How to survive a technology downturn, according to a venture capital investor

Venture capitalists at Lux Capital have some bad news. The outlook for the tech sector is likely to get worse – much worse.

Lux Capital founders Josh Wolf and Peter Hebert say: Baron That a wide range of investment firms and portfolio firms are unlikely to do so Surviving deflation.

“In the same way that technology has driven the increase down the road, you’ll see it all the way down,” says Wolf. “It’s as if it was the summer of 2000, where you had a speculative surplus that would be dumped.”

But there is a silver lining to these dire predictions. The upcoming turmoil should give impatient investors a new set of money-making opportunities.

Lux was founded in 2000, just as the collapse of the internet wreaked havoc in Silicon Valley and throughout the tech investment scene.

Lux thrived because it eschewed the Internet and optical network companies that were prominent at the time. Instead, the company invested primarily in science and technology startups that sought to solve real-world problems.

“We’ve always moved away from consumer-led companies and marketing, where it’s been about spending dollars on advertising to get people’s attention,” says Wolf. “We invest in the things that matter. They tend to be more atoms than bits.”

Today, Lux has $4 billion in assets under management. Since the company’s inception, its funds have averaged annual returns of 30% to 40% through the end of last year, according to a source familiar with the company.

Now, Lux says she is once again preparing for the challenging times ahead for the broader tech world.

In recent weeks, deteriorating economic conditions have led to layoffs. in late April,


Robinhood Markets

(stock ticker: HOOD) Announced a 9% staff reductionAnd the


Netflix

(NFLX) follow suit Leave about 150 employees Last month.

Wolff sees this type of job cut announcement eventually moving from 10% to 20% of a company’s workforce to 30% to 50%. These technology cuts could hurt spending in other categories of luxury goods to bars and restaurants, leading to a broader economic slowdown.

Meanwhile, with interest rates rising and cheap capital drying up, many of the hottest tech companies built on uneconomic business models are facing a reckoning.

“We talked to a lot of peers who had never gone through this cycle,” says Wolf. “We were kind of born into the fire, watching the boom and bust of the dotcom crisis, and formed Lux ​​to study why other companies failed and what they did right and what went wrong.”

In recent years, the company has invested in artificial intelligence, robotics, and new drug discovery methods, while much of the venture capital world has focused on social media and crypto companies.

One example of Lux’s success story is its 2008 investment in Korion, a startup co-founded by Wolff that uses robots and chemistry to clean up nuclear waste.

Kurion became one of the few companies that responded to Japan’s Fukushima nuclear disaster in 2011. Lux sold Kurion for it. Nearly $400 million in 201634 times the company’s total investment.

This kind of investing based on deep science should hold up in the coming months and years even if Luxe’s ​​predictions about global economic trends prove accurate.

The founders of Lux are excited about two specific investment themes over the next few years.

The first is what the company calls the technology for hard power. Lux funds companies that give the US military and its allies the tools to win on the battlefield, including robotics, missile launch technology, monitoring satellites, and modern communications.

One of Lux’s investments is Primer, which Uses advanced artificial intelligence algorithms To translate battlefield intercepted communications into real-time intelligence for government analysts.

Lux’s founders see a more dangerous world in which geopolitical issues are the tailwinds for many of these hard power investments. “Large portions of food, essential minerals, and energy have been stretched and stretched by the Russo-Ukrainian war,” says Wolf.

The theme of the second investment includes soft power technology, which entails developing infrastructure for scientists, including drivers for advanced labs and microscopes, that may enable groundbreaking discoveries.

In 2019, Lux made Establishing an investment in Aikon Therapeuticsa company based on the microscopy technology behind the 2014 Nobel Prize in Chemistry, which can see inside cells in real time and could lead to the discovery of life-saving drugs.

Even with the bleak economic outlook in the short term, the founders of Lux remain enthusiastic about the technology. “We’re going to fund some amazing people doing incredible things in the coming years,” says Heber, co-founder of Wolfe. “In the long term, we remain very excited and optimistic.”

write to Tae Kim at tae.kim@barrons.com

.