The potential for a recession, driven by recent financial and economic turmoil, will spur investors to reduce risk across their portfolios.
Higher interest rates offer attractive alternatives to riskier bets and undermine the TINA (There Is No Alternative) mindset that has propelled capital into the riskier corners of the market for much of the past decade.
Higher hurdle rates and less leverage are weakening valuations. Pressure to grow at all costs will be met with a drive toward profitability for VCs and startups. At PitchBook, we expect the focus to narrow toward startups that have technology with a durable competitive advantage. Perkin’s Law—solve a tough technical problem to minimize market risk—will likely be the law of the land once more.
A downturn would stem in part from a number of supply shocks across the globe: crippled supply chains from the response to the COVID-19 pandemic and resulting volatile patterns of demand, as well as pinched energy, food and key raw materials due to war in Ukraine.
The crimping of supply coupled with decades of easy money policies globally (and massive largesse in response to the pandemic) ignited inflation rates that much of the developed world hasn’t seen in nearly half a century. Hopefully, a slowdown won’t revive that other malady of half a century ago: stagflation.
The response to these supply shocks could reorient trade and consumption patterns and alter global trade permanently. Startups that help resolve these problems or have technology that hastens the transitions stand to gain.
In our latest Emerging Tech Research report, “Emerging Tech Braces for Impact: How Today’s Market Turmoil is Impacting Key Technology Verticals,” PitchBook analysts examine how the current market and economic disruptions are affecting pivotal areas of tech we track.
Climate tech: As the effects of the war in Ukraine reverberate, key climate tech winners will be lithium mining service providers and new Western battery companies. European startups in solar, wind and hydrogen are likely to see increased demand from governments as the bloc seeks to wean itself off Russian energy sources. HDF Energy, Lhyfe and HiiROC are among the hydrogen startups that could benefit. Meanwhile, oil majors, flush with capital from higher oil prices, are likely to accelerate investment in renewable energy. —James Ulan, Lead Analyst
Blockchain: After a period of outsize gains, investors and founders are bracing for the effects of a downturn. Non-fungible token transaction volumes should fall as their highly speculative nature makes them less attractive. Blockchain gaming could see meaningful innovation as video game studios partner with blockchain infrastructure startups such as Forte and Fractal. —Robert Le, Senior Analyst
Mobility tech: An economic downturn creates a mixed bag of challenges and opportunities for mobility tech companies. Higher energy prices will accelerate electric vehicle adoption, but higher materials costs and supply chain issues will stymie production. In a recession, a softer labor market would ease costs for companies that rely on contracted labor, namely last-mile and ridehailing, but also hurt demand. Capital-intensive strategies will likely struggle for funding. —Jonathan Geurkink, Senior Analyst
Supply chain tech: Supply chain disruptions and geopolitical events are causing countries and companies to reevaluate their dependence on pan-Pacific trade and far-flung suppliers. Diversification, reshoring and near-shoring are the new mantras. A downturn creates an opening for supply chain tech firms to offer new solutions and alternatives. Warehouse automation startups such as Exotec and Ox could benefit. —Jonathan Geurkink
Artificial intelligence & machine learning: AI-aided software development, also referred to as Software 2.0, will be accelerated to withstand the loss of software developer capacity and the challenges of building software in a recession. Elsewhere in the sector, sometimes-outlandish forecasts are unlikely to stand up to scrutiny in the current landscape. —Brendan Burke, Senior Analyst
Information security: Geopolitical instability will encourage information security adoption and reinforce the vertical’s position at the top of enterprise priority lists. Those in the sector focused on vulnerability assessment, extended detection and response, access management internet of things, and secure networking are likely to benefit. —Brendan Burke
Internet of things: Consumer categories face risks of slower growth in 2022. Smart home led the vertical in VC funding in 2021, but faces a low-growth outlook as pandemic-induced demand subsides and inflation pushes consumer dollars to staples. Areas with less exposure to consumer budget constraints include healthcare, energy and utilities, and commercial real estate. —Brendan Burke
Foodtech: Rising food prices are eroding consumer purchasing power and leading consumers in stores and online to buy less, and less expensive goods. Providers of premium-priced goods—plant-based foods, for instance—and online food delivery providers that charge a significant premium may run into headwinds. —Alex Frederick, Senior Analyst
Agtech: Record fertilizer prices, war-caused grain shortages and extreme weather have created extraordinarily challenging conditions to meet growing global food demand. Biofertilizers and indoor-farming technologies will be essential in overcoming these challenges in the long term. Field robotics provided by startups such as Augmenta, Verdant Robotics and Rowbot that reduce inputs stand to do well in the new environment. —Alex Frederick
Insurtech: Insurtech companies selling risk products will face new challenges in a downturn, while those selling technologies that improve underwriting and claims processes could see strong growth. Insurance startups in the cybersecurity area such as Coalition, Corvus, Envelop Risk and Qomplx also stand to gain. —Robert Le
Fintech: Consumer fintech companies could see growth impaired as household budgets are squeezed. SMB-focused fintech is also expected to face challenges. Fintech infrastructure should continue to do well, as banks maintain or increase technology spend, yet consolidation is also likely. Trading and investment apps are likely to face significant pressures as consumers retrench. —Robert Le
Read the full report: “Emerging Tech Braces for Impact“
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