Looking back, and ahead, at the global VC landscape
The venture capital industry experienced significant shifts in the past decade, from the ubiquity of unicorns and mega-rounds to the rise and fall of private-market darlings in the public market. Looking ahead, it’s instructive to reflect on the defining moments of the last 10 years to determine what may come in the following decade.
2009–2019
Investment — Capital Abundance
The 2010s will be remembered as a decade of capital abundance — bigger funds, bigger checks, bigger valuations. Zero, or near-zero, percent interest rates, a result of the Great Recession and central banks’ attempt to spur investment and economic recovery, enabled this super-sizing of the venture capital-tech world. Investors suddenly had a strong incentive to seek alpha in private equity and venture capital. The rest is history.
The resulting abundance of capital also spurred the “capital as a moat” phenomenon — the more money a startup has, the faster it can grow and the more market share it can capture to insulate itself from competition, ostensibly speaking.
Uber, a pioneer in this strategy, raised over $20 billion in funding over 23 rounds, obliterating virtually all competition (with the exception of Lyft, which arguably has always played second fiddle to Uber). However, Uber has yet to prove that overflowing coffers lead to market domination, creation of shareholder value, and sustainable long-term growth. Then we have Bird and Lime, the two biggest micro-mobility companies, still struggling to achieve positive unit economics. WeWork is a notable example of the “capital as a moat” strategy not working as intended.
At Fuel Venture Capital we watched as this trend of excess unfolded. It only emboldened our public market-driven philosophy to startup financing and mentorship. We’ve always advocated a long-term approach to scaling and have always refused to subsidize portfolio company operations with LP dollars.
Location — Beyond the Valley
Silicon Valley has been the capital of Startupland for almost as long as anyone can remember. Over the last 10 years however, technology has democratized information, enabling aspiring founders to break ground on impactful ventures that would have otherwise not been viable the decade prior. Startup ecosystems are sprouting all over the U.S., from Chattanooga, Tennessee, to sunny South Florida (shameless plug — Fuel Venture Capital is headquartered in Miami). In Europe, London is no longer the only option if you’re a talented software engineer with a great business idea. Even Australia (where unicorn startup Canva is based), Africa and Latin America have begun to nurture robust startup ecosystems. The growing ubiquity of the entrepreneurial can-do spirit of tech across borders will stand in history as one of the most important shifts of power, wealth and cultural capital of this century.
Technology — Software Eats the World
Our decade was kicked off early on with an important and definitive declaration from one of tech’s most important figures. In 2011, Marc Andreessen wrote in his Wall Street Journal op-ed: “We are in the middle of a dramatic and broad technological and economic shift in which software companies are poised to take over large swathes of the economy.” It was a prescient declaration that has largely turned out to be correct.
Think of the biggest startup success stories of the past 10 years — Uber (never mind their public-market troubles), Airbnb and Netflix. Three paradigm-shifting companies that share a common trajectory: Its leaders evaluated existing platforms in the late 2000s and early 2010s and asked themselves how they could leverage those platforms to create paradigm-shifting tech-enabled services. With broadband internet, the growing ubiquity of smartphones and the cloud, Uber, Airbnb and Netflix became not just service providers but also software companies. Andreessen’s 2011 declaration has been a call to action for forward-thinking entrepreneurs, prompting introspection: “Does my company leverage existing resources as best as it can? Am I thinking big enough?”
Looking Ahead: 2020–2030
Investment — Shift of Focus
2019 saw more than a dozen tech IPOs, leading to plenty of liquidity for funds and LPs. But it wasn’t all good. There were a number of underwhelming public-market debuts from a number of high-profile players, from Uber to Peloton, making 2019 a year of sobering reflection for the tech industry and venture capital overall. The hype around raising private capital has proven to be a poor indicator of how a company will perform under public market rules and scrutiny.
Going into a new decade, investors will exercise more caution when writing checks, increasing scrutiny of business models and corporate governance. Rather than prioritizing growth above all else, investors will incentivize entrepreneurs to create profitable and sustainable companies to pursue more tempered, disciplined growth. We welcome that direction, and it ties closely to our company curation process given that our background is one informed by the public market. We understand how public investors think. We owe it to ourselves to try to focus on operational excellence and have founders put those controls in place early.
The shift of focus from growth at any cost to a path to profitability seems timely, as the U.S. economy has been in a bull cycle over the past 11 years or so. The recession that is expected to materialize in the next decade will be a test for all companies.
This trend of sustainable development over explosive, VC-subsidized growth will lay the groundwork for the direct listing trend, a route to the public market we expect to become more common. One of the most important criteria to make a company an ideal candidate for direct listing is profitability.
Culture — Gender Diversity
The world of tech and venture capital has been historically dominated by men, most of them white and heterosexual. Countless initiatives have emerged to address the industry’s gender gap, a compelling endeavor when you consider the overwhelmingly positive statistical data on gender parity in tech.
As a VC, one of my favorites is the following: Founder teams with women are more likely to exit and have higher internal rate of returns than all-male teams (– 12% versus 48%) — according to the British Business Bank and KPMG, respectively. Gender-diverse companies routinely delivered higher returns with a lower risk of failure, compared to gender-homogeneous counterparts, according to a joint study by French business school HEC Paris and MVision Private Equity Advisers.
As of the end of 2019, less than 22% of all venture capital dollars and roughly 14% of all venture capital deals went to founder teams with women, according to Pitchbook. These numbers, while small, represent progress compared to figures 10 years prior. We expect this trend to not only continue but gain significant traction in the coming decade, and we are proud to be helping to drive this positive change.
