How a recession could be a huge opportunity for 'upstream' startups
Monty Rakusen/Getty Images
- A looming recession is changing the game for venture investors and startups.
- Investors rushed to supply-chain startups during the supply chain crisis of the last two years.
- Now VCs may look 'upstream' in the supply chain, creating a window for often overlooked startups.
When Harvard Business Review researchers looked at what happens to venture capital in a series of recessions between 1976 and 2020, they noticed one category of tech didn't behave like the rest.
While investments in new biotech, medical hardware, internet startups, and consumer products dropped or stagnated during recessions, the HBR researchers found that "industrial startups" — the sorts of players that make tech for factories, farms, and other supply chain players — actually grew, albeit slightly, in their share of all VC deals.
The HBR working paper also confirmed what startups have been telling Insider for weeks now: With a recession looming, investors are intensifying their due diligence and insisting on a faster path to profitability. Gone are the free-wheeling ways of 2021.
But the end of the boom times could spell opportunity for industrial or "upstream" startups.
Up the river
In supply-chain parlance, the end-consumer is the mouth at the end of a stream. The van that brings a package to their doorstep is a bit upstream of that final stop, the warehouse that packed the box is upstream of the van. Near the source of the stream are the folks making things like trucks and tech for factories and farms.
There's plenty of tech to invest in here. Vision systems see and analyze everything happening in a warehouse or on a farm and make recommendations. Big data plays create global "maps" of the buying and selling of raw materials all over the world. Robots pick strawberries and pick up pallets of goods.
The startups working upstream are rarely household names, and likely never will be. But upstream startups today have an advantage even over their counterparts trying to raise funding in past recession: two years of supply chain pain.
Why upstream needs innovation
Investors got a crash course in supply chain principles over the last two years as the pandemic messed with everything from manufacturing in China to ports in Los Angeles. The chaos of pandemic-induced supply chain bottlenecks is still ingrained in the memories of investors and operators alike.
All that chaos gave operators — the customers for upstream teach — a taste for innovation they may not have developed in less chaotic times. Startups that provide tracking services for cargo via software and hardware got a big boost when freight was suddenly showing up weeks later than expected. Trucking startups with a novel way of finding capacity in a strapped market did too.
Name a supply chain problem, and there's likely a startup working on it. There are tech startups attempting to address the need for more truck drivers on the roads and workers in warehouses. Startups are creating building sensors that know a machine is about to break before it happens, and software to find a new supplier for the part to fix it. There's tech for faster food safety testing for factories (remember the baby formula crush?). Not to mention, there's tech trying to decarbonize every link in the chain.
Why investors often overlook upstream tech
Startups are supposed to scale as fast as possible, and the prevailing wisdom says a large addressable market and fast sales are required. The perception that upstream startups have neither keeps some investors from giving them a look.
Indeed, the best customers for industrial tech, the big corporations with millions, even billions, to spend on new tech, tend to make such decisions at a snail's pace.
"Increasingly, it's becoming clear that using vision systems like layers of quality control and insight is game changing. But it does require not doing things the way you've always done them," Brita Rosenheim, a seasoned food-tech investor and managing partner of Vita Ventures said. "If it's not broke or doesn't feel broken enough, then you know … "
On top of a long sales process, the number of customers potentially interested in buying warehouse automation, for example, is considerably smaller than that for a consumer technology or a workplace software product.
But dismissing upstream startups as too niche is short-sighted, said Menlo Ventures partner Steve Sloane, who's led investments in warehousing and robotics startups. "I think you can be pleasantly surprised by the size of the global supply chain."
Why investors will look upstream now
In 2020 and 2021, more investors got hip to the opportunity that lies upstream in supply chains.
"You only get to do kind of these massive tidal waves of capital infusion when you have people who are not specialists coming in," said Rosenheim.
Supply chain tech startups raised $41.3 billion in 2021 — a 120% increase in funding for the category since 2019.
That introduction of generalist investors to tech much farther from the consumer is likely to help those same startups raise follow-on funding in the coming recession, as HBR found and Insider reporting confirms.
Perhaps excepting the whims of SoftBank, which has thrown hundreds of millions at high-tech indoor farms, e-commerce warehousing, and procurement software just to name a few, upstream tech rarely gets the kind of monster rounds consumer tech does.
But the combination of lasting urgency to improve age-old practices and processes and a more initiated investor class with a suppressed appetite for consumer tech, could add up to some record-breaking rounds for upstream startups.
Contributer : Business Insider https://ift.tt/hx3DiW7
Reviewed by mimisabreena
on
Monday, January 02, 2023
Rating:
No comments:
Post a Comment