Post COVID-19 World: The Bullish Case for (early stage) VCs & Founders [Part 3]

Applied AI Investment Thesis

The case for rapid adoption of Applied Artificial Intelligence across every sector remains valid, and if anything, the roadmap for adoption is being shortened considerably.

AI is part of the solution to fight COVID-19

Every day, we read about ways AI is helping fight COVID-19:

World’s Fastest Supercomputer Used To Stop COVID-19 (link here)
Autonomous robots use light beams to zap hospital viruses (link here)
A neural network that can detect coughing (link here)
Researchers use machine learning to discover coronavirus treatments (link here)

The Case for AI and Healthcare is Huge

Global venture capital funding in the digital health sector reached $8.9B in 2019, fuelled by the needs of an aging population, outdated infrastructure, and unsustainable business models and cost structures. According to Mercom Capital Group, $58B has been invested in the sector since 2010.

AI is driving major advances in diagnostics, drug discovery, trial efficiencies, mental health & wellness, quantified self, preventive medicine, continuous remote patient monitoring, intelligent prioritization. AI is also creating new models that will help redesign our healthcare systems of tomorrow, bringing instant diagnosis/testing at home or the nearest point of care, remote consultations, delivery of drugs, compliance, and providing doctors and drug companies with real time feedback loops. Last year, $4B was invested into AI and Healthcare companies, up from $2.7B the year before. We expect this number to stay flat or increase in the next 12-18 months as investors see the opportunity to benefit from an acceleration of digital health technology adoption as the world tries to better prepare for future health care crises like the one we are now experiencing.

Swift Legislative & Privacy Protection Changes

Governments are taking swift action to authorize or channel the delivery of new technologies and services to the people and organizations that need them the most. These changes in policies should help shorten the path to market for startups and their innovations. (e.g., EU Privacy Guidance for COVID-19 Data Processing, FDA Guidance on COVID-19 drug trials, etc.)

Governments, like every corporation, will need to digitalize their services and adopt new technology much faster in order to streamline their services and make them more efficient, scalable, and resilient. According to McKinsey research, this is a $1T annual market opportunity worldwide.

At the same time, western governments will need to find their (and their citizens’) own comfort levels with respect to monitoring policies and privacy protection. As Yuval Noah Harari said in his recent article in The Financial Times, “this storm will pass, but the choices we make now could change our lives for years to come. […] we face two particularly important choices. The first is between totalitarian surveillance and citizen empowerment. The second is between nationalist isolation and global solidarity.”

Several Other Sectors are Set to Thrive

Other sectors benefiting from Applied AI technologies are also expected to see an accelerated adoption curve, including industrial automation/autonomy, autonomous vehicles, cybersecurity/privacy protection, enterprise software collaboration/productivity, education, entertainment, foods, etc. With global experiments such as “Working from Home” and “Remote Tutoring/Schooling” involving millions of people, along with manufacturing site closures, transportation disruption, and people seeking new and interactive entertainment from home, it is hard not to be bullish on early stage venture investment leveraging Applied AI in any of these sectors.

The Digital Transformation can no longer wait

According to Wilshire Associates, $7.3 trillion in value has been removed from the total stock market since the February 19, 2020 high (which includes small and mid-sized companies). Corporations around the world moved from DEFCON 5 to DEFCON 1 levels in a matter of weeks. Boards around the world are asking their CEOs to implement immediate and far reaching digital transformation measures TODAY, and commit capital against it NOW, to ensure their survival. This transformation is no longer a “nice to have”, and “innovation theater” is no longer acceptable – time has run out.

On the bright side, 10 years of bull markets have provided significant cash reserves to corporations in the US and abroad. As of November 2019, the US cash reserves of US Corporations, excluding financial institutions, was expected to reach $1.5T by year end 2019, according to Moody’s.

We expect corporations to use this accelerated capex/refresh cycle to “leapfrog” the traditional software vendors and adopt (and in some cases, acquire) startup developing AI-software/solutions.

A 2019 CIO survey from Sapphire Ventures stated that over 80% of CIOs are investing in AI and ML innovation today:

And that nearly 70% of them would rather trust a startup with AI/ML technology than an established player/vendor:

This will not only fuel revenue growth for AI startups, including those in BootstrapLabs’ portfolio, but it will accelerate the “build, partner, or buy” decision framework used by corporations as they rush to accelerate the digitalization of their day-to-day operations and seek to acquire talent and new products via strategic M&A deals.

Conclusion

Overall, I remain bullish on venture capital as an asset class, and especially early stage venture investing.

I am concerned about the failure risk of certain early stage companies that have strong long term value-creation potential, but may have gotten caught at the wrong time in their fundraising cycles, or have simply been overwhelmed by the sheer scale and speed at which this Pandemic has shut down the world economy.

Being an optimist though, I remind myself that most startup founders are used to operating under high levels of uncertainty, are capable of making quick decisions, are able to listen and adapt to the world around them, can manage remote teams in their sleep, and therefore, are much better prepared to survive this crisis than large corporations.

The worst stock market corrections may be behind us (since stock markets tend to already anticipate the future based on all known information today), but the health care crisis has not yet peaked.

The impact of this pandemic will be felt for months post contamination peak, and will likely act as a drag to any economic recovery until we find a cure or vaccine (which hopefully will take months, instead of years). The world is likely to plunge into a recession, but I trust the US will be able to recover faster than other economies, and bounce back first, as it often did in the past.

If you are the leader of a large corporation seeking to accelerate your digital transformation and believe that the adoption of AI technologies will be a key driver of your future success, or if you are an asset allocator seeking exposure to early stage Venture Capital returns in the Applied AI space, contact us, and we will be happy to discuss our views in greater depth.