Dear Reader,
This year, I’ve been keeping a very close eye on the venture capital (VC) and private equity (PE) industries.
When the economy is strong, interest rates are low, and capital is in abundance, it’s pretty easy to figure out that the VC/PE industries will raise a ton of money and deploy it as quickly as possible.
In an environment like that, there isn’t much insight to glean. It just means there’s a bunch of money chasing a limited number of deals. And that leads to one thing… higher valuations.
But in challenging markets like we’ve faced this year, what’s happening in the industry can give us insights as to what the smart money’s seeing in the near future. If capital completely dries up and the VC/PE industries run for the hills, watch out – we’re in trouble.
And fortunately, that’s not what’s happening.
This week, tech-focused private equity firm Thoma Bravo announced a record raise of $32.4 billion across funds. It wasn’t just the sheer magnitude of the raise, but the fact that the raise was 42% more than its last raise in 2020.
And while 2020 may feel like it’s way back in the rearview mirror, that was a time when the economy was very strong – unlike today.
If Thoma Bravo and its limited partners felt like we were in for outright economic collapse in 2023, this raise would have never happened.
For context, Thoma Bravo is a software- and information-technology-focused PE firm that’s been remarkably successful buying out high-growth tech companies and eventually selling them off or taking them public a few years later.
Sometimes it acquires a company to combine with another one of its assets, resulting in an even stronger competitive position. Other times, it focuses on restructuring and providing growth capital that its targets otherwise wouldn’t have had access to.
Thoma Bravo is a PE firm that we know well in Exponential Tech Investor. I’ve lost count of how many of my portfolio companies have been acquired by the PE firm since 2015.
I know what kinds of companies Thoma Bravo likes, and I’m always looking for small-cap growth companies that aren’t just fantastic investments in their own right, but also attractive acquisition candidates.
This year, Thoma Bravo acquired Ping Identity, an Exponential Tech portfolio company, and one that I predicted would be acquired. Not only was it a high-growth leader in its industry, but it was trading at a valuation that was simply too cheap to last. Thoma Bravo couldn’t resist.
And the larger strategy is clearly an industry roll-up. In April, Thoma Bravo bought SailPoint. In August, it bought Ping. And October, it acquired ForgeRock.
It’s also building what could become the dominant identity and access management company in the industry, and one that it could take public or sell to a large-cap IT company a few years down the road.
Okta will benefit during the restructuring process, as there will be so much change. But years down the road, the end result will almost certainly be impressive.
Thoma Bravo’s raise tells us two things.
First, we’re in for a better year in 2023. Second, while most hedge funds, institutional capital, and VC/PE firms are all licking their wounds like the rest of us this year, they’re gearing up to deploy capital in 2023.
And Thoma Bravo clearly sees what I see. The small-cap growth market is one of the most undervalued sectors in the public markets. Growth simply wasn’t rewarded this year, and institutional capital fled these smaller companies for safety.
This is temporary. And with compressed valuations at the level we see today, it makes for a target-rich environment for acquisitions at very attractive prices.
Over the next six months, I predict that we’re in for a flurry of acquisitions in small-cap growth companies, particularly high tech and biotech. This is where the value is right now. Many companies are trading at record low valuations, some of which are even trading at negative enterprise values.
Whenever a market extends itself to an extreme like we’re seeing today, it always snaps back quickly. While funds are cleaning up their portfolios this month in preparation for closing out the year, once the calendar page turns to 2023, it’s game on.
We just got an exciting look at Apple’s upcoming augmented reality (AR) launch. There are clear signs that we’re months away from a product launch.
Here’s a mock-up of Apple’s first AR headset:
Apple’s Forthcoming AR Headset
Source: AppleInsider
We can see here that Apple’s first-generation AR eyewear won’t be as big and bulky as a standard VR headset. At the same time, this particular device isn’t as sleek and form-fitting as a pair of glasses.
But there’s a catch.
Apple plans to release a series of three different AR products: the N301, the N602, and the N421.
This first is expected to be the N301, which will be Apple’s high-end headset. It will offer high performance and high resolution. And it will likely be priced in the thousands. I could easily see a price tag between $2,000 and $3,000.
The N602 will become the mass-market AR headset launched at a later date. It won’t have all the high-end tech that the N301 comes with, but it will still be fully functional and run on the same software platform as the N301. We’ll likely see a price tag of less than $1,000 for it.
Lastly, the N421 is rumored to become a light-weight pair of smart glasses. It won’t offer full AR functionality. But it will feature the sleek, form-fitting design that consumers prefer.
Regular readers may remember Apple’s trademark filings from back in September. Those filings detailed Apple’s AR operating system, which it referred to as “realityOS.”
Well, Apple’s latest announcement indicates that the company changed its software from “realityOS” to “xrOS.” XR stands for extended reality.
This is what gives me confidence that a product launch is near. Apple typically uses placeholder names for its software in the early stages. Then it changes the name when the software is close to launch. And that’s exactly what Apple just did with its AR software.
Now that the formal naming is in place, we can be sure that Apple’s AR launch will happen the next calendar year. The wait is almost over.
And given that this is Apple’s first new product category launch in many years, we can expect a dedicated launch event from Apple. If I had to guess, we might expect to see such an event by the second quarter of next year.
