11 سبتمبر 2019

Venture Capitalists

What are investors looking for in 2018?

By Eliana Dreyfus

Let's take a walk back to review 2018's VC funding landscape. Hindsight is always 20/20 they say. We wanted to take the time to review, how right (or wrong) our predicitions turned out! According to TopTal Finance

"The year of 2018 saw a total of $254 billion invested globally into ~18,000 startups via venture capital financing—a 46% leap from 2017’s figures—with 52% ($131 billion) landing in the US alone." - Alex Graham, CFA

Below, check out our predictions from 2018. You decide how we fared. We think, we hit it spot on!

Many start-ups struggle to find funding for their ventures, especially if it is their first project. Nevertheless, there are many different options for finding an investor or a financial source for start-ups (for our three-part series on fundraising click here).

Venture capitalists (VCs) are one of the most difficult investors to secure investment from. However, they do often have the largest available funds. Venture capitalists are investors, usually professionally managed by firms, who provide funding to start-ups or small businesses. VCs invest in small enterprises that are expanding in exchange for equity positions in the company. This means that the investors buy shares of a company, either making a profit from the company’s success or experiencing a loss from its failure.

Venture capitalists take a risk by investing in start-ups and small businesses because of the potential for high returns over a short period of time. VCs will only take this risk when they have faith in the company and the team. For example, the early investors in Facebook, like Accel Partners and Breyer Capital, two major American venture capital firms, profited in the billions once the company became a success. However, VCs never know if their risks will pay off and this is the gamble.

Venture capitalists look to finance enterprises or innovations that can transform society and create global change. Although VCs often seem to focus heavily on tech, the start-ups they invest in do not necessarily invent new technology. Instead, VCs often invest in start-ups that apply existing technology to improve non-technological areas, such as transport, logistics or consumption. In today’s fast paced global economy, it is near impossible to predict what will be a successful product or service in the future. Because of this, VCs try to invest in companies that have novel ideas, a strong product, and a large target market, thereby demonstrating the immense potential for revenue generation and eventually profit. For the start-ups they invest in, VCs are often an important source of support, by providing funding, connections, and in-house expertise. Knowing what VCs are looking for is therefore essential to young entrepreneurs searching for investors.

To give you some guidance, we have compiled some of the key areas where major venture capitalist firms expressed interest for investing in 2018:

Blockchain Technology

2017 saw an increased interest in blockchain technology and cryptocurrencies, such as bitcoin. Although most companies do not seem interested in buying digital currency itself, they do want to find ways to finance the blockchain and cryptocurrencies more generally. Blockchain technology has the potential to provide a transparent, efficient, decentralized way to trace and securely modify data and information. So far, blockchain technology has been primarily used in the financial services sector, but there is a lot of potential for its use in other areas, such as organizing safe ride sharing, without the involvement of a third party, preventing voter fraud, promoting safer sharing and storing of medical records, and tracking and tracing products within the supply chain. There are still many more ways for companies and organizations to integrate blockchain technology into infrastructure and technology, the market is simply waiting for the next great invention.

Healthcare Technology

Healthcare technology (health tech) has many areas that require improvement, and with a large market comes large interest from investors. As people live longer and more senior care services are required, the ‘Silver Economy’ offers growing demand for companies catering to the senior population. This includes opportunities in senior housing, pension solutions, and senior-centric goods. Investors are therefore looking to fund more technology catering to the needs of this population segment. According to Venrock, a major US venture capitalist firm, there is an increased interest in digital health services that use technology to reduce costs and improve the outcomes of care. Investors are interested in finding a way to make healthcare more accessible, efficient, and affordable, and they are looking for new and creative ideas to support these goals.

AI and Machine Learning

Companies are seeking to transfer decision-making responsibilities previously held by humans to Artificial Intelligence (AI). Much of the interest in AI and machine learning stems from the fact that machines can complete small and repetitive tasks with less error than humans. Examples include, searching for patterns in images or the use of chatbots for customer support. Automation seems to be one of the largest themes from the last few years, continuously peaking the interest of investors. With automakers and AI companies racing to see who achieves commercial success first, investors are increasingly funding AI and machine learning projects. Many start-ups are jumping on the Self-Driving Car bandwagon and developing products that could bring us one step closer to safe, automated, self-driving cars. An example of this is the creation of special maps for autonomous car navigation.

