About SuperSeed Capital Limited

SuperSeed exists to back Europe's best B2B SaaS founders at the earliest stages, and to help them build great companies. In the short term, our portfolio companies enable their customers to drive revenue growth and efficiency savings using next-generation software and AI. In the long-term, they have an opportunity to create category defining global technology companies. SuperSeed focuses on the fundamentals by helping founders build good companies with strong unit economics and sensible distribution models.

Forward-looking statements

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Investment Manager's Review

The world of tech investing, ⅓ into 2024

Four months ago, at the start of 2024, we said we thought that US equities looked pretty fully valued. We also said that we thought the S&P 500 might have further to rise on the back of positive market sentiment.

Two months ago, markets were even higher, and we wrote how investors were partying like it was 1999. At the time I asked whether this was a revival of the dotcom bubble.

NVIDIA peaked on 25 March, and the S&P 500 3 days later. Since then, the S&P 500 is down 5% and NVIDIA is down 20%. Volatility is back.

Inflation isn't slain yet

Up until late March, there was still hope that inflation was more or less under control, and that the Fed would start cutting rates. That hope has been put on pause for now. US inflation has come down significantly from 2022, but it is still stubbornly high.

Cue the Fed and Powell, who have been rethinking interest rate cuts in the face of stubborn inflation numbers. Here is Jerome Powell on April 16th: "Given the strength of the labour market and progress on inflation so far, it is appropriate to allow restrictive policy further time to work and let the data and the evolving outlook guide us."

So the Fed keeps looking at their favourite data points, and they don't much like what they see. However, their pessimism may be excessive. The Truflation team has US inflation at 2.09% as of the latest reading, vs the Fed's reported 3.5% rate. And as the FT Alphaville Team points out, fears about inflation stickiness might be overdone.

So there are clearly two sides to the story. Even so, it's likely that we will get fewer cuts than hoped for in 2024. And thus markets are taking a breather and going soft.

Have the Magnificent Seven run out of Steam?

Since US Markets bottomed out in October 2022, the runup to current levels (+40%) have been powered by the Magnificent Seven (Apple, Google, Facebook, Amazon, Nvidia, Tesla, Microsoft). Investors have (in many ways correctly) treated the Seven as an unbeatable block of growth and profit. All driven by exceptionally dominant positions in their respective areas of technology.

But start scratching under the surface, and we can see that the party might be coming to an end.

While the Mag 7 are still up way above their position as of a year ago, the last month has been challenging. And there might be further headwinds.

Look under the covers:

·      Apple is struggling to explain where future growth will come from. Demand for iPhones has gone into a tailspin in China, and the pipeline of new blockbuster products looks bare.

·      Tesla is still growing modestly, but the company has missed Earnings Per Share for the past two quarters. And there are worries that both revenue and profit could be put under pressure from Chinese manufacturers:

·      NVIDIA has had an incredible run over the past 18 months on the back of the LLM/AI boom, but there are major questions as to whether the company can keep up the current combination of growth and profit margins (which would be needed to justify the valuation).

·      Facebook/Meta has also had a formidable run since the start of 2023. But a lot of the performance was driven by cost optimisation as the company got lean and trimmed investments in the Metaverse, leading to better operating profits. The company is theoretically well-placed to benefit from AI, given its massive data trove. However, as Meta felt it was behind Google and Open AI in the LLM race, it took an early decision to open-source its own LLM (Meta Llama). This potentially caps the upside of any benefit Meta can derive in the AI space.

·      Google was widely seen as the indisputable leader in AI prior to OpenAI's launch of ChatGPT. For more than a decade, Google (and Google Deepmind) produced world-leading research in the AI field. However, internal cultural issues have slowed down the pace of innovation at Google, exemplified by the botched launch of Google Gemini earlier this year. Gemini is in many ways an awe-inspiring product, and Google certainly hasn't been knocked out yet. But with its core business model (search and advertising) under assault from LLMs, many are questioning future growth prospects.

Amazon and Microsoft - the two remainders - have their own challenges. But even if we accept that they are formidable companies, it's hard to see those two pick up the slack from the other five to continue to drive the stock market all on their own.

So where are the growth opportunities?

