How to Survive the Tech Downturn, According to a Venture Capital Investor

“In the same way tech led the excess on the way up, you’ll see it on the way down,” Wolfe says. “It feels like the summer of 2000, where you had speculative excess that will get squeezed out.”

But there is a silver lining in this dire forecast. The coming dislocations should give patient investors a new set of moneymaking opportunities.

Lux was founded in 2000, just as the dot-com crash was wreaking havoc in Silicon Valley and throughout the tech-investing landscape.

Lux thrived because it avoided the highflying internet and optical networking companies that were prominent at the time. Instead, the firm primarily invested in hard science and emerging technology companies that sought to solve real-world problems.

“We’ve always shied away from consumer and marketing-driven companies, where it was more about spending ad dollars to get people’s attention,” Wolfe says. “We invest in matter that matters. It tends to be more atoms than bits.”

Today, Lux has $4 billion in assets under management. Since the firm’s founding, its funds averaged annualized returns of 30% to 40% through the end of last year, according to a source familiar with the firm.

Now, Lux says it’s once again bracing for difficult times ahead for the wider tech world.

In recent weeks, deteriorating economic conditions have sparked layoffs. In late April,

Robinhood Markets

(ticker: HOOD) announced a 9% staff reduction, and

Netflix

(NFLX) followed suit by letting go about 150 employees last month.

Wolfe sees these kind of job cut announcements eventually going from 10% to 20% of a company’s workforce to more like 30% to 50%. Those technology cuts could hurt spending in other categories from luxury goods to bars and restaurants, resulting in a broader economic slowdown.

Meanwhile, as interest rates head higher and cheap capital dries up, many of the hottest tech companies built on uneconomic business models face a reckoning.

“We talked to a lot of peers who have never lived through the cycle,” Wolfe says. “We sort of were born in the fire, watching the boom and bust of the dot-com crisis, and formed Lux studying why other firms had failed and what they did right and wrong.”

In recent years, the firm has invested in artificial intelligence, robotics, and new drug-discovery methods, while much of the VC world focused on social media and crypto firms.

One example of a Lux success story is its 2008 investment in Kurion, a start-up co-founded by Wolfe that uses robotics and chemistry to clean up nuclear waste.

Kurion became one of the few companies that responded to Japan’s Fukushima nuclear disaster in 2011. Lux sold Kurion for nearly $400 million in 2016, 34 times the firm’s total investment.

That type of deep-science-based investing should hold up in the coming months and years even if Lux’s predictions about global economic trends prove accurate.

The Lux co-founders are excited about two specific investment themes for the next few years.

The first is what the firm calls technology for hard power. Lux is funding companies that give the U.S. military and its allies the tools to win on the battlefield, including robotics, rocket-launch technology, observational satellites, and modern communication.

One of Lux’s investments is Primer, which uses advanced artificial intelligence algorithms to translate intercepted battlefield communications into real-time intelligence for government analysts.

The Lux founders see a more dangerous world in which geopolitical issues will be tailwinds to many of these hard power investments. “Significant portions of food, basic metals, and energy are strained and stretched because of the Russia-Ukraine war,” Wolfe says.

The second investing theme involves soft power technology, entailing developing infrastructure for scientists, including software to run labs and advanced microscopes, which may enable groundbreaking discoveries.

In 2019, Lux made a founding investment in Eikon Therapeutics, a business based on microscope technology behind the 2014 Nobel Prize in chemistry, which can see within cells in real time and could drive the discovery of lifesaving drugs.

Even with its gloomy economic outlook over the short term, the Lux founders remain enthusiastic about technology. “We’re going to fund some incredible people doing incredible things in the years ahead,” says Hébert, Wolfe’s co-founder. “Long term, we remain hugely excited and bullish.”

Write to Tae Kim at tae.kim@barrons.com