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It’s time for the second part of our Year in Review! This time we’re getting cinematic, as the team looks into topics like “Rise of the Machines”, “Hidden Figures” and “The Ides of March”. Bob looks into the developments in the AI space, Toby has analysed the market data from the past year to uncover what underpins the market movements, and Richard reveals the patterns of the investment cycles. So, let’s dive in!
Rise of the Machines (Langchain, AI, OSS)
Bob Thomas, Partner
In 2023, the open source community witnessed a significant development with the introduction of Langchain, an innovative Python library designed to revolutionise the integration and utilisation of advanced language models in software applications. Langchain emerged as a standout tool due to its streamlined approach in enabling developers to harness the capabilities of large language models like GPT-4. The library simplifies the process of integrating these complex AI models into various applications, offering modular components for easy customisation and implementation. A notable feature of Langchain is its support for agents, allowing chain-of-thought (heading towards “tree-of-thought” prompting techniques, which enhances the user’s ability to break down and solve complex problems through a step-by-step prompt / response process.
Langchain-driven agents, leveraging advanced language models like GPT-4, can very quickly replace repetitive human-centric tasks, potentially surpassing the capabilities of traditional Robotic Process Automation (RPA). Here's how:
Advanced Natural Language Understanding: Langchain-driven agents excel in understanding and processing natural language. This allows them to perform tasks that involve complex language instructions or interactions, such as summarising reports, drafting emails, or managing customer queries, which are often beyond the scope of traditional RPA tools.
Adaptability and Learning: Unlike RPA, which typically follows predefined, rule-based processes, Langchain agents can adapt to new information and instructions. They can learn from interactions with humans, or potentially other agents, and refine their approach over time, making them more flexible and scalable for diverse tasks.
Complex Decision Making: Langchain agents can handle tasks that require a level of decision-making and problem-solving. They can analyse data, generate insights, and even make recommendations, which is a step beyond the mostly mechanical processes handled by RPA.
Integration of Diverse Data Sources: These agents can integrate and process information from a wide range of sources, including unstructured data like text, images, conversational inputs or even specific private (or public internet) data endpoints. This capability is crucial in tasks where decision-making depends on a variety of data types.
Reduced Need for Structured Input: RPA systems often require structured input to function effectively. In contrast, Langchain agents can work with unstructured or semi-structured data, making them more versatile in handling real-world data scenarios.
This puts us in an interesting new world, where tools to automate tasks are increasingly capable, and in the hands of software developers immediately via open source libraries. I’m excited to see where this software theme leads in 2024 and beyond: developers have the opportunity to automate more tasks, and more powerfully, than ever before, creating a new arena of business process management that could leap-frog existing RPA technologies. There are going to be some very exciting businesses built in this space.
Hidden Figures – a market slowdown?
Toby Lywood, Investment Professional
Everyone in the tech ecosystem is at least anecdotally aware of the slowdown in venture funding for tech companies in 2023. Data from reports like Atomico's "State of European Tech 2023" supports what we've all been seeing and shows that venture funding in Europe has declined in 2023 by roughly 44% vs. 2022 and 55% vs. the peak in 2021. We've also seen this trend in our space, loosely defined as B2B SaaS companies raising rounds of €5-25m, so we decided to take a look at the data ourselves to understand how significant the impact has been.
Looking at the amount of funding raised from 2020 to 2023 by European B2B SaaS companies at the early growth stage, there are two key takeaways:
The first is that funding in this space has been significantly more resilient than the overall tech ecosystem – showing a decline of only 31% vs. 2022 and 24% vs. 2021
The second is how much this market is very much dominated by the top three countries – the UK, Germany and France accounted for 65% of all early growth B2B SaaS funding in 2023
While it's clearly still been a tough year to raise capital for B2B SaaS companies, the question remains as to why funding in this space has been more resilient? There are the more obvious answers such as the relatively lower cost of building and scaling a SaaS company and the high margins that allow these companies to reinvest in growth. However, I believe a key reason for this resilience is the essential role that B2B SaaS companies will play in addressing many of the most significant global trends and developments that we face today. Rapid development of AI/ML (as described earlier by Bob), the push for greater sustainability and an increasingly digitised world are just three areas where B2B SaaS will continue to have a huge impact. Recognising this, both entrepreneurs and investors will continue to place a premium on this space.
The belief in the ability of tech to deliver both commercially and in terms of impact is reflected in one of the positive takeaways from Atomico's report – despite the decline from 2021 and 2022, funding in Europe was actually up 18% since 2020, which suggests that despite some ups and downs, the ecosystem is continuing to grow in the long term. Looking again at our data: B2B SaaS funding once again outperforms the broader market with a 37% increase in funding in 2023 vs. 2020
The geographical distribution of this growth is interesting - while still primarily driven by the three top markets, an increasing proportion of this growth came from other countries with rapidly developing ecosystems, many growing in the triple digits since 2020 (Spain at 191%, Norway at 746%, Turkey at 166% and Austria at 195%).
Based on this data (and what we see in the market), I believe that in the long term the B2B SaaS market will only continue to grow in size and impact and that category leading companies will continue to increasingly emerge all over Europe.
Beware the Ides of March, every two decades
Richard Anton, Co-Founder & General Partner
Having been a growth software investor for more than 20 years, I remember well the low point of the post dotcom crash - it was in March 2003, as Iraq was being invaded. In the software world many promising and potential high flying companies failed then. Why? Investors, even those with good quantities of dry powder, were extremely risk averse. And in March 2023 we hit what I hope will prove to have been the low point of the post ZIRP/pandemic crash, when SVB failed. The whole tech sector rallied together, especially in the US and the UK, solutions to the crisis were found, and the systemic risk for the innovation economy was averted. But serious pre-earthquake shocks like that make everyone skittish, and it takes a while to wear off.
It’s been a tough year for financings, with a vicious circle of investors holding back, good companies not wanting to raise new funding rounds because investors were holding back, and investors holding back further because they feared adverse selection bias in evidence with any company raising funds in that environment. Or to put it another way, we all got into a funk.
On the plus side, not only does it look like revenue growth has normalised and started to become more predictable again in business software, but also the cost base restructuring which companies went through in late 2022 and early 2023 has bedded down. As a result, companies’ operating metrics are looking healthier again. Furthermore on the macroeconomic side, with inflation most of the way to being tamed, interest rate expectations have stabilised. This makes investment decisions easier across the whole economy. All of this has led good companies to start to return to the fundraising market this quarter. At Oxx, our pipeline of new investment opportunities is looking healthier than at any point over the last two years. This makes us really excited about the prospects of funding innovative new scale-ups in 2024.
If you missed the first post where Gökce, Phil and Mikael shared their perspectives, you can find that here.
