SuperSeed Capital Ld - Interim Results for Q2 and H1 2024

About SuperSeed Capital Limited

SuperSeed exists to back Europe's best B2B SaaS founders at the earliest stages, and to help them build great companies. In the short term, our portfolio companies enable their customers to drive revenue growth and efficiency savings using next-generation software and AI. In the long-term, they have an opportunity to create category defining global technology companies. SuperSeed focuses on the fundamentals by helping founders build good companies with strong unit economics and sensible distribution models.

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Investment Manager's Review

A busy summer

It's been a super hectic July. Both on the political and the investing front. We are sometimes given flak for putting too much focus on the US, but - as the US goes, so goes the world. Especially in technology (which we will aim to rectify in the long term, but for now, we need to cover what matters).

A new face-off in the US election

At the start of the year, I wrote that it was likely that Trump would win the 2024 election. Trump was ahead in the swing states, and Biden had weak approval ratings. The biggest threat to Trump seemed not Biden, but the US courts. The US Supreme Court essentially refused to interfere in the election, and so by June, Trump was all but assured to win. The smart money started lining up behind Trump (including many people who previously denounced him).

Then came the June 27th debate between Biden and Trump, and it became clear to everyone that Biden would not be able to win anything (let alone govern for another four years). What followed was several weeks of painful soul-searching for the Democrats. By July 21st, Biden announced that he was stepping back from the race, endorsing Vice President Kamala Harris to be the new candidate in his place.

Some people on the Democratic side had hoped for a new primary to help the party find the strongest candidate. Some folks thought Ms Harris would be a weak candidate in her own right. Others pointed out that Democrats always lose after a "coronation" (Gore in 2000, Clinton in 2016).

But then the pundits got surprised again. Kamala Harris has raised $200m in a week to fuel her campaign. Importantly, the Democratic ticket bounced back to the point where it is now neck-and-neck with Trump in the swing states.

At this point, Prediction markets give Kamala Harris a small edge. But the campaign is far from over yet, and we look forward to their first presidential debate in September.

US Economy - Still Powering Ahead?

US GDP grew 2.8% in Q2, well above market expectations.

At the same time, inflation continued to gradually ease, with core inflation numbers now down to 3.4% (3% for headline inflation). Markets now expect two-three rate cuts before the end of 2024. At the same time, it looks like US consumer spending is starting to slow down.

Many US corporates had relatively weak earnings announcements in July, and the outlook for H2 is that growth may have peaked. If growth slows just slightly and it enables the US to firmly get inflation under control, that's not a bad thing. This should pave the way for more interest rate cuts, and then we can start a new cycle without first going through a painful recession.

Then again, markets currently put 35% odds on a US recession before the end of 2024, so we are not out of the woods yet.

US Stock Markets Take a Breather

US stock markets peaked on July 10th, and they've since taken a breather, with Nvidia losing nearly $1trn of market cap. In a short span of time, we've gone from "AI will change everything overnight" to "the technology isn't ready yet, and we'll never recover invested capital".

At moments such as these, it can be helpful to revisit the good old hype cycle. We have repeatedly said that "yes, there is an AI bubble" and "yes, AI will change the world", and the two can be true at the same time. In July, we probably came off the "Peak of Inflated Expectations", and it's likely that we have a bit of Disillusionment ahead. But we still see plenty of productivity ahead for the economy and stocks.

What's Happening with SaaS?

From 2014 to 2022, SaaS companies were highly favoured due to their reliable recurring revenues and substantial growth rates. However, by 2024, the median revenue growth of SaaS companies in the EMCLOUD index dropped below 20%. Revenue multiples are now below 6x, a stark contrast to companies like Nvidia trading at ~25x revenue.

Over the past 12-18 months, corporates have shifted all new tech spend towards AI. This has boosted revenue growth of companies like OpenAI, and slowed revenue growth of more traditional SaaS companies.

As we've seen in July, there is a sense that this "headlong rush" into the first wave of AI has started to come to a close. There isn't enough ROI in deploying generic models from OpenAI, and there is still a lot of customisation work required to make AI work at scale and in production in corporate settings.

The future of AI model enhancement lies in leveraging private, proprietary data within enterprises. This data can differentiate AI models and significantly enhance their capabilities in automating and optimising business operations. This also lends itself well to SaaS applications - often the core repositories of corporate data.

As both incumbent and challenger SaaS vendors start offering AI models based on proprietary data, enterprise customers will start seeing increased ROI from off-the-shelf SaaS platforms. The companies that manage to make this transition will benefit from attractive growth rates. Some of these are already public companies. Others are still being built from the ground up. Those are the start-ups we invest in.

What Happened in Venture Capital in Q2?

PitchBook recently issued an update on US and European venture capital activity in Q2. The numbers were up across the board. US deal value was up 46% from Q1 (to $56bn) and European deal values up 27% to €16bn. Even when factoring in the $6bn Elon raised for x.ai, it looks promising.

Look under the covers:

·      Big jump in round sizes: The median European seed round increased 40% to €2m ($2.15m). That's a huge jump, and one that's closely tied to AI, meaning that it will be volatile in future quarters.

·      European rounds are still smaller: Although the jump is big, this is still behind the median US seed deal which was $3.1m.

·      And Europe still trades at a discount: Even bigger was the valuation gap. PitchBook estimates $12.4m pre-money for the median round in the US, vs. $5.5m for the median seed round in Europe. That's a 56% gap.

·      Bigger rounds and (slightly) fewer deals: Pitchbook reported an 18% drop in deal count (so - fewer, larger rounds). However, it often takes a while before rounds are announced. PB estimates that a total of 2,478 rounds were done in Europe in Q2. That would only be a 4% decline on Q1. In other words, about the same number of much bigger rounds.

Overall, the trend is positive. We've covered the political and economic uncertainty above, but there is a sense that things are heading in the right direction for venture.

Fund progress in Q2 2024

New Investments:

SuperSeed II closed one new investment in early Q2, and is otherwise building pipeline for investments later in the year.

Tector (formerly Woodsense)

The global construction industry wastes billions annually due to moisture damage, with approximately half attributed to water ingress alone. This not only impacts the bottom line of construction projects, but also undermines the structural integrity and longevity of buildings. Tector's SaaS platform monitors and detects moisture ingress in buildings by leveraging IoT sensors and AI-driven anomaly detection algorithms. Woodsense's platform eliminates risk, reduces cost, and provides quality assurance which is valuable for various stakeholders participating in the industry (architects, contractors, financiers, and insurers). Although still a young company, the business has strong product/market fit, with more than 100 customers already using the platform to manage construction risk.

Portfolio Revenue:

Portfolio revenue grew 58% annualised growth mark in Q2. Portfolio companies are generally forecasting sales growth to continue at a similar pace.

Valuations

Duel is now close to completing the new investment round, as discussed last quarter (49% uplift over the last round), and Popp has also been offered terms for a new investment round (47% up from the last round). Other than that, there have been no changes to valuations in Q2.

Outlook for the remainder of 2024

With strong deal-flow and positive market sentiment, our strategy for the year remains unchanged: back the best founders that use (AI-powered) software to change how business is done. While the rate of investments in Q2 was below expectations, we expect to make up for that in the remainder of 2024 and thus complete another 4-6 investments on this strategy for the remainder of the year.