Cathay Innovation US: 2024 VC Outlook
Reflections and projections on US investments across consumer, fintech, digital health, energy & mobility
In the world of tech, startups and venture capital, 2023 was undoubtedly a year marked by AI. We saw high-profile IPOs of ARM, Instacart, and Klaviyo, the collapse of Silicon Valley Bank, the $20B Adobe-Figma deal flop, the Twitter X rebrand, and talks of a Musk vs. Zuckerberg cage match. But AI still took the cake with integrations across popular product suites (think Microsoft, Google, etc.)… and of course, the big firing / re-hiring of OpenAI CEO Sam Altman.
It was a challenging year for fundraising globally with high interest rates, geopolitical tensions, inflation and a “pending” recession — in the US, Q3 saw the lowest deal volume in the last 6 years. However, AI startups were the exception — with companies like Inflection raising $1.3B, Anthropic raising $750M or OpenAI raising $300M.
Looking forward, we’re optimistic about 2024 as it’s not only the best time to invest after a decline, but we’re also at the beginning of the new AI-led tech cycle. While most money is currently in infrastructure (e.g., chips and models), the biggest potential for startups will be in vertical AI — building tailor-made solutions for industries. We’re most excited for applications that work with proprietary info to create net new opportunities. Mobile was great, but the iPhone and the subsequent apps built on top were even better.
Despite the AI craze, there will be a flight back to quality with a return to VC fundamentals (critical KPIs like cash flow, burn rate, LTV, CAC, and NDR). Investors will give points to founders that balance managing cash prudently with sustainable growth — companies that don’t will be at risk of shutdown.
At Cathay Innovation, our San Francisco-based investment team has had their ear to the ground on the latest AI developments and trends across our key sectors: consumer / commerce, fintech, mobility & energy and digital health. Below, we’ll share our US investment outlook for 2024 — the investment trends, the technologies and startups to watch in the coming year.
Investment Outlook: Consumer / Commerce
Brian Schwarzbach | The commerce and consumer verticals are on the precipice of a shift from incrementality towards exponentiality. AI is positioned to be a powerful unlocking mechanism to improve commerce flows, create more engaging consumer experiences and enable startups to provide solutions that are both revenue drivers and cost savers (music to any businesses’ ears!).
- Personalized Commerce: AI unlocks the holy grail of effectively $0 marginal cost, infinitely scalable 1:1 customized consumer experiences. Imagine shopping experiences where you find items that look and feel like they are designed just for you. Given more constrained advertising and consumer data privacy environments, we expect this to become a huge sector. Companies like Fermat, AI-personalized shopping experiences based on the customer shopping journey, or Qloo, productizing AI-enabled recommendations not dissimilar to the powerful algorithms behind Netflix and TikTok, have the potential to fundamentally change what online shopping and discovery looks like.
- AI-Enabled Commerce & Consumer: Consumer-facing and commerce-enabling AI applications, starting with AI OS and personal assistants, are a very exciting area. We as a society were trained on a fundamental understanding that interacting with technology typically occurs via interfacing with a tactile-based device (like a keyboard) with outputs shown to us on a screen. AI presents an opportunity to take a first step into “ambient computing,” where our interactions with technology become far less intentional and better incorporated into the daily flows and rhythms of our lives, like Humane’s AI Pin or Meta’s AI-powered Ray-Bans.
- Post-Purchase Logistics: Solutions that simplify the post-purchase logistics process, lessen shipping’s economic impact, and help mitigate its environmental impact. Returns drag down margins for brands, create more environmental damage and overload logistics infrastructure — but have increased exponentially post-COVID, reaching $800B in GMV in the US in 2022 (up nearly 2x from 2020).
- Marketplaces: Marketplaces continue to be an attractive business model with AI improving supply and demand side interactions. By removing friction from the discovery and curation process, AI creates more opportunities for consumers to find the right products more efficiently — increasing AOVs, purchase frequency, and customer retention / satisfaction. Ghost (one of our portfolio companies) is a B2B marketplace for excess consumer goods inventory. The company leverages AI to improve product curation and discovery for buyers and sellers while simultaneously unlocking access to blue-chip brands’ excess inventory. Reebelo is another one, focused on refurbished tech & sustainable lifestyle products.
Investment Outlook: Fintech
Andrea You | Refocusing on fundamentals and profitable business models continues to reset FinTech markets from 2021 highs, but builders and investors may now be ready to play ball. It’s never been easy to build in FinTech given its various geographic and regulatory nuances, but this is why we love the space and are eager to double down in 2024 — backing founders that drive financial equity forward.
- WealthTech 3.0: Next-gen personal financial management tools driven by aging Baby Boomers’ impending generational wealth transfer, along with Millennials and Gen Z’s growing debt, will be a key focus. Add in macroeconomic instability and the advent of genAI, 2024 will be a launchpad for a new wave of wealth management tools that are personalized, empathetic, and collaborative. We’re particularly excited about companies at the intersection of Silver Tech (FinTech for seniors) and WealthTech that are tackling underserved parts of the wealth transfer and management flow and those that are empowering lenders and debtors alike with more personalized, automated, proactive approaches to debt management.
- Financial Management Tools: genAI-powered back office tools and automation that supercharge knowledge work and the office of the CFO. Customer-specific models are changing what it means to “understand your data” with business-specific insights and the security that financial services demand. However, many solutions are over-engineered (see our CFO tech stack deep dive). We see significant opportunity across use case-specific tools (e.g. accounting and compliance) and first-principles builders that deliver the power and connectivity of modern web apps with the familiarity of traditional spreadsheet interfaces.