Voice-Centric Devices and Skills

Another trend that has caught on and continues to show promise is voice-centric software and the devices that use it, such as Google Home or Amazon Echo. These devices are being used in new ways and for new purposes, such as advertising. However, due to the flaws that have arisen in existing products, such as the bugs found in Amazon’s Alexa, there is clearly space for improvement in voice-centric software. Moreover, there is space for growth in the ambient voice technology outside the home, like in the car or the gym.

There is also immense interest in the creation of applications or ‘skills’ for new and existing devices. Skills are capabilities built into devices, such as Alexa, which allow the technology to correctly answer questions or provide information, such as a weather update. New skills allow users to easily connect with websites or existing applications using the voice-centric device. For example, by creating a command like ‘Alexa, find a recipe for stir-fry’ the device connects the user to a recipe online. These applications or ‘skills’ connect voice-centric device users to the information, services, or products they need online. With so many industries already preparing for a voice-centric device takeover, investors are on the lookout for innovations in this area.

IoT: Internet of Things

Last, but not least, the Internet of Things (IoT), which allows devices to communicate with one another via the internet, is the next hot trend for VCs. Often items using IoT are called ‘smart’ devices. IoT is already making society more efficient and productive by allowing devices to communicate information to each other safely and instantaneously. IoT has created endless opportunities for innovation. Although the technology was conceptualized in 1999, IoT has only reached mass-market awareness in 2014. It is predicted to have a market of $8.9 trillion by 2020. IoT solutions open a range of niche possibilities for new start-up companies to fill. For example, a bracelet that can provide a doctor with data on your heartbeat in case of emergency or solar powered roads, which can not only use the sun to power streetlights, but can also charge electric cars and warn drivers about upcoming obstacles on the road. The potential uses for IoT technology vary significantly, but they seek to provide a more efficient, productive, safe and interconnected society. Whether big or small, many start-ups can foresee that VCs will continue to invest in IoT innovation well beyond 2018.

Using Technologies for Non-Technological Services

Does your start-up focus on a different area not listed above? Don’t worry! Every VC will have different interests. In fact, more and more investment is being diverted to using tech, machine learning, and IoT in areas you might not typically expect, such as agriculture, water conservation, and construction. Examples abound of unconventional uses for technology by successful non-tech start-ups. Technologies like AI can be useful for increasing the efficiency of a product or taking a business idea to the next level. For example, the try-on clothing service Stitch Fix. Not only does it allow customers to try on clothing before deciding whether or not to buy, it also uses a mixture of human stylists and algorithms to create custom boxes for customers! This combination of a technology with a non-tech concept, coupled with human involvement, has resulted in a high customer return rate. Stitch Fix has gained an edge over Amazon’s Prime Wardrobe service, which is cheaper but does not match products to customers.

Don’t Forget!

Interests will vary from VC to VC based on location and the firm’s focus. This is why it is crucial to know your target market! You never really know what the next big thing will be or who will develop it. It might just be you!

Looking Back...

So, we think our predictions turned out pretty good! What are your thoughts?

Ready to learn more and to dive into the current state of VC investments in 2019? We know, you're always hungry for more knowledge!

If you want to take a deep dive, we recommend you check out this 25 minute read from TopTal which shares all the insights on how the investment climate is progressing in 2019 and how it differs from 2018. Don't take our word for it, check out this infographic for example... 

2019 State of Venture Capital Infographic

Want to learn more about Fundraising? Check out our series - Fundraising is a Work of Art

Header Image Courtesy of: Pixabay

Eliana Dreyfus is a fundraising intern at Child & Youth Finance International. She graduated from University College Maastricht with a degree in Sociology, Gender Studies, and Political Theory. In the coming year she will head to the U.S. to complete her Master's degree at the University of Colorado - Boulder.

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