Gender diversity is a top priority for Fuel Venture Capital. Women comprise half of our core team, and we take pride in continually working to implement internal processes that promote gender parity and ethnic diversity. As far as our portfolio breakdown, two of our companies are led by female CEOs: Eyrus in the field of construction, and Bolt in micro-mobility — both male-dominated industries. I am also proud to say that we incentivize our founders to hire from a diverse pool of candidates and actively aim to increase the number of female-led startups we consider and ultimately invest. Internal efforts include participating in female-led entrepreneurship conferences and all-female startup competitions, where we can get the Fuel Venture Capital name out there for aspiring or early-stage female founders seeking venture backing and mentorship.
Data-Derivative
If I had a dollar for every time I heard the phrase “data is the new oil” this past decade, I’d have at least $1,000. However, that phrase is not just a nod to the mad dash toward bigger and better sources of data. The real truth in the metaphor lies in the fact that data, like oil, isn’t usable until it’s refined.
We are living in a world that is connected more than ever. Nearly everything we do leaves a digital trace or leaves data to be collected, analyzed and protected. While the last ten years were considered to be the age of big data, it’s my belief that these next 10 years will see the exponential growth of “data derivative fields,” wherein different technologies converge with Big Data, resulting in practical applications that shape the way we do business and meaningfully alter our day-to-day lives.
Artificial Intelligence/ Machine Learning (AI/ML)
The convergence of Big Data and Artificial Intelligence is arguably the most significant development in firms’ ability to capitalize on their data and analytics capabilities. Cost-savings potential has incentivized initial use and implementation of AI/ML. AI/ML is unique in its power to refine data into applicable insights, which facilitates automation and optimizes enterprise processes across sales, marketing, customer services, HR functions and more.
As deep learning, computer vision, generative adversarial networks, and other meaningful technologies become more advanced, we expect AI/ML to become a must-have competence across various industries, from retail and health care to logistics and manufacturing. The rise of “AI-as-a-Service ‘’ will accelerate this trend because the platform will make it easier for companies and individuals to explore and implement AI/ML technology. With companies spending nearly $36 billion dollars on AI/ML products and services annually, virtually all tech giants — Microsoft, Google, Amazon, Baidu, Alibaba — are heavily investing to create those AI/ML products and services, making it increasingly hard for startups to compete. However, as these same heavy hitters continue to invest in these technologies, acquisition sprees are likely to ramp up and be a boon for sophisticated nascent startups.
Internet of Things
Over the last decade, we have seen the Internet of Things (IoT) come to be embedded in all sorts of consumer products, from the useful (exercise trackers) to the inane (toasters). Usually well-intentioned, but far too often gimmicky, applications of IoT were not exactly inspired yet. But we expect this to change in the near future as the advent of 5G will push unparalleled growth in IoT technology.
IoT will benefit from the 5G network in three ways. 5G promises lower latency, enabling faster transmission of larger data streams. Bandwidth will be measured in gigabits per second, rather than megabytes providing less strain on batteries and computers. That said, 5G is about more than just “fast internet”. The coverage 5G delivers will expand the power of the network to cover more users, devices, sensors, and connected vehicles. Last but not least, 5G-enabled IoT devices will be more reliable, allowing better transmission of data in extreme conditions.
Early 5G deployment began at the end of 2018 when AT&T launched 5G wireless networks in 12 cities, but widespread implementation of the technology may take the better part of a decade. Verizon’s CEO has stated that full 5G application will have happened by 2023. Naturally, phones are the first devices that come to mind when IoT in the context of 5G and vice versa are the topic of discussion, but new applications of sensor data and IoT devices will be where real change comes.
Autonomous vehicles, robotic surgery, and critical infrastructure monitoring are just a few of the potential applications of 5G-enabled IoT.
Information Security (Infosec)
The abundance of data brings both opportunities and challenges, the latter here referring primarily to data breaches and their numerous downsides.
First, let’s establish that data breaches are not just ubiquitous in news headlines and corporate scandals, but actually increasingly prevalent. According to Pitchbook, in recent years, hackers have multiplied their rate of attacks, with the number of publicly disclosed breaches escalated from 4,209 in 2016 to 6,728 in 2017. The average cost of a breach is $3.9 million, further highlighting the importance of prevention, early detection, and efficient damage control.
As a result, the field of cybersecurity sometimes referred to as “info security” will likely get a significant boost in the coming years as the velocity and breadth of attacks across the enterprise perimeter continue to expand. We see opportunities for startups to empower developers to embed security earlier in the software development process. This shift can help startups grow in a challenging environment in which incumbents offer unified platforms.
Exit opportunities in infosec are plentiful as strategic acquirers, public markets, and private equity buyers have shown a great appetite for this segment, pricing them at significant premiums, near the top of SaaS valuations for their sticky revenue and the ability to quickly achieve profitability. The infosec market is estimated to be as large as $126 billion and is expected to grow to $183.6B by 2022 at an 8.8% CAGR.
The shift in focus toward profitable and sustainable companies, paired with the push for more diversity across founder teams and organizations, will be driving forces in venture capital in the coming decade. This will help foster the diversity in thought necessary to bring about new and innovative applications for the future we see within the data-derivative fields. Data has become the staple and its collection, analysis and protection will be what takes over the next swathe of the economy.
This post was authored by Fuel Venture Capital General Partner and Chief Investment Officer Maggie Vo, CFA. Maggie manages investment activities, leads due diligence for prospective investments, and performs valuation analysis for existing portfolio companies. To reach Maggie, email her at maggie@fuelventurecapital.com. Follow Fuel Venture Capital on social media, via Instagram, Twitter and LinkedIn.
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