Venture capital isn’t a monolith, but startup investors are compared to lemmings for a reason. Once a trend gets hot, every firm needs to make a play, or come up with a good excuse for missing out. (To be safe, if the firm does miss a trend, its partners should privately trash talk it to anyone who will listen.)
Investors continue to aggressively pour money into startups. As of the third quarter, US investors were on track to match or exceed 2016’s $69 billion in investments, according to the National Venture Capital Association and Pitchbook.
For startups, riding a trend such as artificial intelligence can be the difference between a hot round of funding and no investor interest. Founders have spent the last year throwing terms like blockchain, neural network, and machine learning into their pitch decks in hopes of attracting investment. Those trends show no signs of slowing in 2018. To those, we’ve added other themes that investors will be tracking in the new year.
With the price of virtual currency bitcoin hitting new highs every other day and money raised from “initial coin offerings” for new cryptocurrency projects surpassing that of early-stage venture funding, venture investors are scrambling to develop a cryptocurrency strategy.
Most firms can’t—or won’t—buy digital currency like bitcoin directly. But they’re high on the potential value of the underlying blockchain technology, and finding creative ways to pour money into the sector. David Pakman, a partner at Venrock, says he is exploring investments in apps that will run on the nascent crypto networks, much as smartphone apps run on either iOS or Android. His firm is also seeking investment opportunities in services around the cryptocurrency ecosystem, including institutional custody for cryptocurrencies, security, app distribution, and blockchain-based distributed file storage.
Rebecca Lynn, a partner at Canvas Ventures, is also hunting for companies using blockchains to build tech infrastructure. “The boring picks and shovels are where people are going to make their returns,” she says. She’s interested in startups using blockchains to securely store health records in a centralized database and to track copyrighted and trademarked content and licensing rights.
Brad Greiwe, a managing partner at Fifth Wall Ventures, is tracking investment opportunities stemming from autonomous vehicles. If, as some expect, self-driving cars cut the number of vehicles in urban areas by as much as 90% in coming decades, we’re going to have a lot of empty parking lots. That could free up billions of square feet of space, creating redevelopment opportunities. “Smart real estate investors are redrawing their maps now to succeed in the inevitable driverless world,” Greiwe says. Already, real-estate companies like Avalon Bay and Hines are putting features like sprinkler systems into parking structures, so the buildings can more easily be converted into storage or housing.
That’s an opportunity for startups. Appear Here, a Fifth Wall portfolio company, offers short-term leases for pop-up stores, including on parking lots. Other startups that could benefit from the shift include Factory OS, a modular building maker, Kasita.com, a startup making modular housing units, and Katerra, a construction tech company, says Roelof Opperman, a senior associate at Fifth Wall.
Artificial-intelligence experts are so in demand that tech giants like Google, Facebook, Amazon, and Apple are paying nosebleed rates to hire them. As a result, PhD’s in the field can raise venture money without so much as an idea, let alone a real business. Odds are, a tech giant will happily acquire the company before it’s built anything.
As the trend matures, venture investors are looking for tangible business ideas. Venrock’s Pakman is interested in startups that will use AI to help large organizations make decisions previously made by humans. That includes hiring, sales planning, and preparing manufacturing instructions for machines, he says. Canvas’s Lynn says her firm is looking at companies that use AI to identify the content of videos, an arena where she says the science is “not as far along as you think.”
It’s been 18 months since Unilever made a splash with its $1 billion acquisition of subscription-razor company Dollar Shave Club. But the wave of copycat deals that many expected has not arrived. (Leave aside Procter & Gamble’s purchase of natural-deodorant brand Native, and Unilever’s acquisition of household-care product maker Seventh Generation; those companies had raised almost no outside funding.)
Investors still believe it’s coming, and that there’s a market for digital-first brands in every consumer-product category. Mamoon Hamid, a partner with Kleiner Perkins Caulfield & Byers, says his firm will seek investments in what he calls “digitally native products,” citing venture-backed startups such as Nurx, for birth-control products; Curology, an acne-treatment startup; and SmileDirectClub, a teeth-straightening service, as examples of the trend.
Kamran Ansari, a venture partner at Greycroft, recently invested in Billie, an on-demand razor company aimed at women. As further evidence of the trend, he named startups like Candid, which offers clear teeth straighteners, as well as two companies that use sleek branding to sell generic Viagra to millennials—Roman, and Hims.
Ansari blames the dearth of copycat deals following Dollar Shave Club on consumer-product giants scrutinizing deals more closely. But he expects more investments and acquisitions next year. “It’s a matter of time before the big brands have to invest in this,” he says.
They’re certainly paying attention. In the last six months, the CEOs of Foot Locker, Macy’s, Express Scripts, and CVS have all discussed Amazon on their earnings calls. “We expect industries like CPG, retail, pharmacies to get more active investing and acquiring companies to help them fend off the threat that Amazon presents,” says Anand Sanwal, CEO of data firm CB Insights. “They are all feeling the need to reinvent themselves to stay relevant.”
The rise of voice-centric devices including Amazon Echo and Google Home has sent tech companies scrambling to develop services for them. Investors are following with their checkbooks. Now that the “hard tech problems” like accuracy are mostly solved, says Canvas’s Lynn (whose partner backed Siri before it sold to Apple), startups are finding new opportunities to use voice, including advertising.
So far, Amazon’s Alexa hasn’t proved terribly friendly to advertising-based businesses, causing companies like VoiceLabs to retreat. But startups with creative solutions are likely to thrive in 2018, as WIRED noted earlier this month.
In recent years, venture capital has fueled a surge in digital-media startups, including Mic, Mashable, BuzzFeed, Vox Media, Group Nine Media, Vice Media, Refinery29, Bustle, and Clique Media Group. Some of those companies have struggled to live up to venture investors’ high expectations. In recent weeks, BuzzFeed and Refinery29 announced layoffs, Vice will reportedly miss its revenue target, and Mashable sold to Ziff Davis at a fraction of its previous valuation.
Venture investors have turned to subscription-based products like Patreon, which raised $60 million in September. Medium, backed by $132 million in venture funding, has recently pivoted to a subscription-based model. But investors are also looking at content businesses with a mix of revenue from advertising, affiliate links, and subscriptions, according to Zack Kaplan, a VP at General Atlantic, which has backed Vox Media and BuzzFeed. Kaplan named Purch, a startup which owns Reviews.com, as well as General Atlantic portfolio companies A Place for Mom, a referral service for senior living facilities, and Red Ventures, which owns a variety of service-focused content sites, as examples of the trend.
Josh Wolfe of Lux Capital chases futuristic, longshot ideas. He’s calling his latest crazy obsession the “interspecial internet,” or humans talking to animals. Wolfe says improved signal processing, combined with increased empathy toward animals, points to demand for humans to communicate with animals through technology. He’s writing checks to groups of people studying the science with a roll-up play in mind. “We have a big ambition to roll some of these things up together and create an Apple-like company that has the aesthetic appeal to pet owners and the true scientific cutting edge with the best and brightest people, with a clear line about what is total bullshit,” he says. He adds, “The odds it’ll be successful—as with almost everything we fund—are very low, but if it works, I believe it will be a decabillion company.”
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