There are big, overarching top-down trends, and there are little-bitty baby trends that have a way of growing into bigger ones. A big trend right now, for example, centers on certain firms that passed out enormous checks to startup founders in recent years and drove valuations sky high in the process. It turns out this strategy doesn’t work as well as they’d anticipated, and some of these same firms are now splitting up with some of their partners and asking their own investors for a lot less capital.
Another big trend? Venture firms that are more aggressively investing in publicly traded companies, given that many have seen their share prices hammered in the downturn. (We began seeing this trend back in January and the WSJ notes that it is only picking up steam.)
Now here’s a new baby trend that’s interesting: new firms that are so niche that, at first glance, it’s easy to laugh off their focus.
A venture firm focused solely dedicated to oral care and not something, um, a little broader? A firm that’s focused on tech that can help detect and contain wildfires? (What?) How about a venture firm that’s dedicated to backing and building psychedelic businesses alone?
As it happens, these outfits exist, and two of three of them have this week announced moderate-size debut funds, while the third suggests it’s on a path to doing the same. Viewed together, they create a picture of how the industry could potentially look over time.
Let’s take the first firm, the one focused on oral health alone. Called Revere Partners, the New York-based outfit — which counts among its partners Mark Zuckerberg’s dentist father, by the way — announced in a late-September press release that it is “launching” its fund, which is usually code for “we don’t have a fund yet” but in this case refers to the rolling-fund nature of the outfit.
You might imagine in this case that a lot of wealthy dentists are pooling their money together to invest in technologies that they know could upend their industry. That could well be what’s happening. But give credit where it’s due. Dental care is a huge market that’s growing as the world’s median age rises. It’s expected to surpass $230 billion by the end of next year, according to the Office of the Actuary at the US Centers for Medicare and Medicaid Services.
Meanwhile, there are a lot of startup opportunities in the business — and not a lot of breakout winners yet. (Think dental insurance, direct-to-consumer subscription products, tele-health services, private clinics, mobile dentistry services, dental implant surgery companies, the list goes on.)
Or let’s take another niche fund, the one focused on wildfire technologies, Convective Capital. My first thought reading about this one was: Wildfires? Really? I happen to live in Northern California, where wildfires are a constant and very terrifying threat. It just seemed . . . very specific.
I wasn’t alone in my skepticism. Founder Bill Clerico — who previously founded the fintech company WePay and sold it to JPMorgan Chase — told TechCrunch earlier this week that the firm’s thesis was more polarizing than Clerico expected, and that some investors understood his pitch immediately while others thought focusing on wildfires was too narrow. But he managed to pull together $35 million in capital commitments for a debut fund, and it’s easy to appreciate why. Extreme heat and dry conditions have begun fueling wildfires across the globe; there aren’t enough firefighters (or tech) to contain these fires; and, as Clerico notes, companies working on solutions to wildfires present a more straightforward investing opportunity than climate tech meant to tackle oncoming problems.
Further, the thesis gives Convective more wiggle room than might initially be imagined. One of its first portfolio companies, for example, is Overstory, a four-year-old, Amsterdam-based startup that’s using AI and satellite imagery to optimize vegetation management for its customers, which are utility companies. (It raised a seed round late last year.)
Convective Capital’s $35 million answer to the increasing threat of wildfires
As for the psychedelics firm, it’s two-year-old, New York- and Chicago-based Palo Santo, a venture outfit that’s exclusively focused on backing and building emerging psychedelic therapeutics companies and that just today took the wraps off a $50 million debut fund.
In the grand scheme of things, $50 million is maybe not too much to pour into an area that has long fascinated investors and founders alike. According to Crunchbase News, psychedelics-related startups — mostly therapeutics companies — raised more than $236 million between July 2021 and July 2022, compared with the $96 million they raised between July 2020 and July 2021.
In fact, while most of those bets have come from funds that invest in other therapeutics or technologies, there’s reason to think it could become a standalone area of focus over time. Already, two psychedelics companies have gone public — Compass Pathways and MindMed. Some of the smartest VCs in the industry are pouring money into the sector, including early Compass investor Peter Thiel and SpaceX board member Steve Jurvetson (who told Bloomberg last year that he decided to carve up his own estate by giving around half of his net worth to fund psychedelic science).
There’s also a lot of excitement right now in particular over the potential for MDMA, known recreationally as Molly or Ecstasy, as a treatment for severe PTSD or post-traumatic stress disorder, with FDA approval expected as early as next year.
Psychedelics startups are on a long journey to consumer markets, but these 5 VCs are taking the ride
Either way, I get the sense that the opportunities for similarly structured funds are limitless and that they could be a new entree point for existing and first-time VCs who have a unique specialty or perspective. The venture industry is already becoming more atomized by the year, thanks to special purpose vehicles and rolling funds and a whole lot of other ways for people to spin up their own business.
Also, as the big funds have gotten bigger in recent years, covering every stage and every sector, it seems logical that one of the only ways to compete with them for founders’ attention is to create exactly the opposite thing.
Not last, this is the sort of product that institutional investors might welcome over time. They’ve done well in recent years, pouring their capital into powerhouse venture firms. But those checks have stopped for now, and a lot of institutions are sitting on overlapping stakes in companies that look overvalued.
Writing some checks to smaller, specialized firms might be one way to ensure that doesn’t happen again.
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