The NatureBacked Podcast

Great Time For Deep Tech Investing With Outsized Ventures

June 13, 2022 Single.Earth Season 1 Episode 16
The NatureBacked Podcast
Great Time For Deep Tech Investing With Outsized Ventures
Show Notes Transcript

Startups should focus on their cash burn and seek to build a 36-month runway as the downturn in markets and economies has started, but it's a great time to be investing in deep tech as founders are increasingly keen to tackle world-changing challenges, Outsized Ventures' general partner Isabel Fox said in an interview on the sidelines of the Latitude59 startup conference in Tallinn in late May 2022.

London-headquartered Outsized Ventures is a 2021-founded deep tech investment firm that invests in Seed+ rounds in founders that are going to have a big impact on the world for the better.

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A few key takeaways from Isabel Fox:

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I think people want to do stuff that's going to have a purpose and an impact. So you're finding more and more great talent wanting to address some of the world's greatest challenges.
The first thing you'll see is more founders wanting to find solutions to our problems. So we definitely see an increase in fabulous people trying to work through whether that's carbon counting, whether it's sustainability projects, which they think can get off the ground. 
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I still think more money will come into the area. It sort of leads with the quality of the founders and the ideas, and what they're trying to build, and the money will be there for great founders, as you know, and I think that's starting to happen. But we need to obviously speed up what we're doing in order to save our planet.

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You definitely hear from corporates that they're looking at it. But I don't think many of them actually even have a strategy. They're working through the plans with the consultants, and when you start to look at the costs of going carbon neutral by 2030, they've got to make a significant investment to get there. Of which I see sort of the start, but I'm probably like you: I'm not seeing them make that full, big commitment of quite a few 100 million, in some cases to sort of drive that. So I think, I think it will be right, I think there'll be panic right at the end. And people then want to sort of see how they can get out of it, rather than necessarily fulfill that obligation.

**

So my advice to founders has been: to watch the cash burn, get prudent on that, and try to increase your runway to 36 months. So you have the luxury of time, and hopefully, the world may have stabilized sooner than we think. 
I think being tight, and being focused is not a bad thing. I always think that it's about being savvy, it's about being prudent and nimble. 
**

I think the stuff that we're backing and the stuff that you like are big plays that have a huge impact on the future of society. That's not going to change much. For me, actually, in deep tech, I think it's a great time to be investing. We still got the problems in the world; we still need to solve them. And these opportunities are so huge that even if we have a bad two-year period now in the macro economy, they're going to come through the other side, very, very strong.

Tarmo Virki  
Welcome, Isabel; thanks for finding time for us at the NatureBacked podcast.

Isabel Fox  
Lovely to be here; thank you for having me.

Tarmo Virki  
To start, tell us a few words about Outsized Ventures.

Isabel Fox  
We were founded last year. So this is our first fund. Three partners, based out of London, actually one in Lisbon. And our whole remit is deep tech. So trying to back founders that are going to have a big impact on the world for the better. And we believe a lot of that will come from science and technology-led businesses. We back companies at seed plus, so we're a bit different to everyone else; we're not coming in on the usual rounds; we'd like to come in between rounds, get to know founders when they're sort of at pre-seed and seed. And then essentially, you know, when we get the conviction that they are the 1% founder with a big opportunity, that's when we like to invest. And that's across, you know, like, I guess our main areas would be food, life sciences, but not therapeutics, health care, sustainability, clean tech, and then we like things which have, like compute power quantum edge, which can sit across a sort of multiple different sectors, but we think they will have a big impact.

Tarmo Virki  
What's this seed plus round?

Isabel Fox  
it's quite unusual, isn't it? It's kind of anywhere between a week after seed to a week before Series A; essentially, we just give ourselves more time to get more data set on a founder. So at seed and pre-seed, we're trying to identify who we think are the top 10% founders doing interesting stuff. And then we typically like to sort of, you know, have regular conversations, interactions with them, see how they're developing, how their team is growing, how they execute on the plan. And once we get the conviction that we actually think that they're a 1% founder, and we want to back them, we kind of move very, very quickly then to see if we can put an investment in a sort of anywhere, typically of one and a half to two and a half million. So we're often creating rounds, but the founders we want are the ones that don't need us and don't want us where we're kind of having to persuade them that actually, you know, we can help, and they should take our money.

