Investing in Transformational Technologies: Q&A With Innovation Endeavors’ Aravind Bharadwaj
Aravind (Avi) Bharadwaj
A veteran technologist and investor, Aravind (Avi) Bharadwaj is based in the firm’s New York City office. Bharadwaj spoke with MarketCurrents WealthNet recently to describe the team’s investment philosophy and the outlook for technology ecosystems at the bleeding edge.
Could you describe your team’s investment philosophy?
Sure. We are seeing a fundamental transformation in how technologies are being created. Over the past decade, the volume, variety, and velocity of data have exploded; computation has become ubiquitous and inexpensive; and many advanced engineering and applied mathematical tools have been created. These advances have led to the rapid shrinking of product iteration cycles. While it used to take months or years to build, test, and iterate, now companies are able to do this within weeks or days. We call this Super Evolution, and this underlies our investment thesis. Super Evolution is happening across industries. We are primarily focused on the industries where it is likely to have the biggest impact, some of which are life sciences, supply chain, and enterprise software.
Is there a specific industry that you focus on? What are some interesting trends you’re seeing in it?
I focus on expansion-stage investments, typically in the enterprise software space. There are many interesting trends happening in enterprise software. One is the expansion of the API ecosystem. APIs are tools that encapsulate complex functionality and allow users to operate using simple interfaces. As a crude analogy for non-technical readers, think of a microwave; you press a button and it heats the food. You don’t need to understand the complexity of how it does it. A layer down, the microwave has components that operate in a similar modular fashion, encapsulating complexity. Similarly, software features that are complex and commonly reused are being converted to services that others can use as a component. Large companies like Twilio and Stripe have built foundational layers of APIs. Newer companies that are being created in this API ecosystem are building higher dimensional features like shipping and fraud prevention. It will become increasingly easy to create full-stack businesses using combinations of these APIs, which will radically reduce time to market.
Another trend that I’m excited about is the application of machine learning to enterprise functions like sales, marketing, and customer success. Legacy software was unintelligent and could not leverage data and improve over time. Tools that are being built today for the enterprise use machine learning to significantly enhance human ability across the board.
Have you made any investments in this space?
Yes, related to what I said about machine learning in the enterprise, we led the $50 million Series B investment in a NY-based company called AlphaSense. AlphaSense is a tool that enables knowledge workers to search across millions of sources of unstructured data to find specific information that they’re looking for. AlphaSense uses machine learning and natural language processing techniques to identify entities, relationships, and context in the data, which enables it to provide highly relevant results, and other functionality. And as users use it, it becomes better. For knowledge work, this is a profound change from the past and represents the true promise of AI.
Investing in innovation is something investors of all stripes now seem involved in some capacity. Do you believe this influx of capital has distorted valuations for veteran investors such as your team?
Valuations have increased quite a bit over the last few years. There are many factors to it, including macro conditions, new players entering the space, companies that are more mature than before, and robust exits, among others. I focus on IE’s expansion-stage investment mandate, where we are fairly sensitive to valuation. One driver of valuation is the market, but the other driver is a company’s performance. We spend a lot of time gathering data, building tools, and running analyses to evaluate core metrics and forecasts of companies. This reduces the degrees of freedom to some extent and increases our conviction in our investments.
How has COVID impacted venture investments across the board? Do you anticipate valuations to go down?
VC investing in the U.S. was down by almost 50% in April compared to 2019. This was true across all stages. Early data suggests that investing pace has picked back up in May as more folks have adjusted to the new normal. On valuations, I don’t think valuations will go down substantially for an extended period. In past downturns, valuations and round sizes dipped for a couple of quarters but picked back up afterward. At the end of 2019, there was a record amount of dry powder (or committed but uninvested capital) in the private markets, a lot of which was in mega funds. Further, there is a lot of pent up demand from startups who have delayed their planned fundraising. Based on these factors, I don’t think valuations and round sizes will see a significant dip.