I don’t think we’ll be disappointed, either. Apple has been working on AR tech for years, and it’s made a number of acquisitions that supported this strategic product development.
As usual, I expect that Apple will set the pace in the industry for AR technology with its new product release. That will send the industry into hyperdrive as major players compete for market share for the next generation of mass-market consumer electronics.
Regular readers of The Bleeding Edge might remember the name Anduril. It’s a prominent defense contractor that uses artificial intelligence (AI) to power drones and solar-powered surveillance towers.
We first profiled Anduril back in June of 2020 after its Series C round brough in $200 million, which valued the company at $1.9 million.
It just achieved another major milestone.
Anduril locked in the second-largest venture capital (VC)-backed funding round of the year. Only SpaceX’s $1.7 billion funding round in June was larger.
As a reminder, Anduril is the only digital-first, bleeding-edge defense firm servicing the U.S. military. It was founded by Palmer Luckey.
If we remember, Luckey was the original founder of virtual reality (VR) start-up Oculus, which Facebook bought in 2014 for $2 billion.
Rather than stay on at Facebook, Luckey left to start Anduril. And he was widely mocked for this in Silicon Valley. At the time, the tech industry was basically boycotting people and companies that were actively competing for defense contracts.
But Luckey saw a tremendous opportunity. There weren’t any bleeding-edge tech companies vying for these contracts. Luckey knew he could bring the Silicon Valley type of innovation to the defense industry that none of the incumbent government contractors could deliver.
Fast-forward to today, and Anduril is worth nearly $8.5 billion. It’s seen a meteoric rise in just a matter of years.
And partly thanks to the geopolitical conflict in the Ukraine, the company’s technology is in greater demand today than ever before.
Anduril specializes in two things: autonomous drones and solar-powered surveillance towers. The towers are powered by Anduril’s AI operating system. The two go hand in hand.
The AI system ingests all sorts of video and data from the towers. Then it synthesizes that information to generate actionable intelligence. This intel can be fed to the drones in real-time to guide their decision-making.
And get this: Anduril doesn’t just make flying drones. It also developed autonomous drones that operate underwater. It’s quickly become one of the most innovative and interesting companies in the defense industry.
Anduril continues to be one to watch. The company is already generating hundreds of millions of dollars in annual revenue – and it even closed a billion-dollar contract with the U.S. Special Operations Command for a major drone project.
As we’ve seen in the Ukraine, war is changing. It’s far more tech-driven. And the usage of drones has become popular, as they’re comparatively inexpensive and easy to deploy.
Anduril develops technology to defend against these kinds of attacks. It saw this need for advanced and developed technology to meet what it knew would be an urgent demand.
Autonomous driving tech company Aurora just made a huge announcement.
The start-up just inked a deal with Uber Freight to add new commercial routes between Fort Worth and El Paso, Texas for autonomous freight deliveries.
It’s just the first of many more routes to come next year.
Most probably don’t realize this, but Uber Freight is a major logistics player in the trucking industry. It’s been acquiring smaller competitors and gobbling up market share. And the latest stats show that the division now has $17 billion in freight under management.
As a reminder, Aurora is the company that acquired Uber’s self-driving unit. It’s been focused very heavily on the freight market in recent years. And Aurora’s approach makes it quite the stand-out.
When we think about self-driving technology, we typically think of electric vehicles (EVs). But when it comes to trucking, it’s very difficult to build an electric semi-truck capable of hauling a typical weight-load long distances.
Doing so would require more than 10 times the number of lithium-ion (Li-ion) batteries in passenger cars, and Li-ion batteries are very heavy – effectively reducing the potential load or sacrificing range.
So Aurora’s strategy is to retrofit traditional semi-trucks with its self-driving technology. In other words, the company is going in and making diesel engine trucks autonomous.
To me, this is the perfect solution given the current constraints with EV battery costs, performance, and the shortage of battery production. And the new commercial routes with Uber Freight come at the perfect time.
As we know, the holiday season is the busiest time of the year for the trucking industry. Yet we’re still dealing with a massive labor shortage in the trucking industry. This is the solution…
And this sets the industry up for an interesting competition.
Tesla just delivered its first five electric semi-trucks to Pepsi. These are trucks outfitted with the same full self-driving (FSD) technology as standard Tesla cars.
The challenge is that Tesla’s electric Semis won’t get the same range as Aurora’s retrofitted diesel trucks. In addition, the batteries necessary to power the electric semi-trucks require about 13 times more lithium than standard EV batteries.
So I’m very curious to see if Tesla continues its push for self-driving electric semi-trucks over the next couple of years. After all, EV battery production is constrained right now. And given the increasing costs of EV batteries, the Tesla Semis are materially more expensive than diesel semis.
I’m certain it would be far more profitable for the company to focus on its standard car models. Why would it give up profitable passenger vehicle sales just to produce the Tesla Semi?
Either way, I’ll be watching this competition very closely. There are a handful of autonomous tech companies focused on the trucking and logistics industry, and Aurora is one of them with a very clear strategy.
The need for autonomy in the trucking industry is far greater than in the consumer markets, which is why we’ll see a major focus in this space in 2023. Especially as the labor shortages are only going to get worse.
Regards,
Jeff Brown
Editor, The Bleeding Edge
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
The Bleeding Edge is the only free newsletter that delivers daily insights and information from the high-tech world as well as topics and trends relevant to investments.