Tarmo Virki  
It's probably the time now in, you know, approaching mid-2022. And looking at the world economy, there are probably more and more people who actually look for capital between the rounds, right?

Isabel Fox  
I think so. My theory is that even like the really good, deep tech companies in Europe, they're not getting as much funding as the US, and they're typically on quite a tight seed to get to the inflection points for Series A. So you know, I think most founders are quite open to taking a little bit more cash. And I think where the world is heading now; there won't be that many boards that will say, No, don't take an extra 1, 2 million at this stage. So I hope; actually, the timing is going to work quite well for us because there are some brilliant founders out there. And I think the market is gonna get tougher. So hopefully, we can help those realize their ambitions,

Tarmo Virki  
One year into the fund, how many investments have you made already?

Isabel Fox  
Yeah, so we actually only closed - we did our first close just before Christmas, and we've made three investments since so since January,

Tarmo Virki  
not rushing it?

Isabel Fox  
No, definitely not. For us, it's, you know, it's a fairly concentrated portfolio; the model is 25 companies, which isn't a huge amount in this venture game. So it's very much for us about getting conviction around the opportunity, the founder. And also making sure that the valuation we're going in at is the right valuation.

Tarmo Virki  
Turning a little bit more towards the main topic of the podcast series, deep tech and environment, how much you're seeing traction in climate or environment-related deep tech startups?

Isabel Fox  
Yeah, I think that's a lot, as you know. I think that's driven partly by the fact that I don't think people want to work at Google or Twitter anymore. And actually, I think, as we were discussing before this podcast started, I think people want to do stuff that's going to have a purpose and an impact. So you're finding, I think, more and more great talent wanting to address some of the world's greatest challenges we have. So I think, you know, that's the first thing you'll see more founders wanting to find solutions to our problems. So we definitely see an increase in fabulous people trying to work through whether that's carbon counting, whether it's, you know, sustainability projects, which they think can get off the ground. And you definitely see a lot of academics and, obviously, the research coming through as well as different solutions for various things, whether that be fusion or using space to improve our own planet.

Tarmo Virki  
Space is something that has also popped up on many environment projects recently.

Isabel Fox  
Yes, we see lots: you know, everything from space manufacturing, which I think super interesting, just what we can produce in space that we can't make down here and what that potential is. Obviously, mining and what we could take from the planet. I think, you know, I think just sort of taking more of that out of our own planet and up into space, you know, hopefully, would have a benefit to us here.

Tarmo Virki  
How do you see the climate emergency having an impact on the startups' minds or maybe investors' minds?

Isabel Fox  
For me, it's not a trend; it's something we just have to fix. I think it has become trendy. But I think most people are looking at it, and looking at it from a long-term patient perspective, and that we need to address this. So, you know, I still think more money will come into the area; I don't think we're like that full capacity of what what we need to do or where that money will come from. But I think you know, for now, you just see, you know, for me, it sort of leads with the quality of the founders and the ideas, and what we're trying to build, and the money, you know, will be there for great founders, as you know, and I think that's starting to happen. But we need to obviously speed up what we're doing in order to save our planet.

Tarmo Virki  
What can be done to speed up?

Isabel Fox  
I think it's everything from policies, which, you know, I think we're starting to see that the UK is obviously pushing a number of initiatives on regulation. Regulation is obviously one big area that pushes people to have to make a change, policies, incentives, regulations, and government funding in this area. I don't think it's all just going to come from venture capitalists, as we know this hasn't always been the most returns-driven area. So you know, I think it has to be backed by governments, corporates need to do more. We, as the general public, need to do more.

Tarmo Virki  
I also think that for the classical VC investment cycles, the sector is a bit challenging. To put it politely, right?

Isabel Fox  
A lot of it's going to take much longer than a typical fund of a ten and two years type of fund structure. So I think, for me, it is about that joined-up approach coming from all different avenues.