As early-stage tech investors, we are unapologetically optimistic here at SuperSeed. That said, there has been some grim reading in the global news columns so far this year. It does not look like the war in Ukraine is drawing to a positive conclusion in the near term, and Israel's conflict with Iran's proxies Hamas and Hizbollah have threatened to engulf the wider region. On a macro scale, this is all "bad for business".

At the same time, there were hopes of a rapprochement between China and the US following November's largely successful summit between Xi Jinping and Joe Biden. But the underlying conflicts have not gone away. The US is unhappy with China's support for Russia, and China is unhappy with the US's support for Taiwan. And there are a host of other issues underneath these.

So rather than collecting a "peace dividend", everyone is now busy restocking their weapons arsenals. The UK government has announced a targeted increase in defence spending from 2.3% to 2.5% of GDP.

While all of this might be bad for peace (at least in the short term), it's good news for arms manufacturers. Rolls-Royce, for instance, have quadrupled in share price in less than 2 years.

Whatever your penchant for defence investments, weapons manufacturers and cybersecurity companies are likely to benefit in the years ahead.

What's happening in venture capital?

While 2023 was largely a year of going sideways, the VC industry has started to rebound as of the past few months.

US fund administration platform Carta reported that VC fund capital calls finally are on the rise again. While it is still too early to tell whether this is a bona fide new "cycle", the data is certainly showing green shoots.

Anecdotally, we are feeling spring-time in terms of deal-flow and velocity as well. But where is the activity?

In many ways, AI is still the only game in town. AI has driven expectations (and market cap) for Microsoft, Google and NVIDIA, and AI has also continued to drive investments in early-stage tech companies.

While US seed valuations ticked up in Q1, Series A valuations were largely flat on Q4 (but still well up on the nadir from Q4 2022 to Q3 2023).

Where are the opportunities?

In March, we looked at areas for early-stage investment opportunities. This month we are going to dive more into opportunities in vertical applications, including some of the AI tooling that enables these opportunities. You can read more here.

Fund progress in Q1 2024

New Investments:

Woodsense (closed early Q2)

The global construction industry wastes billions annually due to moisture damage, with approximately half attributed to water ingress alone. This not only impacts the bottom line of construction projects, but also undermines the structural integrity and longevity of buildings. Woodsense's SaaS platform monitors and detects moisture ingress in buildings by leveraging IoT sensors and AI-driven anomaly detection algorithms. Woodsense's platform eliminates risk, reduces cost, and provides quality assurance which is valuable for various stakeholders participating in the industry (architects, contractors, financiers, and insurers). Although still a young company, the business has strong product/market fit, with more than 100 customers already using the platform to manage construction risk.

Messium - Using AI to optimise fertiliser use in agriculture

Messium uses hyperspectral satellite imagery to monitor the nitrogen concentration of crops, and applies machine learning to infer the appropriate application of fertiliser. The solution optimises fertiliser application to increase yield and reduce waste, significantly growing farmers' margins. The average margin for a farm is 11.3%. Top-quartile farms achieve 75% higher margins than an average-performing farm. As agricultural subsidies continue to wane, and as crop prices continue to fall, farmers must focus on reducing costs. Fertilisers exist to maximise crop yield from arable land, but routinely, farmers over- or under-fertilise. Fertiliser prices are at historic highs, and are expected to continue to grow. Nitrogen concentration monitoring solutions that exist today generate unreliable, inaccurate information about nitrogen density in soil, leading to misinformed purchasing and application of fertiliser, or they are prohibitively time-consuming and expensive. While the over-purchasing of fertiliser further erodes farmers' slim margins, significant environmental implications also result from its overapplication.

Portfolio Revenue:

Portfolio revenue hovered around the 50% annualised growth mark in Q1. While buying cycles generally are better than 12 months ago, several companies still experienced delays in bringing in forecasted deals. The Q2 forecast is outlooking growth at a similar rate to Q1.

Valuations

Duel and Uhura have both had offers of new investments rounds, which has positively impacted valuations for the companies. Other than that, there have been no changes to valuations in Q1.

Outlook for the remainder of 2024

With strong deal-flow and positive market sentiment, our strategy for the year remains unchanged: back the best founders that use (AI-powered) software to change how business is done. We look to complete another 4-6 investments on this strategy for the remainder of the year.