Valuation, Liquidity, and Opportunity in Uncertain Times

For this special three-part series on Insights, Azafran Capital Partners shares insights on the future of the venture capital ecosystem, marketplace, and fund thesis.

This article will take about 4 minutes to read

About the Series

Azafran Capital Partners is an early-stage venture fund. Their investments ($2 million to $8 million) focus on companies using deep and machine learning, emphasizing voice, acoustics, and imagery datasets in the health, wellness, IoT / automation, and enterprise spaces.

Only a few months ago, managing partner and Opportunity Network member, James Kenefick, was travelling constantly. Meeting with companies and attending conferences around the world. Now, like everyone else, he’s finding new ways of doing business from home. 

In this three-part series, Kenefick and his colleagues at Azafran Capital Partners, Jock Percy and Martin Fisher, will share their global perspectives on the current state of the investment market, the potential for tech, and the power of the network. 

Part One (of Three) of this Special Report Series focuses on the venture market. Specifically, the road ahead as seen through the lens of Azafran’s Investment Thesis. Taking into account new global realities, they will cover experiences both personal and professional.

Rather Listen?

This series is accompanied by a podcast discussing the main topics of each issue.

The Current Climate

First and foremost, we send our hopes and wishes to everyone in the Opportunity Network community. For you, your families and colleagues to remain safe and unharmed by the COVID-19 virus.

In economic terms, there is no precedent or vocabulary for the long list of what is happening now. The world is flooded by news media trying to make sense of it all.

“A disorienting reversal is underway in the markets, and it is instilling fear in many investors, especially folks who have been greedy during the go-go years. These players—many of whom never worked or invested during a down market—have now joined the fearful crowd, and they will fall to the sidelines. But I’ve checked in with a wide variety of skillful, experienced investors to take their pulse since the coronavirus has brought the world economy to its knees. Most of them are forging ahead, albeit while exercising more caution and advising their partners and portfolio companies to do the same.” – Alexander Davis, executive editor – PitchBook

Predictions for the Venture Market

Looking at the venture market, we’ve combined up-to-date research with our decades of shared experience in businesses, investment, and markets. Here are some of the key predictions that we see for the future:

• When COVID-19 levels off and starts to subside by summer in the Northern Hemisphere, we see a short recession. Considering the fundamentals leading into the crisis were solid, unlike 2008.

• Later-stage investors will see limited exits for their portfolio companies. Exits via public markets will be extremely limited, and PE/later stage suitors focusing more on distressed scenarios.

• There will be a lot of activity in the secondary market. Opportunity to buy portfolios or funds at lower prices if they need liquidity.

• Resulting in VCs in the mid to later stages of the market (i.e. invested tens and hundreds of millions or more) required to put more money into their existing portfolio companies. Resulting in holding them for a longer-than-normal timeframe.

• At the angel and seed stage, market losses will hamper the ability to make new investments and follow-ons.

• In the current cycle, valuations in vintage funds from 2016-2019 most likely peaked before the crisis. Therefore, the timing is positive for early-stage, new vintage 2020 funds. 

What will this mean for Venture Funds?

VC funds well into the fundraising process should be able to hold first or final closes. However, according to Kelly DePonte of Probitas Partners, most new efforts will be put on hold. 

“You cannot do a pitch to an LP in person and you cannot schedule onsite due diligence. If you’re a newly launched fund you are basically in pause mode. Let’s say you launched a fund in September of last year,” DePonte says. “You’ve already met with a bunch of LPs, and for the ones that are interested you have already had a number of on-sites.”

Those funds should be able to get over the line with follow-up phone or video conference calls. (Venture Capital Journal)

Investment Possibilities?

AI-Imagery Products are being developed to fight COVID-19 and possible viruses of the future. Miso Robotics’ AI screening devices, for example, can detect signs of fever at restaurants.

“Miso Robotics is a startup developing robots that can perform basic cooking tasks in commercial kitchens. Today, they announced the deployment of new tools to its platform in CaliBurger restaurants. This will be part of an advanced approach with CaliGroup intended to improve safety and health standards.”

The hope is to minimize the threat of infection for patrons and delivery workers during the COVID-19 pandemic. In the coming weeks, in partnership with payment provider PopID, Miso will install a thermal-based screening device in a CaliBurger location in Pasadena, California. Attached to doors, it will measure the body temperatures of people attempting to enter the restaurant.

Fever detection is on-trend. Various companies have begun deploying cameras that detect people who may have COVID-19 by using thermal imaging. Ramco Innovation Lab in Singapore recently unveiled a facial recognition-based system with embedded temperature recording. In China, authorities have reportedly used drones to detect signs of fever.

Miso says that it will also install physical PopID terminals so that guests can transact without touching a panel, using cash, or swiping a credit card — all of which can transfer pathogens. Customers will also be able to pay using PopPay on the CaliBurger website.

Opportunity in the Venture Market

There is sufficient market and economic consensus that the best-performing vintages tend to be those which invest at the low point of a downturn and into the early stage of recovery. As a 2020 vintage fund, Azafran Fund Two (ACP2) for example will capitalize on these new valuations and opportunities. 

Social distancing coupled with trends that were already well underway (i.e. technologies moving to the edge) offers further validation of the Azafran Investment Thesis: Investing in the imagery/ voice/acoustics modalities feeding machine learning/deep science tech into health/wellness and IoT/enterprise markets.

From technologies that are helping mitigate the pandemic, to those enabling the remote enterprise and at-home worker, and health/wellness, these new realities will further speed the adoption/commercialization of this machine learning tech revolution. 

The future for Azafran

Since 2017, our team has been compiling a proprietary database (KESAR) using 347 tech tool attributes, tracking over 1,800 vetted and qualified companies. Groundbreaking Machine Learning and AI algorithms, combined with deep science, are creating new innovations leveraging voice, acoustics, and imagery as the input modality. This technology is already in the market and eliminates the inefficient touch-based inputs; keypad/keyboard. These technologies and modalities meet the challenges of our new world realities such as hygiene and social distancing.

Considering these new realities, the Azafran thesis of investing/partnering in the modalities of voice, acoustics, and imagery is even more compelling with even greater market-fit. The companies Azafran has invested in and those under LOI offer edge solutions, technology networks & platforms that make our lives better.

Our deep experience, global network, and hands-on focus are key at this stage of investment and company development. Especially in this time of crisis. We are working every day with our founders/managers, focusing them on short-term actions while strategically executing over the mid-term horizon.

In recognizing the moment and appreciating the implications and severity of the situation, our team wishes you, your family, and colleagues safety, health, and peace as we face these incredible challenges together.