Investing in the certainty of innovation

A number of seismic shifts are underway that are transforming the global economy and presenting vast opportunity for both entrepreneurs and investors, writes Ed Knight, president of Antler.

With the world facing numerous challenges — the covid-19 pandemic, war in Ukraine, the cost-of-living crisis, market instability, and the recession that we will likely be facing soon — it is all too easy to focus on downsides. Understandably, these factors are having a destabilizing effect on investor confidence.

Ed Knight, Antler

But amid the volatility and uncertainty, it’s more crucial than ever to zoom out and consider the broader investing environment. A number of seismic shifts are underway that are transforming the global economy and presenting vast opportunity for both entrepreneurs and investors.

First, the most talented and ambitious young people today are channeling their energy differently than they were 25 years ago. Finance and law no longer have the monopoly on top graduates. For the first time in history, we are seeing a significant subset of the younger generation choosing innovation over traditional career paths, finding ways to improve and upgrade existing industries. Forty-one percent of Gen Zers plan to become entrepreneurs and nearly half (45 percent) believe they will invent something that changes the world, according to a report in Entrepreneur.

At the same time, the advent of cloud computing has revolutionized how businesses start and scale. Founders can scale their start-ups from anywhere in the world and reach enormous global audiences faster and at a lower cost than ever before. This means their time to impact is several orders of magnitude quicker than just a decade ago. As an example, it took the airline industry 68 years and television 22 years to reach 50 million customers. By contrast, it took Twitter two years and Pokémon Go a mere 19 days. As the fourth industrial revolution continues to gather steam, AI, robotics, genomics, the internet of things, quantum computing and more will be a source of immense opportunity.

The combination of these factors is turbo-charging the pace of disruption around the world. Just consider that in the late 1970s, the average lifespan of a S&P 500 company was 30 to 35 years; this decade, that average is forecast to shrink to 15 to 20 years and keep shortening as every industry in the world is being disrupted and rebuilt, according to Innosight.

The market downturn we are experiencing now will not dampen these trends. We are in a sustained age of innovation led by transformational technological advances that will impact every industry — fueled by the brightest minds on the planet. We can expect this to endure for many years to come, through up and down cycles.

The opportunity for venture

All of this makes a strong case for venture capital. The current uncertainty reinforces the importance of a long-term view and investing consistently through cycles, backing talent focusing on innovation. In recent years, leading investors have pursued this approach to great effect and continue to advocate for greater allocations to VC.

Cambridge Associates advises that a 15 percent allocation may be appropriate, and Blackrock suggests that an allocation to private markets/alternatives should grow from 5 percent to 20 percent of a portfolio over the next few years. Increasing numbers of investors have been moving into the space, with US VC fundraising surpassing $100 billion for the first time in 2021, and Q1 2022 fundraising accelerating from last year’s momentum, according to PitchBook.

VC investment in non-US companies in 2021 also broke records. Though private markets have not been immune to the downturn, early-stage markets have remained robust, with funding in May increasing 11 percent from 2021 monthly averages, Crunchbase reports.

In addition, the deteriorating return profile of traditional asset classes is providing further incentive to consider alternatives. Over the last 40 years, the 60/40 equity/bond portfolio construction formula has generated 7.5 percent annual returns. Looking ahead, Goldman Sachs projects that this strategy will return no more than 1 percent over the next decade. Inflationary pressures will likely reduce this number further. Elsewhere, in their recent seven-year asset class forecast, Boston-based asset manager GMO foresees negative returns in US equity markets and virtually all fixed income categories.

Amid the current period of instability, it does not seem controversial to suggest that technology will become a bigger part of our lives in the coming decades. Every industry is being reimagined and rebuilt around technologies that are global in nature, transcending borders and languages. This increasingly makes it harder to ignore the logic for an allocation to VC in investment portfolios as innovation reshapes our world.

Ed Knight is president of global early-stage investor Antler, based in London. This content represents the views of the author.