Time to Hack the Secret Formula

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Happy Monday, folks.

Prepare like you’re rope dropping Space Mountain ‘cause January venture capital numbers are a rollercoaster.

• In total, startups raised $31 billion globally. That’s a lot of money (yay!)

• Except, this is still down 50% from January 2022 (oh…)

• But hey, it is up 27% from December, and it marked the highest monthly total since June (yay!)

• But 1/3 of this ($10 billion) was Microsoft’s investment in Open AI, and without this massive raise, the month would have been worse than any month in the entirety of an already-dreadful 2022 (oh…)

In conclusion, meh?

While it might seem that funds just aren’t spending, this is only party the case. Many spoke of 2022 as a year of dry powder, or money that wasn’t being invested, which spent 12 months accumulating in funds like on the slopes of a snowy Park City. Now, they’re increasingly willing to deploy it, though just not on new pitch decks hitting their inbound emails.

VCs are currently spending more to help existing portfolio companies to weather the fundraising winter. Companies have been hesitant to raise at discounted valuations or have struggled to raise additional money at all over the brutal last year, so many funds are stepping in to provide bridges to their portcos to keep them chuggin’ along to the next raise when conditions are more favorable.

This is being seen across stages, from pre-seed to Series D, though it has been most pronounced at the higher end of the spectrum. This makes sense given these companies are likely the ones who have proven themselves to be safer bets and worthy of another dose.

One of the appeals of these follow-on investments is that both sides come out winners, at least compared to the alternative. VCs get to keep their bets alive by supporting still-promising companies, and they can protect themselves from equity dilution from outside investors getting massive discounts on the companies that they’d paid much more for. These propped up valuations keep the founders’ net worths up, too. At least on paper.

However, someone had to sacrifice a bit, and though I can already picture a fund manager boo-hooing about how they have had to pass on so many promising companies in the downturn, it has been the founders who have had to accept increasingly investor-friendly terms.

More deals are being reported with increasing multipliers which allow for investors to be paid back first and in higher amounts. Sticking with later stage deals, 44% came with some form of seniority protection for investors in the case of liquidation.

For you early stage, pre-money founders, just keep plugging away. The tides will shift. For you later stage entrepreneurs who have become all too familiar with Carta, congrats. Your LPs are committing to going down with the ship, Captain.

Finally, now that some of this pent-up cash is finally being spent, it’s time to consider how it will be replenished. The WSJ had some interesting stats showing that this might be a bigger challenge that you’d think.

In Q4 of last year, VC fundraising (where the fund managers get to walk a mile in the founders’ shoes and beg outside investors themselves) hit a 9 year low with just $20.6 billion restocking the pantry. That’s down 65% YoY and more than 50% from the quarter before. Before you suggest that this holiday season drop is typical (even big money investors have to get ready for Santa Clause), it was the first such Q3 ➡️ Q4 drop since 2009.

In total, LPs (the people giving money to the VC firms) invested in 226 funds, a wee bit short of the 620 funds from 2021’s final quarter. Typically, there’s a delay between the public and private markets, largely driven by the conviction of private investors holding out for the long-term thesis of their bets. However, in the end, FUD gets us all.

More logistically, bad markets also breed poor IPO environments and thus fewer companies steering their vessels to the choppy public markets. For early investors, these exits are what free up their money from prior bets and provide them with the liquidity to reinvest in future companies. There were also the issues of high interest rates (so expensive borrowing) and plunging valuations encouraging even the wealthiest of investors to stop checking their Robinhood accounts.

Firms are having to readjust their strategies in response to the reluctance of donors, including postponing future funds (a16z), lowering fees (Sequoia), or lowering their raise targets (Tiger).

And investors are turning to their ol’ reliables by concentrating investments in funds managed by experienced managers. The number of raises by funds being managed by rookies was just 141, a 59% dip and the lowest in 9 years.

Idk man. Give the kid a shot.

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One of the least relevant subreddits that I frequent is r/starbucks.

I initially joined hoping for tips and tricks to save money on my morning cup of Joe or to learn about secret menu concoctions that would replace my go-to straight cold brew (psycho energy, ik).

Instead, it’s just a bunch of disgruntled baristas complaining about corporate and the teenage girls coming in to order the complex TikTok drink of the week, always some monstrosity with 12 flavor shots and more sugar than a Def Leppard song. Kids, just admit you don’t actually like coffee and go get a milkshake.

Apparently, these abominations take a ton of time to make, requiring various manual modifications that are usually standardized when preparing the set menu items, and with lines which are consistently a dozen people deep and frequent staff shortages, workers are stressed tf out.

However, these drinks are a goldmine for Starbucks who reported that sales of customized drinks have doubled since 2019 and now account for more than $1 billion in extra revenue. Clearly, it doesn’t plan on cutting them out of any future plans.

Still, it seems that corporate is tired of getting slammed in the public eye, so it is getting innovative and investing in everyone’s favorite dystopian reality: robots.

The company filed a patent for a machine which would allow for these heavily customized drinks to be quickly created with a fraction of the manual work and mistakes.

While some applauded the company’s effort to reduce the strain on baristas, others saw between the lines and recognized the potential impact that this could have on employees. As of now at least, there’s no need to fear for replaced jobs.

The machine is meant to be a labor complement, making the work of employees easier so that they can get back to only stressing over whether their outfit granted them the cool, hipster coffee guru they were hoping for when they sent in their application.

There’s also not even a guarantee that the machine will ever actually be developed. Still, the door to automation is open, and startups are investing in a technology which is becoming ever more attractive to cost-conscious companies.

Already, there’s a company generating plenty of buzz for the progress it has made in these efforts: Artly.

Based in the very same rainy and grey city as the world’s most prominent coffee chain and biggest restaurant (by revenue), Artly is a full-blown Machine Learning matcha wizard. The company has set out to “preserve, elevate, and democratize the fine craft of coffee making“ by tasking some of the world’s experts in the art with training machines to create these exotic bevs.

Not only does this mean that the robots produce the perfect cup every time, but in the rare case that an extra grain of honey is mixed in, each is equipped with specialized inspection tools to monitor each stage of the process and self-correct. They’re also able to quickly learn new tricks and recipes when they’re taught by baristas.

There are no public revenue numbers, but some quick research suggests the $5 million seems like a safe estimate given their location, target demographic, and recent growth efforts.

The average specialty coffee shop in California does roughly $750K per year in sales, and though they operated most of last year with just 5 locations, they’ve launched another 3 throughout Oregon and Washington. Not bad for a company which only launched midway through 2021.

To help accelerate the process of improving their tech and expanding their locations, the team recently announced an $8.3 million Pre-Series A round (Seed²??? A/2???). Backers include SV Tech Ventures, LDV Partners, and Aimtop Ventures among others. This injection will help that revenue number to skyrocket (almost put a rocket ship, but apparent those are considered financial advice now…).

Cafe owners are cashing in on our crippling caffeine addictions. The coffee industry does an estimated $45.5 billion in sales in the US every single year. While the industry is actually contracting a bit, it’s still large enough to support a very successful entrant, particularly as customers grow increasingly disillusioned with the likes of Starbucks and other top chains for skyrocketing prices. Plus, we all know that despite our plans to cut down on our consumption, we’re still going to be drinking a cup or 12.

The Siren will always come to mind first when it comes to coffee, but there are various other chains, both national and regional, which pose a threat to the company’s success. The country is littered with Dunkin, Tim Hortons, and Peet’s. If the company is to meet its goals of becoming a coffee brand mainstay, it’ll be because it has managed to cement its name amongst this group.

However, there will be barriers even to taking off nearer to home. The west coast is renowned for its local and regional cafes, and the likes of Dutch Bros, Phil’s, and The Coffee Bean & Tea Leaf have loyal followings. While the competition might be fierce, though, there’s a reason so many big names are banking on Artly’s success.

Priority one for running any business, particularly one in the F&B space, is managing costs. Luckily, the very thing that makes Artly such a customer draw is the thing which will help it to keep expenses down. The robots will dramatically decrease what is listed in parentheses on the company’s income statement.

Further, the market will be hot for larger chains looking to secure access to Artly’s tech.

As mentioned with Starbucks, many companies are looking at robots as the future of the industry. Some sort of partnership, or even an acquisition, between Artly and one of its larger competitors could be a potential future play.

This would allow the company to have another source of income as it liceses its robots out and further spread its own name, or in the case of a buyout, it would allow a larger brand to integrate Artly’s technology to improve its own business model.

Why am I really convinced that this isn’t some mere fad capitalizing on investors’ appetites for anything AI/ML?

I’ve been down the rabbit hole that is sommelier competition (connoisseur core?) videos on TikTok. These people can identify the specific field that a grape was grown in from a single whiff and a swig from a glass of wine.

That’s how this incredible team is with its java. They have the LeBron of brews in Joe Yang, the reigning US barista champ, who roasts all of their beans and helped teach the robots how to coffee.

Running the company as CEO and CPO/COO are cofounders Meng Wang and Yushan Chen, two former leaders on Amazon’s robotics team. The 15-person group truly represents the best of the best in machine learning, robotics, and most importantly, coffee.

Long Artly. Long FRIENDLY robots. Long cold brew.

And fingers crossed that the robots will be too busy perfecting their latte art to destroy mankind :)

TLDR: Artly is revolutionizing the world of coffee with its robotic baristas The company uses machine learning to perfect the java crafting process, and in addition to drawing in curious customers, these robots ensure the highest quality beverages while keeping costs low, allowing the company to succeed even despite fierce competition. Equipped with the world’s best beans and former robotics execs at Amazon, the company is flush with capital to further expand its footprint on the west coast and across the nation.

Cheers to another day,

Trey