- Vertical FinTech: Solving for the second-order effects of Vertical SaaS — which not only drives deep customer integrations and stickiness, but the marriage to fintech unlocks monetization opportunities. We all know the model works, but financial services integrations often lead to time and resource-intensive product roadmap tradeoffs.
- Payments: Empowering the long tail of businesses and individuals with low-friction, lower-cost, money movement solutions. Whether it be for merchants or individual employees, global money movement and payment optionality remain a key driver of friction. Companies like Tandym are building closed-loop, co-branded payments solutions for underserved mass-market e-commerce brands. On the consumer side, startups like Higlobe offer stablecoin-powered global transfers with a fee-free, security-first model.
Investment Outlook: Mobility & Energy
Jonathan Healy | The US (and the globe) is undergoing one of the most critical paradigm shifts in human history — the clean energy transition. Bolstered by one of the largest sets of spending bills in US history (IRA, JOBS Act, CHIPS Act), 2024 will see several market-making companies within the energy & mobility space.
- Retail Energy Markets: DER proliferation and advanced compute will drive new business opportunities. Over 2/3rds of US energy consumption comes from competitive wholesale electricity markets where utilities compete to supply energy at the lowest cost. This market has undergone a drastic change in the past decade, giving startups an opportunity to build market-scale platforms in a new era of energy, such as David Energy, which is creating “gated insights” on energy supply and demand by matching Virtual Power Plant (VPP) models to actual energy consumption.
- Grid Operations: Tech-forward solutions driven by an aging infrastructure and stagnated budgets. The IRA and Jobs Act allocated $65B to upgrade US electric and grid infrastructure — presenting an opportunity for startups to foster innovation in a sector vital for a sustainable energy transition. Look for companies building tools to replace legacy infrastructure (the average US transmission line is ~50 years old) and adapt to the increase in weather volatility like Amperon has done by offering tailored insights for utilities and energy markets for better observability and resilience.
- Autocommerce: Next-gen solutions expanding access and sustaining the EV and ADAS transition. The expected cost of EVs and complete flip-over of the powertrain service segment (augmented by ADAS) provides new, untouched pockets for startups like repair and maintenance (R&M) — a $1T market worldwide — or new financing and ownership models enabled by the renewed EV powertrain.
- Industrial Operations: AI-assisted manufacturing tools that optimize the base layer of data and yield higher throughput, quality and lower costs. While still nascent (and greatly underpenetrated), industrial AI at scale presents an excellent opportunity to monetize the base data layer that has been logged, tagged and processed from the prior decade of Industry 4.0. Solutions reducing administration and design cycle time, developer tools for manufacturing automation and AI-enabled digital work instruction all focus on centralization and automation to enable magnitudes of efficiency gains.
Investment Outlook: Digital Health
Elijah Yi | The US healthcare system is plagued by personnel shortages, skyrocketing costs and a need for incentives alignment. In 2024, we’re optimistic that digital tools built on AI platforms will bring substantive change. Broadly, we’ll see new technologies disrupt the most significant therapeutic areas in both positive and negative ways.
- AI HealthTech: AI tools that empower healthcare providers, reduce administrative bloat (~25% of US healthcare costs) and improve patient outcomes. With more pilots and AI tools in hospitals, we’re starting to chip away at the era of faxes and phone lines. For doctors, scribe technologies such as Nabla (one of our most recent investments) are strong initial use cases, and they only scratch the surface. Look for companies to tackle the burdensome administrative tasks of medical coding and prior authorization and tools to generate diagnosis and care plans in seconds. By leveraging the vast amounts of real-world patient data, doctors will have clinical decision support tools at their fingertips. For this case, this upcoming year will be a balance of innovative ideas and evaluating regulatory hurdles.
- Chronic Care: GLP-1s and AI tools that can dramatically improve chronic conditions like obesity, diabetes, cardiovascular disease and more. Cardiometabolic care has been fundamentally changed through GLP-1s, but there are also drawbacks to reliance — success will come from a more comprehensive approach, which leverages solutions such as food-as-medicine. Emerging tools will additionally tackle the identification of underdiagnosed chronic diseases through existing clinical data and improvement of patient engagement to improve outcomes.
- Oncology: Developments in diagnostics and therapeutics that lead to improving cancer treatment. Data shows a 33% reduction in cancer death rate since 1991, and with advances in navigation, detection, and drug discovery, this trend should continue. However, there’s an alarming uptick in early-onset cancer, highlighting the importance of diagnostics. Detection will continue to be improved with AI innovations supporting radiologists. Navigation and patient support will continue to play an important role, with potential tailwinds from new CMS reimbursements. Access will be emphasized, with companies like Inato (a CI investment) unlocking necessary access to trials through a global marketplace.
- Mental Health: Digital health care delivery models for those with anxiety, depression and serious mental illnesses. As depression rates and overdoses reach new highs, studies now point to a correlation between anxiety and depression and excessive social media use. As the tech behind these platforms improves, there’s a risk that our mental health problems will grow larger. Mental health has and will continue to be an important investment area for society. This includes quality access to psychiatric services and life-changing care for severe mental illnesses while aligning incentives with payors.
A Seismic 2024
We expect fewer incremental changes and more seismic, disruptive shifts in 2024 and beyond. It won’t be a “silver bullet,” but AI will continue to dominate the conversation and drive innovation. We’re excited to see evolutions in consumer / commerce, fintech, energy & mobility, and digital health — from more personalized shopping or empathetic financial management to advancing the great energy transition and chronic care.
If you’re a founder building with AI or working to transform any of these key sectors, let’s get in touch!
Written by Simon Wu, edited by Jaclyn Hartnett, Cathay Innovation
For more insights on the world of AI and startups across our key sectors, check out our previous posts:
