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The ChatGPT effect? Investors bet big on deep tech startups 

An expert from Velocity Ventures believes new startups will build their business models on the chatbot.

Back in 2014, businesses focused on logistics tech and e-commerce were not as big, but when Ninja Van entered the picture, the startup scene saw a rise of entrepreneurs gravitating towards the sector. The same phenomenon will likely happen again in the current startup economy, but this time with deep tech—technologies requiring substantial investment in research and development.

In an interview with Hong Kong Business, Bennett Lee, investment director of Velocity Ventures, said there are going to be a “lot of new startups building upon the technologies of artificial intelligence (AI) and ChatGPT.” 

Jeffrey Chi, Vice Chairman for Asia at Vickers Venture Partners, also believes that deep tech is set to flourish, especially since the sector already saw growth in 2022. 

Raymond Moh, senior adviser to Cambridge Advisers Pte Ltd, had a similar observation, saying that many of the emerging startups are “developing disruptive applications in the Web 3.0 space.” 

“This includes deep learning applications to enhance the productivity of traditional processes and generate insights from untapped data that are conventionally stored in archives; blockchain applications to provide decentralised solutions to the traditional finance processes, and others create a whole new digital ecosystem and user experience in gaming and metaverse platforms; Internet of Things (IoT) applications in both household and commercial uses to provide convenience and enhance the longevity of high-value assets, respectively,” Moh said.

Vickers Venture Partners is particularly looking for startups with innovative technologies in expanding fields such as biotech or healthcare, AI, advanced materials, robotics, photonics, and quantum computing.

Whilst deep tech has become somewhat popular amongst entrepreneurs and investors, Tan Shuo Yan, Deloitte Southeast Asia’s Innovation Senior Manager, said the industry is currently underinvested in.

“These technical industries will constitute the backbone of the next frontier of innovation in Southeast Asia, but there are still significant existing gaps in each industry to be bridged,” Tan said.

Going green

Apart from deep tech startups, Moh said that over the past year, there has been a ballooning number of “green” startups attempting to plug gaps in the environmental, social, and corporate governance (ESG) domain.

“[Startups] are capitalising on the regulatory ambitions of developed countries and countries with large carbon footprints,” said Moh.

One of the companies featured in this year's Hottest Startup list that focuses on sustainability is Packmojo.

In 2023, Tan believes that climate-tech and sustainability-related startups will “likely gain some traction as companies and governments all over the world double down on their sustainability efforts.”

Chi said startups with technologies associated with renewable energy are becoming increasingly interesting and attractive.

Vickers Venture Partners is interested in grid-level energy storage and geothermal innovations.

“One of the key issues with renewable energy sources such as solar and wind is its reliance on weather conditions. Efficient energy storage and geothermal solve those problems and provide for stable and dependent energy supply. These are game changers in the renewable energy world,” Chi said.
 
“As countries in the region continue to develop, there is increasing demand for electricity and a need to reduce carbon emissions. Geothermal energy can play a significant role in meeting these goals, and venture capitalists see the potential for strong returns on their investments. In addition, governments in Asia are also making efforts to increase their geothermal power generation capacity by providing incentives and subsidies to companies and investors who develop geothermal power projects,” Chi added.

Lee said startups must also focus on the “governance” side of ESG since there is a lot to be done in this aspect, considering the downfall of several big startups like FTX, Theranos, and Zilingo.

Healthcare remains a hit

According to Moh, many of the innovations from healthcare startups are targeting front-end applications, such as AI for medicine, and relatively less on the supporting infrastructures such as regulatory compliance support.

“The area of regulatory support across…[the] medical sector is still lacking in terms of innovation and sophistication… Medical innovations such as biotechnology and cell gene therapies are also not keeping pace with the evolving needs of an ageing population. These require deep expertise that crosses multiple disciplines, heavy but patient capital, and longer gestation periods. Black swan events like the COVID-19 pandemic have raised the importance of new discoveries in defensive medicine,” Moh said.

“Deep tech startups who are committed to plunging in for the long term can leverage on their advanced technologies and partner with medical professionals to shorten the development lifecycle, with the aim to create profound impacts to treatment and medicine discovery,” he added.

Tan, for his part, said entrepreneurs should tap into innovations such as non-intrusive sensors, wearables, and diagnostics.

Whilst healthcare remained popular in 2022, Lee believes the sector will see a slowdown in the coming years, particularly on the telemedicine front.

He added that telemedicine’s pace of growth during the pandemic is “not going to be sustainable.” During the pandemic, telemedicine startups grew 400% to 500% year-on-year. Lee expects this growth to come down to a 150% to 200% range. 

Fintech, still a frontrunner

Like healthcare, fintech remains at the forefront of the startup economy. In 2023, experts believe the sector will continue to grow.

Adjacent fintech verticals, like credit scoring, buy-now-pay-later (BNPL), and earned wage access (EWA) will continue to grow as well, said Tan.

