It is the ultimate suffix: Agri-tech, fin-tech, health-tech, prop-tech, reg-tech, legal-tech and so on. And wealthy investors are allover it, allocating more money to technology via venture capital and private equity vehicles than ever before.
European venture capital funds now raise a fifth of their wealth from private investors, up from just 15% four years ago, according to Dealroom, an Amsterdam-based information company. More than real estate, private equity is now the second most popular asset class for family offices, according to Swiss bank UBS. The number one investment for these funds? Technology.
Outside of funds, direct investment into European startups has grown five times over the same period, according to research by Dealroom for Talis Capital, a venture capital firm. Startups now raise 18% of their investment from private wealth.
“Family offices are trying to understand the tech space and so are dipping their tow in the water”, Dr Rebecca Gooch, director of research at Campden Wealth told a private equity conference in London in November.
However, to those with all their limbs firmly submersed in the tech world, talk of “dipping toes” might seem belated. Most of the last decade’s major tech companies have already floated and the WeWork fiasco has reminded investors that this is not always a good thing anyway.
The next tech wave is already in doubt. Although 87% of the family offices polled by UBS believe artificial intelligence (AI) will be the next disruptive force, others think this is overblown. Denmark-based Saxo Bank says that we could be entering a new ‘AI winter’ as semiconductor applications fail to live up to the hype.
“This time around, the hype bar has once again been set very high, with AI researchers such as Andrew Ng claiming that AI is the new electricity,” Saxo Bank said in the latest of its seasonal “Outrageous Predictions”.
Andrew Ng, the founder and CEO of LandingAI, believes artificial intelligence is the new … [+] electricity.
AFP via Getty Images
While the predictions come with a caveat (“it’s an exercise in considering the full extent of what is possible, even if not necessarily probable”), they are based on now widely held views: “The AI industry also has a scaling problem: it costs more and more in energy to train their ever-larger models, with less and less marginal improvement. Only the largest companies such as Facebook, Microsoft and Google can keep up.
“A higher bar of entry will eventually dry up venture capital and innovation for new AI ideas”, Saxo Bank adds. This means that all of the money piled into funds by wealthy investors might not be fruitful.
Can Tech Beat A Recession?
Despite recent scepticism, wealthy investors normally think for the long-term and right now they are gearing up for a recession. Over half (55%) of those surveyed for UBS’s Global Family Office Report 2019 expect a recession next year. RBC Wealth Management says we are now in “uncharted territory”.
Rather than making bumper returns, many betting on tech are simply looking to weather the storm. Tech is not going anywhere and most funds realise this: Venture capital or private equity funds typically have much longer investment periods than a recession, which, on average, lasts nine months.
“The funds are much more catered to withstand [a recession] because we have the largest dry powder that has been accumulated and this capital can be deployed in the next five years” says Vasile Foca, a managing partner and co-founder of Talis Capital. (‘Dry powder’ is industry lingo for money raised but not yet invested.)
Another reassuring trend, adds Foca, is that the investors behind so many of these technology firms are not whimsical financiers, but industry veterans. “There’s a startup evolution where you have entrepreneurs and founders who have exited and have so much experience and they’re launching a second, third, fourth startup in their career”.
Such veterans include Xavier Niel who founded the French internet service provider Iliad and now backs a handful of tech startups including Deezer, Square and Meero. Or consider Alex Chesterman, the man behind the ‘prop-tech’ Zoopla, and since exiting, has invested in Secret Escapes, Uniplaces and Farmdrop.
Xavier Niel, billionaire and founder of Iliad SA, has reinvested much of his wealth in tech … [+] startups.
© 2017 Bloomberg Finance LP
These industry champions may be convincing others to invest in technology as the sector matures, though the latest jargon will not: Wealthy laymen must now catch on to the variations of suffixes, says Foca: “We have an evolution of verticals. We now have prop-tech 3.0.”