How to survive the tech downturn, according to a venture capitalist

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The venture capitalists at Lux Capital have bad news. The outlook for the technology sector is likely to deteriorate, much worse.

Josh Wolfe and Peter Hébert, co-founders of Lux Capital, talk about Barrons that a wide range of investment firms and holding companies are unlikely to survive the recession.

“In the same way that technology has driven excess upwards, you will see it downwards,” says Wolfe. “It feels like the summer of 2000, where you had a speculative excess that will be squeezed out.”

But there is a silver lining to this terrible prediction. The upheavals ahead should present patient investors with a new set of lucrative opportunities.

Lux was founded in 2000, just as the dot-com crash was wreaking havoc on Silicon Valley and the entire tech investment landscape.

Lux thrived because it shunned the high-flying internet and optical networking companies that were big at the time. Instead, the company primarily invested in hard science and emerging technology companies that sought to solve real-world problems.

“We’ve always steered clear of consumer-driven and marketing-driven businesses, where it was more about spending ad money to get people’s attention,” Wolfe says. “We invest in what matters. It tends to be more atoms than bits.

Today, Lux has $4 billion in assets under management. Since the company was founded, its funds have posted average annualized returns of 30% to 40% through the end of last year, according to a source familiar with the company.

Now, Lux says he’s once again bracing for tough times for the wider tech world.

In recent weeks, deteriorating economic conditions have prompted layoffs. End of April,

Robinhood Markets

(ticker: HOOD) announced a staff reduction of 9%, and

netflix

(NFLX) followed suit by laying off about 150 employees last month.

Wolfe sees these kinds of job cut announcements eventually growing from 10% to 20% of a company’s workforce to over 30% to 50%. These tech cuts could hurt spending in other categories, from luxury goods to bars and restaurants, leading to a broader economic downturn.

Meanwhile, as interest rates rise and cheap capital dries up, many of the hottest tech companies built on unprofitable business models are facing reckoning.

“We spoke to a lot of peers who have never experienced the cycle,” says Wolfe. “We were sort of born into the fire, watching the rise and fall of the dot-com crisis, and formed Lux ​​by studying why other companies failed and what they did right and wrong. of badness.”

In recent years, the company has invested in artificial intelligence, robotics and new methods of drug discovery, while much of the venture capital world has focused on social media and crypto firms. .

One example of Lux’s success is its 2008 investment in Kurion, a start-up co-founded by Wolfe that uses robotics and chemistry to clean up nuclear waste.

Kurion became one of the few companies to respond to Japan’s Fukushima nuclear disaster in 2011. Lux sold Kurion for nearly $400 million in 2016, 34 times the company’s total investment.

This type of investing based on deep science should hold up in the months and years to come, even if Lux’s predictions of global economic trends turn out to be accurate.

The co-founders of Lux are excited about two specific investment themes for the next few years.

The first is what the company calls Technology for Hard Power. Lux funds companies that give the US military and its allies the tools to win on the battlefield, including robotics, rocket launch technology, observation satellites and modern communications.

One of Lux’s investments is Primer, which uses advanced artificial intelligence algorithms to translate communications intercepted on the battlefield into real-time intelligence for government analysts.

The founders of Lux see a more dangerous world in which geopolitical issues will be tailwinds to many of these hard power investments. “Significant portions of food, base metals and energy are stretched and stretched because of the Russian-Ukrainian war,” Wolfe said.

The second investment theme is soft power technology, involving the development of infrastructure for scientists, including software to run advanced laboratories and microscopes, which can enable breakthrough discoveries.

In 2019, Lux made a founding investment in Eikon Therapeutics, a company based on microscope technology behind the 2014 Nobel Prize in Chemistry, which can see inside cells in real time and could lead to the discovery life-saving drugs.

Even with their bleak short-term economic outlook, the founders of Lux remain passionate about technology. “We’re going to fund amazing people who will do amazing things in the years to come,” says Hébert, co-founder of Wolfe. “Long term, we remain extremely excited and optimistic.”

Write to Tae Kim at [email protected]

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