NFX: “Generative Tech will be a big sector this coming year”

If you’re interested in tech, the chances are you’ve been captivated by OpenAI’s chatbot service ChatGPT. Its harrowingly accurate AI-generated answers show promise for some of the technology and innovation the world can expect to see - despite the current downfall.

“We think Generative Tech will be a big sector this coming year,” said Gigi Levy-Weiss, General Partner at NFX. “New AI platforms like OpenAI and Stability AI are unlocking new potential that span from gaming to marketing. Longevity technology and food technology are two other sectors that will leverage recent breakthroughs in biology and life sciences.”

Read every interview in our ongoing project

NFX General Partner Gigi Levy-Weiss

As the world turns to 2023, he presented an idea of what the sector can expect. “Sectors that blew up during COVID are likely to see a slowdown, especially food-delivery platforms and work-from-home tech. Many of those companies will suffer as consumers return to in-person activities,” he said.

Name of fund/funds: NFX
Total sum of fund: $1.1B
Partners: Gigi Levy-Weiss, James Currier, Pete Flint, Omri Amirav-Drory, Morgan Beller
Notable/select portfolio companies: Lyft, C2i Genomics, Mammoth Biosciences, Walnut, Yo-Egg, Triple Whale, Firefly, Moov, Papaya Gaming

NFX joined CTech to discuss some of the ways tech - and our interactions with it - will change next year.

If 2020 was the year of the pandemic, and 2021 was the year of records, how would you define 2022 in the VC sector?

I’d say 2022 is the year things came back to earth. The massive amount of pandemic stimulus fueled a massive boom in private and public investments and valuations, to an unsustainable level. As interest rates continue to rise through the end of 2022, I think people will look back at this year as a corrective one for the tech/startup landscape.

Who are the big winners of 2022 and why?

Startups that have been able to maintain a balanced growth/spending ratio are definitely winners and attractive. Also, companies that help people save money are good bets, something that becomes particularly powerful during a recession when interest rates and inflation are deeply impacting the economy. Gaming is also pretty resilient during a downturn as people stay in and save money.

Who are the big losers of 2022 and why?

During COVID, industries that helped people adapt to pandemic life exploded to unsustainable valuations; food-delivery services and work-from-home software are good examples of this. While these categories will still remain valuable, now that the pandemic is behind us, these valuations can’t be justified anymore. It will feel like a loss for the moment, but it’s actually a correction toward a more sustainable business.

What do you expect in the VC sector in 2023?

We’re definitely not sitting on the fence, I’m optimistic about 2023, especially for early-stage investors like ourselves. Many VCs including NFX have plenty of dry powder that we’re looking to deploy.

Some of the world’s largest tech companies were created during downturns as new problems and inefficiencies become more apparent; I see no reason why this wouldn’t be the case this time around. We’re keeping an eye out for these types of companies and are still willing to make big, bold, investments in category-defining companies.

Later-stage VCs might have a harder time in 2023–we really need to see a big IPO to open up the markets. But this is something early-stage startups and VCs don’t need to worry as much about. We have 5-10 years for the correction to happen. New funds without a strong track record might also have a hard time fundraising as LPs will want to invest their money with proven management teams.

What global processes will affect (positively and negatively) the Israeli market?

The #1 factor is if/when a global recession hits. After that, there are several major headwinds that include U.S. interest rates, Chinese economic stability, and the war in Ukraine.

How should different companies prepare for the coming year?

Companies of all sizes should think about streamlining their operations, cutting costs where possible, and focusing on profit and not just growth.

This is the time for companies to figure out how to maximize their main revenue drivers but also keep an eye out on how to creatively/affordably add additional streams of revenue

What will be of the dozens of unicorns born last year?

As it was before the pandemic, having a high ARR ($100M+) will be key for companies to gain unicorn status.

As the market recalibrates, many companies will lose this status, and that’s okay; a lot of late-stage companies have seen their valuations slashed already–probably to more realistic levels.

Founders should focus on reducing burn and increasing revenue rather than just wanting to increase valuation. If they boost revenue or even become profitable during this down market, a higher valuation will surely come with it.

What sectors will experience an acceleration in VC investment and which will suffer a slowdown - and why?

For one, we think Generative Tech will be a big sector this coming year. New AI platforms like OpenAI and Stability AI are unlocking new potential that span from gaming to marketing. Longevity technology and food technology are two other sectors that will leverage recent breakthroughs in biology and life sciences.

As I mentioned earlier, sectors that blew up during COVID are likely to see a slowdown, especially food-delivery platforms and work-from-home tech. Many of those companies will suffer as consumers return to in-person activities.

HR: Do the layoffs, those that have already happened and those that are coming, help to fix in any way the distress experienced by companies over the past 2-3 years?

We will likely see more layoffs; the job market has still been oddly strong given the state of the economy, but I think it will worsen perhaps even more. It’s an unfortunate part of the business cycle, as companies ramp up to meet demand during boom markets, and then that demand fades as times get tough.

The silver lining is that layoffs from large tech companies often unlock a ton of talent for emerging companies. Many people who are laid off may go on to join startups or become founders themselves.

Triple Whale, Landa, ImagenAI - NFX’s notable portfolio companies

Triple Whale
E-commerce: A simple mobile-first dashboard that connects all the tools eCommerce stores use

Founders: Maxx Blank and AJ Orbach
Founding year: 2021
Number of employees: 110

Explanation behind investment: Group of young and driven entrepreneurs who started off as e-commerce sellers, then built the dashboard they wish they had. Have seen immense growth and product-market fit in the last year.

Landa
Proptech - allowing anyone to invest in real estate via fractional ownership

Founders: Yishai Cohen and Amit Assaraf
Founding year: 2018
Number of employees: 30

Explanation behind investment: It's becoming more difficult for the average person to invest in the real estate market, and Landa allows anyone to do this for as little as $5.

Imagen
AI - Personalized Lightroom Editing Assistant

Founders: Yotam Gil, Yoav Chai, and Ron Oren
Founding year: 2019
Number of employees: 50

Explanation behind investment: Photo editing is still an incredibly time-consuming process, even though much of the work can be automated.