It’s no secret that the declining valuations of today’s public and private tech companies and the resulting depression of the venture capital environment is putting a strain on the high-tech sector. Many LPs are turning to more grounded asset classes like private equity to avoid the risks associated with venture capital. However, we see this moment as an opportunity and are seeking to fill the chasm between the worlds of “growth at all costs” venture capital and “predictable returns” private equity that has the potential to increase upside while decreasing downside. We call this “modern growth” venture equity (VE).
We believe that strategically injecting AI, and more specifically our state-of-the-art AI technology platform, into established companies will enable them to outperform relative to their peers while preserving the core drivers of their business that are working well. Rather than trying to boil the ocean with AI, focusing on simple improvements like increasing the number of customers served by 5%, or preventing accidents on a manufacturing line by 10% will have real, sustainable impacts on the bottom line.
Higher Order Capital sees an opportunity for companies that are already solving real problems, have a strong customer base, and are considered subject matter experts in their respective industries to capitalize on proven AI Playbooks. Systematically embedding practical AI and other technologies into these companies and management teams will position them to outperform relative to their peers and focus on strategic growth.
Only one out of 20 VC investments are considered highly successful. Successful or not, it is rare for a VC-backed company to become a solid PE buyout candidate. We see an opportunity to restructure and combine distressed and non-sustainable VC investments with great, non-technical companies to become feeders for PE. As a result, our LPs, founders, and fund managers are motivated by the “perfect storm” opportunity to fill the VC-PE gap.
We start with companies that have a proven business baseline.
The opportunity to find an outsized growth trajectory in our investments is where the similarity with venture mindset exists. Investing in companies that have a proven baseline can produce industry leaders and superlative results while minimizing the odds of any investment going to zero.
PE most commonly focuses on traditional business, meaning zero to no technology innovation outside of their core competency. PE’s value-add when acquiring these companies can include things like introducing CRMs or other basic technologies. Sometimes PE will combine technology-enabled companies with portfolio companies, but the outcomes tend to resemble Frankenstein-like organizations where cultures clash between operators and technology idealists. These are issues our strategy can ameliorate.
Our AI Playbooks aims to empower our portfolio companies to automate labor-intensive tasks with low gross margins, driving more efficient growth, significantly better returns, and lowering risk for investors.
Higher Order Capital will propel innovation on a more sustainable trajectory for our investments by harnessing the potential of AI and by leveraging the careful downside management practices inherent in private equity while simultaneously preserving the desirable upside potential of venture capitalism.
The imminent transformation in most aspects of our lives demands that we overhaul the approach to financing innovation. Higher Order Capital's founding partners feel compelled to provide founders and investors with an investing vehicle that offers less binary outcomes. Further, we aim to improve on the best of the profit-driven PE model by learning to embrace the quickly evolving human-machine partnership. In the end, we aspire to democratize access to the tremendous power of AI for good.
Read more about Our Approach.
It’s no secret that the declining valuations of today’s public and private tech companies and the resulting depression of the venture capital environment is putting a strain on the high-tech sector. Many LPs are turning to more grounded asset classes like private equity to avoid the risks associated with venture capital. However, we see this moment as an opportunity and are seeking to fill the chasm between the worlds of “growth at all costs” venture capital and “predictable returns” private equity that has the potential to increase upside while decreasing downside. We call this “modern growth” venture equity (VE).
We believe that strategically injecting AI, and more specifically our state-of-the-art AI technology platform, into established, industry-focused companies will enable them to outperform relative to their peers while preserving the core drivers of their business that are working well. Rather than trying to boil the ocean with AI, focusing on simple improvements like increasing the number of customers served by 5%, or preventing accidents on a manufacturing line by 10% will have real, sustainable impacts on the bottom line.
While AI is grabbing headlines and “changing the world,” very few companies are equipped to implement AI in a practical, impactful way. Phase 1 and Phase 2 of the Higher Order Capital strategy is to acquire and invest in a technology and services platform that delivers turnkey AI capabilities specifically for the average enterprise. This platform is our AI Cloud. Growth potential within the AI Cloud itself includes opportunities to acquire technologies, services, and talent at reduced valuations due to the current depressed funding environment. The AI Cloud achieves revenue by delivering high-margin recurring services and one-time professional services directly to clients in addition to providing the “secret sauce” to future Higher Order Capital industry-focused platforms (Phase 3).
To further capitalize on the AI Cloud, Phase 3 of the HOC strategy is to invest in narrowly focused industry companies that have the potential to materially benefit from relatively simple AI implementations. These are the solid companies that have a dependable growth curve, but do not have the vision or teams in place to take advantage of AI.
Only one out of 20 VC investments are considered highly successful. Successful or not, it is rare for a VC-backed company to become a solid PE buyout candidate. We see an opportunity to restructure and combine distressed and non-sustainable VC investments with great, non-technical companies to become feeders for PE. Through venture equity, our LPs, founders, and fund managers are motivated by the “perfect storm” opportunity to fill the VC-PE gap.
As we build out our industry platforms, we target companies that are already solving real problems, have a strong customer base, and are considered subject matter experts in their respective industries. Systematically embedding adoptable AI and other technologies into these companies will make a lasting, positive impact.
Venture equity also entails acquiring and leveraging debt in these narrowly focused industry businesses that are generating revenue and EBITDA, are positioned to outperform relative to their peers, and are focused on strategic growth. These companies have strong management teams and are receptive to training, education, and adoption of an end-to-end AI platform to increase revenue.
We start with companies that have a proven business baseline.
The opportunity to find an outsized growth trajectory in our investments is where the similarity with venture mindset exists. If our industry platforms have small trajectory changes to the upside, those will compound over time into better returns for investors. If those improvements are more pronounced, the outcomes can produce industry leaders and superlative results. Likewise, on the downside, if a venture equity investment does not go as planned, the odds of it going to zero are significantly less than a venture capital investment because we start with companies that have a proven business baseline.
PE most commonly focuses on traditional business, meaning zero to no technology innovation outside of their core competency. PE’s value-add when acquiring these companies can include things like introducing CRMs or other basic technologies. Sometimes PE will combine technology-enabled companies with portfolio companies, but the outcomes tend to resemble Frankenstein-like organizations where cultures clash between operators and technology idealists. These are issues venture equity can ameliorate. At Higher Order Capital specifically, maintaining the AI Cloud outside of the industry portfolio companies themselves prevents the need to radically alter internal expertise.
Our AI cloud aims to empower citizen data scientists and enable practically anyone to build data-intensive AI applications.
In essence, the mission of venture equity at Higher Order Capital is to propel innovation on a more sustainable trajectory by harnessing the potential of AI within established and niche industries. This will be accomplished by leveraging the careful downside management practices inherent in private equity while simultaneously preserving the desirable upside potential of venture capitalism.
The imminent transformation in most aspects of our lives demands that we overhaul the approach to financing innovation. Higher Order Capital's founding partners envision a permanent shift in venture funding and feel compelled to provide founders and investors with a new type of financial instrument that offers less binary outcomes. Further, we aim to improve on the best of the profit-driven PE model by learning to embrace the quickly evolving human-machine partnership. In the end, we aspire to democratize access to the tremendous power of AI for good.