The crypto-blockchain space, however, will likely hit a slump, according to Lee, adding that there’s a lot of risk at the moment with regard to crypto. 

With the FTX collapse and regulations becoming stricter, Lee said startups will have a harder time entering the space. 

On the brighter side, Lee believes there will be new innovative companies coming out of crypto which can use the technology more soundly, 

Fintech also has a lot of scope for investment and innovation, particularly in areas such as digital banking, said Chi.

But since traditional financial institutions like large banks are also “adopting their solutions very quickly,” Chi said fintech startups will find the “space challenging and highly competitive, and in all likelihood, find it difficult to sustain their business on their own.”

Fundamentals to funding 

As funding levels decrease in the current economic climate, entrepreneurs should stress-test their value proposition and refine their go-to-market plans, sharpen their go-to-market plans, and brutally cut excessive expenditures, according to Lee.

“This year, it's all about execution, talking about profitability and talking about what makes your business model viable. If you could do that, that would obviously attract investors' attention,” Lee said. 

For Chi, the key to attracting inventors is to focus on “profitability and demonstrating a clear path to revenue growth.”

“In times of economic uncertainty, investors are often more cautious about investing in high-risk startups,” he said. 

“Be transparent with your potential investors about the risks and challenges your business may face. Investors appreciate honesty and want to know that you have a clear understanding of the obstacles your business may encounter,” added Chi.

Tan, for his part, advised enterprises to create “painkiller products that solve core pain points, as opposed to vitamin solutions that are good to have.”

“[Venture Capitalists (VCs)] are looking for capital-efficient profitable startups that offer indispensable products and/or services. During tough times, people tend to cut back on discretionary products and focus on necessities. Startups that provide a tool, platform, or service that people and businesses need have better chances to raise capital.” Tan said.

Tan added that VCs will also be looking at startups that are capital-efficient and have a clear path to profitability.  

“This means startups should avoid capital-intensive business strategies, such as expensive customer acquisition strategies, owning significant amounts of assets, and employing large numbers of talent.  They will be held to even higher expectations of demonstrating potential for profitability, whether that be in healthy margins, or tapping on network effects to grow exponentially,” he added.

Entrepreneurs should continuously shape, or even pivot, their business model so that it can withstand disruption by market forces, said Moh.

“Investors generally have turned to be more cautious in measuring valuation and take longer time to select their perceived market segment leaders. Therefore, entrepreneurs may want to negotiate for larger investment size and face more dilution to buy time amid a gloomy climate,” Moh said.
 
For products that require a long gestation period but can really make a significant impact, [entrepreneurs] should not be deterred by the short-term view of venture capital firms who have targets and fund life limitations. They potentially can look out for the more ‘patient capital’ offered by family offices in Asia. The latter are looking for ventures that are aligned to the family’s mission and can make a good impact on the society, and less so on significant returns,” Moh added. 

Pushing Hong Kong as a startup hub

Whilst Hong Kong has fallen in the rankings of top startup economies in Asia-Pacific, Chi believes it can rise anew with four steps.

“First, it could increase its investment in innovation by providing funding for research and development and promoting collaboration between universities and businesses. Second, it could streamline its regulatory environment by removing barriers to entry and reducing bureaucracy. Third, it could attract and retain top talent by offering attractive salaries, providing training opportunities, and offering a high quality of life for its citizens,” Chi said.
 
“Finally, Hong Kong could work to build a more diverse economy, reducing its reliance on financial services and creating opportunities for startups in a variety of industries. By taking these steps, Hong Kong could attract more startups, foster innovation, and establish itself as a leading startup hub in the region,” Chi added.
 
Recently, there have been audit work paper inspections occurring in Hong Kong which, in turn, has affected investment activity in the city. 

“The inspections, which are being conducted by the city's accounting regulator, the Financial Reporting Council (FRC), have resulted in delays in the release of audited financial statements for many companies, including startups. This has led to a slowdown in investment activity, as investors are hesitant to commit funds without access to up-to-date financial information. The inspections have also resulted in increased scrutiny of accounting practices, which may lead to greater caution among investors and a more risk-averse approach to funding,” Chi said.
 
The impact of the inspections on funding in the city, however, will depend on several factors moving forward.

“If the inspections result in a greater focus on transparency and accountability amongst companies, this could ultimately lead to increased investor confidence and a more stable investment environment,” Chi said.

“If the inspections continue to lead to delays and uncertainty, this could lead to a further slowdown in investment activity and a loss of confidence among investors. Ultimately, the impact of the inspections on VC funding in Hong Kong will depend on how effectively the FRC is able to balance its oversight responsibilities with the need to maintain a vibrant and dynamic startup ecosystem in the city,” Chi added.

READ MORE: ‘Stand-off’ between VCs and entrepreneurs pushes funding volumes down

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