While venture capital is taking a more cautionary approach with
crypto startups, the buzz around GenAI is only increasing.
----- Transcript -----
Welcome to Thoughts on the Market. I’m Ed Stanley, Morgan
Stanley’s Head of Thematic Research in Europe. Along with my
colleagues bringing you a variety of perspectives, today I’ll
discuss what private markets can tell us about the viability and
investability of disruptive technologies.
It’s Tuesday, the 3rd of September, at 2pm in London.
For the past three years we have been tracking venture capital
funding to help stay one step ahead of emerging technologies and
the companies that are aiming to disrupt incumbent public
leaders. Private growth equity markets are -- by their very
definition – long-duration, and therefore highly susceptible to
interest rate cycles.
The easy-money bubble of 2021 and [20]22 saw venture funding
reach nearly $1.2trillion dollars – more than the previous decade
of funding combined. However, what goes up often comes down; and
since their peak, venture growth equity capital deployment has
fallen by over 60 percent, as interest rates have ratcheted ever
higher beyond 5 percent.
So as interest rates fall back towards 3.5 percent, which our
economists expect to happen over the coming 12 months, we expect
M&A and IPO exit bottlenecks to ease. And so too the capital
deployment and fundraising environment to improve.
However, the current funding market and its recovery over the
coming months and years looks more imbalanced, in our view, than
at any point since the Internet era. Having seen tens- and
hundreds of billions of dollars poured into CleanTech and health
innovations and battery start-ups when capital was free; that has
all but turned to a trickle now. On the other end of the
spectrum, AI start-ups are now receiving nearly half of all
venture capital funding in 2024 year-to-date.
Nowhere is that shift in investment priorities more pronounced
than in the divergence between AI and crypto startups. Over the
last decade, $79billion has been spent by venture capitalists
trying to find the killer app in crypto – from NFTs to gaming;
decentralized finance. As little as three years ago, start-ups
building blockchain applications could depend on a near 1-for-1
correlation of funding for their projects with crypto prices. Now
though, despite leading crypto prices only around 10 percent
below their 2021 peak, funding for blockchain start-ups has
fallen by 75 percent.
Blockchain has a product-market-fit and a repeat-user problem.
GenerativeAI, on the other hand, does not. Both consumer and
enterprise adoption levels are high and rising. Generative AI has
leap-frogged crypto in all user metrics we track and in a
fraction of the time. And capital providers are responding
accordingly. Investors have pivoted en-masse towards funding AI
start-ups – and we see no reason why that would stop.
The same effect is also happening in physical assets and in the
publicly traded space. Our colleague Stephen Byrd, for example,
has been advocating for some time that it makes increasing
financial sense for crypto miners to repurpose their
infrastructure into AI training facilities. Many of the publicly
listed crypto miners are doing similar maths and coming to the
same outcome.
For now though, just as questions are being asked of the listed
companies, and what the return on invested capital is for all
this AI infrastructure spend; so too in private markets, one must
ask the difficult question of whether this unprecedented
concentration around finding and funding AI killer apps will be
money well spent or simply a replay of recent crypto euphoria. It
is still not clear where most value is likely to accrue to –
across the 3000 odd GenerativeAI start-ups vying for
funding.
But history tells us the application layer should be the winner.
For now though, from our work, we see three likely power-law
candidates. The first is breakthroughs in semiconductors and data
centre efficiency technologies. The second is in funding
foundational model builders. And the third, specifically in that
application layer, we think the greatest chance is in the
healthcare application space.
Thanks for listening. If you enjoy the show, please leave us a
review and share Thoughts on the Market with a friend or
colleague today.
*****
Digital assets, sometimes known as cryptocurrency, are a digital
representation of a value that function as a medium of exchange,
a unit of account, or a store of value, but generally do not have
legal tender status. Digital assets have no intrinsic value and
there is no investment underlying digital assets. The value of
digital assets is derived by market forces of supply and demand,
and is therefore more volatile than traditional currencies’
value. Investing in digital assets is risky, and transacting in
digital assets carries various risks, including but not limited
to fraud, theft, market volatility, market manipulation, and
cybersecurity failures—such as the risk of hacking, theft,
programming bugs, and accidental loss. Additionally, there is no
guarantee that any entity that currently accepts digital assets
as payment will do so in the future. The volatility and
unpredictability of the price of digital assets may lead to
significant and immediate losses. It may not be possible to
liquidate a digital assets position in a timely manner at a
reasonable price.
Regulation of digital assets continues to develop globally and,
as such, federal, state, or foreign governments may restrict the
use and exchange of any or all digital assets, further
contributing to their volatility. Digital assets stored online
are not insured and do not have the same protections or
safeguards of bank deposits in the US or other jurisdictions.
Digital assets can be exchanged for US dollars or other
currencies, but are not generally backed nor supported by any
government or central bank.
Before purchasing, investors should note that risks applicable to
one digital asset may not be the same risks applicable to other
forms of digital assets. Markets and exchanges for digital assets
are not currently regulated in the same manner and do not provide
the customer protections available in equities, fixed income,
options, futures, commodities or foreign exchange markets.
Morgan Stanley and its affiliates do business that may relate to
some of the digital assets or other related products discussed in
Morgan Stanley Research. These could include market making,
providing liquidity, fund management, commercial banking,
extension of credit, investment services and investment banking.
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