Oh Venture Capital, you evil mistress of every startup founder or executive. Your song is so sweet but sting can be deadly if handled without care. So the question for 2018 is where will the big boys be placing there chips in 2018? Where will the promise of being the next Unicorn be told?
Here is my take on the VC outlook in 2018 as I see it.
One thing is certain, the supply of capital is still plentiful. The record-high fundraising activity of the past 19 months has been driving the growing amount deals. One differential, and I believe it to be a good thing, is that valuation as a discipline has returned as seen in the total investments as to raised by VC’s themselves. The investment thesis has shifted from “growth at all costs” to “growth with fundamentals.”
Investment into venture-backed companies in 2017 (couldn’t find definitive Q4 data yet) is on track to match or exceed dollars deployed in 2016, and if this pace holds, full-year 2017 venture capital (VC) dollars invested could be the highest in the past decade. Venture investors deployed $21.5 billion to more than 1,699 venture-backed companies during the third quarter, bringing 2017’s total investment to $61.4 billion deployed across 5,948 deals to date.
In the VC ecosystem, sensitivity to political and corporate governance issues is growing. The past six months have hinted at the growing impact of political climate and corporate governance on private tech companies. These issues include the ongoing immigration debate, VC activism at Uber, sexual harassment allegations at leading VC firms, and diversity discussions at tech companies.
VCs are hoarding cash for the inevitable rainy day
Given these issues and the impending rise in the cost of capital do to macro-economic factors and the Federal Reserve it is no surprise that there is a correlation. A correlation between the amount VCs have risen themselves versus investing in startups, especially seed stage and the number of exits.
These trends point to VCs not only being more selective in areas of interest to result in the “home run” for them but skeptical of those startups claiming expertise or participation in those areas. Anyone who has been around the startup world for more than a minute can recognize the first time startup founder vomiting buzzwords in their pitches only to fall far short when it comes the the actual product or service.
So where will VCs be focusing their investment attention then… here’s 6 areas.
- Self-driving cars – There has been an escalating “share of wallet” for self-driving cars and related initiatives. Over the past few months C-level executives from numerous self-driving car companies including Cruise, Zoox, nuTonomy, Drive.ai, Argo AI and Mighty AI have all indicated increased courtship from the VC community. At the Code Conference, Marc Andreessen argued that we shouldn’t be concerned that self-driving vehicles will lead to job losses – in fact, just the opposite could occur. Not only could self-driving tech lead to fewer traffic deaths and a boost in productivity, it could also cause a boom in exurbs, communities that exist beyond suburbs. At a recent Silicon Valley event featuring over 15 startups focused on some aspect of autonomous vehicles, there were almost twice as many investors as entrepreneurs in attendance. Clearly, we are rapidly approaching the peak of the hype cycle regarding self-driving cars.
- Artificial intelligence (AI) – Machine-learning initiatives continue to occupy a substantial “share of mind” among tech leaders. 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 AI, neural network, and machine learning into their pitch decks in hopes of attracting investment. Those trends show no signs of slowing in 2018. 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. As the trend matures, venture investors will be looking for tangible business ideas such as startups that will use AI to help large organizations make decisions previously made by humans. That includes hiring, sales planning, preparing manufacturing instructions for machines or use AI to identify the content of videos. The collective efforts of the research community continue to impress, especially as we see low-hanging breakthroughs in areas outside of vanilla deep learning, such as reinforcement learning, adversarial networks, one-shot learning and unsupervised methods. The discussion on how AI will impact employment will shift from solely focusing on the elimination of jobs to how best to help workers accommodate the inevitable change: in their responsibilities, the skills they need or requirement to find a new role. Different countries will take different approaches. Those which combine an investment in social goods (like education and a safety net) and maintain a healthy approach to entrepreneurship and innovation will do best. We will also make more progress in understanding the commons questions of trust, fairness and justice in algorithmic systems. Sensible boards, prompted by legislators, regulators and activists, will make ethical AI a top-table issue.
- Cryptocurrency – 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. Look for investments in apps that will run on nascent crypto networks, services around the cryptocurrency ecosystem including institutional custody for cryptocurrencies, security, app distribution, and blockchain-based distributed file storage. The activity in decentralised applications and protocols based on tangle and tokenization will increase and coins like IOTA, FileCoin, Orchid and Ocean will come live. Below the speculative froth, sober-minded teams are coming together to tackle real problems using the unique attributes of blockchain technologies (solving the incentivisation problem across a market network of random participants, allowing the emergence of trust in such a system). We’ll see AI developers increasingly experiment with the fruitful combination of AI and blockchain. These areas include how to build a data commons to incentivise the sharing of data, allow the sharing of models, using blockchains and smart contracts for individual AIs to mediate their machine-to-machine interactions.
- Voice-centric devices – 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, 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.
- Mixed Reality – Clearly, there’s interest in this area, as expressed by the $1.9 billion invested in Magic Leap. But instead of the idea of augmenting our existing world –like digital recipes we can see when we’re at the stove – think wearable devices that can see and interpret what’s going on around us. If such a computer could identify people in front of you, when you last met, and how they fit into your life that would be exciting. So would it being able to tell you instantly if a product you’re holding at a store is available cheaper online.
- Targeted Social Networks – I think we’re seeing the natural movement toward people doing smaller, niche-focused networks again. Who isn’t less satisfied by Facebook’s increasingly information overload that has less appeal to our interested today? Artificial intelligence will be the technology investment priority for large firms.