Tarmo Virki  
Absolutely. The government has, or let's say the governments, been playing a key role in the climate actions for quite a while -- is there something more the governments should be doing?

Isabel Fox  
I think there's always more. We always want more across, whether it's sustainability or health in the UK, or whatever it might be. I think we are all for education, but there's always more that can be done. I think it is just about setting targets. And, you know, forcing some of that change to happen.

Tarmo Virki  
Some of the big change happening happens through big corporations, and a lot of them have made some kind of commitment to become carbon neutral by 2030. The cynical me has thought that one of the best business ideas must be to buy up carbon credits and then sell them in 2029...

Isabel Fox  
... when everyone is desperate.

Tarmo Virki  
Exactly. That must be the point - it always happens the way that people at the last minute understand that they don't actually have enough. So there must be the kind of market squeeze happening in late 2029. So everybody can say to their investors that...

Isabel Fox  
they hit the target. Yes, I think you're right there. You definitely hear from corporates that they're looking at it. But I don't think many of them actually even have a strategy. They're working through the plans with the consultants, and when you start to look at the costs of going carbon neutral by 2030, they've got to make a significant investment to get there. Of which I see sort of the start, but I'm probably like you, I'm not seeing them make that full, big commitment of quite a few 100 million, in some cases to sort of drive that. So I think, I think it will be right, I think there'll be panic right at the end. And people then want to sort of see how they can get out of it, rather than necessarily fulfill that obligation.

Tarmo Virki  
Rather than fixing the problem. Looking at also the war in Ukraine and how some of the German or French companies especially have been really dragging their feet with getting out of Russia. I think it kind of shows that, yes, corporates have very high positive agendas. But, you know, eventually, money matters. And they're not in a rush to spend, you know, any time any extra pennies on anything.

Isabel Fox  
Yeah, I think that's the problem with corporates. They are very good at writing a report every year that says about their ESG or their great contribution, but actually, on the ground, I think it can be quite different when quarterly results drive you. And if your public-listed, obviously, the scrutiny of analysts and investors and shareholders. So you know, for me, it is definitely, you know, the corporates need to do more.

Tarmo Virki  
As I mentioned, with Russia's war in Ukraine, Europe has been making decisions of or at least being pushed towards decisions to energy dependency, or at least cutting, they're cutting the cord to Russia? Do you think this is having a huge impact on the kind of energy sector startup scene across Europe? Do you see any of that yet?

Isabel Fox  
It's not a space that we know particularly well. So I'm probably not the best person. I've definitely seen, the startups, you know, that there's a number of sort of fusion startups out of Oxford University. And, you know, I have seen, you know, there's big rounds coming together on those, like, seriously big cash going into them. And that's a mix of sort of corporate venturing, government as well, and I think that some of those projects will probably get more funding than they previously would have done, just because people are starting to look at alternatives and making sort of scenario plans as to how to diversify. So that's my peripheral view of what's happening. I, you know, I don't cover it as much as I probably should. But I've definitely seen, you know, that some of the alternatives in the UK market are starting to get some, you know, fairly substantial funding coming through.

Tarmo Virki  
When you travel these days around to European startup events, I'm sure Latitude59 is not the only one. What do you kind of, you know, touching the pulse of the startup market? What do you see?

Isabel Fox  
Yeah. Like, I'm, you know, I'm, I always love those VCs that have a thesis and can, you know, look into their magic ball and, you know, great predictions. And, yeah, you know, I don't necessarily think I'm one of those; I think I'm much more driven by meeting or, you know, I think I've got a great muscle memory on what a good founder looks like. So I'm always when it comes to places like this, I'm always really interested at just talking to founders about what problems they're solving because I think, you know, they're far better at identifying where the opportunities are, what needs to be fixed, and, you know, the ideas that they come up with, so I've been like, super interested in just, you know, the workaround blockchain, hear lots around sustainability, metaverse, crypto like it's been fascinating, and you're always learning from great founders as to where markets and where opportunities are going. So you know, for me that's the real that's a really interesting part of coming and traveling around Europe. And then the other is just meeting other VCs and hearing what they're interested in, what the markets currently like, and you know what, what's going to be happening over this next 18 to 24 months, because I think, you know, it's definitely going to be a tough time for people on an individual level, but also for the startups and the world that we live in.

