate investment activity will resume…eventually. The question of when remains.

Arguably, we are in one of the most interesting, brief periods when “we have so much capital, but we are not yet pulling the trigger.” Whoever pulls the trigger first—and largely—stands to benefit. It explains why round size increases. It also explains why capital is rushing into the seed stage, which logged nearly-flat deal counts and high valuations in 2Q. 

Figure 5. Angel and seed stage deal activity; Pitchbook, 2Q2022.

This will not go on forever. The private market is inefficient. Information is slowed to be assembled into deal activity. But all VCs read the Pitchbook and NVCA reports. Many will come to the same conclusion as I did: now is the time to invest. 

The key, however, is to have already invested by the time those reports came out.