Tarmo Virki  
Why it's gonna be tough times?

Isabel Fox  
I think it's gonna be tough for, you know, we've just got so much uncertainty in the world at the moment, as you touched on the war, supply chains are obviously, you know, a real mess, inflation's growing. We've obviously had a number of Spax in the US, and public markets have now come off substantially. And, you know, talking to the US VCs over the last couple of weeks, it's really coming off there. So early stage, not so much. There's less sensitivity around valuation and funding companies, but from Series B upwards, certainly, valuations have been coming down. VCs have been, you know, making sure that their own portfolios are well, well funded to survive 36 months, and, you know, cost-cutting has started across those big portfolios. So, you know, I think we're probably lagging in here in Europe; I would say we, we could be, we could be a quarter, we may even be two quarters behind the US and some of that sentiment, but as you know, often it's driven by sentiment rather than actual, often realities. So, you know, I suspect that we're, we're just going to see tougher times ahead. I don't think we're going to see well, you know, obviously, the Crunchbase data from Q1 showed a slowing down in deep tech investments. It was still, in fact, higher than 2020. It just wasn't; it was down on the 2021 figures. But I suspect that slowing down from being here talking to European VCs, everyone's still investing, but they're just not going to be deploying at the pace that we have been the last two years. And, you know, gotta be even more careful on valuations and who we back. And that that starts to have an effect.

Tarmo Virki  
Step by step. 

Isabel Fox  
Yeah. So my advice to founders has been: to watch the cash burn, get prudent on that, and try to increase your runway to 36 months. So you have the luxury of time, and hopefully, the world may have stabilized sooner than we think. And we might be able to come out of this.

Tarmo Virki  
Do many startups have a 36-month runway?

Isabel Fox  
There haven't been. And, you know, talking to the US VCs, some big ones, last week, as they were saying they were seeing portfolios coming out twice in a year to raise money. But even they were saying, you know, they want to see 36 months now of runway, and companies well funded to be able to survive that long. That's a big shift. Because I mean, 24 months was a lot. And in the last, you know, in this last sort of a couple of years, we've been quite happy to see sort of 12 to 18 months. So that's the sort of shifts that I think you're seeing, and that's from, you know, top VCs over in the US. I think that's the sort of dialogue we're going to be starting to have here.

Tarmo Virki  
What's the positive thing to wrap up - so we would not finish on a somewhat cautious or negative note?

Isabel Fox  
Yeah, look, good founders will always get funding. And, you know, I think being tight, being focused is not a bad thing. So, you know, for me, I always think that it's about being savvy, it's about being prudent and nimble. And great founders will do that, they'll, you know, they will, they will look at the market conditions they'll make, make their plans, decide on what milestones they're going to hit, and probably tighten their belts to get there. But, you know, in all honesty, there's plenty of money in the world. Still, as we know, I think the deep tech is counter-cyclical to probably some of the riskier e-commerce consumer-type plays, which will probably get affected more. I think the stuff that we're backing and the stuff that you like are big plays that have a huge impact on the future of society. And, you know, that's not going to change much today. So, you know, for me, actually, in deep tech, I think it's a great time to be investing. We still got the problems in the world; we still need to solve them. And these opportunities are huge that, you know, even if we have a bad two-year period now in the macro economy, they're going to come through the other side, very, very strong.

Tarmo Virki  
Kind of urgency is getting, you know, worse day by day. So the need to invest in the great solutions he's growing.

Isabel Fox  
Absolutely. And we need them. So. And I think, you know, obviously, we get our money from limited partners, whether that's institutions or family offices, and so many people are behind making this change that, you know, I'm truly believing, you know, naively or not that deep tech is actually a great place to be investing still, obviously, from the LP perspective, but also as a GP into the founders that can drive us positive change.

Tarmo Virki  
Absolutely. Good. Thank 

Isabel Fox  
Thank you.

Transcribed by https://otter.ai