Venture capital firms (VCs) are willing to bet cold cash on the future. So, what do they see coming down the road that’s going to boost their bottom line?
Before answering that, let’s take a look at the larger VC picture.
Since 2014, VCs have been investing more heavily than at any time since the early 2000s, suggesting a rising degree of confidence in their bets on specific companies and industries. On the other hand, the actual number of deals has been fairly flat since it fell after the heydays of the early 2000s.
Over the last year, however, both funding levels and the number of deals have showed a kind of hesitancy:
- The number of deals peaked in the second quarter of 2015 (at 2319), and the amount of investments peaked in the third quarter of 2015 (at $39.8 billion), according to Venture Pulse Q2 2016, a report from KPMG and CB Insights.
- In the second quarter of 2016, global funding to VC-backed firms rose 3% to $27.4 billion. That’s a small uptick after two quarters of declines. However, the overall number of deals fell by 6%.
- In the U.S., deal funding was up 10% from the previous quarter but the number of deals declined by 9% from the previous quarter.
Why the uncertainty? No one knows for sure, but the Venture Pulse report points to various factors, including Britain’s withdrawal from the European Union, the upcoming U.S. presidential election, China’s slowing economy, the specter of higher U.S. interest rates, and “the hangover resulting from the valuation highs created in 2015, which continues to see VC investors questioning high valuations.”
Amid these uncertainties, one area stands out as drawing greater amounts of funding since the fourth quarter of last year: artificial intelligence. The organizations drawing the top deals in this area are Cylance, Anki and MOOGsoft. Venture Pulse notes that business process outsourcing companies have been investing in this space: “For many, the opportunity to decouple headcount increases from revenue increases is a significant driver. With more complex AI technologies, companies can reduce headcount and automate many back-office jobs.”
The MoneyTree Report—a product of the National Venture Capital Association and PricewaterhouseCoopers—also reports that there has been a recent decline in the overall number of deals but a recent increase in terms of total venture dollars.
It notes that the strongest funding has been in three areas: software, biotechnology and IT services. Given the strength of software investments, it’s not surprising that Silicon Valley was the geographic area that received the highest levels of funding. (To examine longitudinal data on funding by industry, region, stage, financing sequence and state, try out the interactive data based on the Money Tree Report.)
Despite socioeconomic uncertainties, the funding levels behind new ventures remain fairly high by historical standards. However, the number of deals remains flat, illustrating that VCs are making some heavier bets on the firms they decide to fund. VCs are looking for quality start-ups. As IA Ventures founder Roger Ehrenberg told Bloomberg, “We are making fewer investments, having the comfort of writing larger first checks and going very, very deep into companies.”
A majority of bets are being placed on high-tech companies in either the software or the biotech areas. More specifically, firms that lead in the area of AI are being funded, partly because AI is becoming useful across an expanding range of companies and industries.
Because investors are banking on high technologies, it makes sense for futurists, business strategists, researchers, academics and others to closely track developments in biotech, software and AI. If the VCs are doing their jobs well, then we’ll see some amazing new products from these industries in the near future.
by Mark Vickers
Below are related resources that may be worth checking out:
CBInsights: From Cornell University: “CB Insights is a venture capital and angel investment database that provides daily real-time information about venture capital and angel investor-backed start-up companies, VC firms, angel investors, and transactions in the United States. It includes detailed analyses related to venture capital, private equity and angel investment on a regular basis, including an in-depth quarterly venture capital report.”
Crunchbase: From Wikipedia: “TechCrunch operates CrunchBase, a database of the startup ecosystem consisting of investors, incubators and start-ups, which comprises around 500,000 data points profiling companies, people, funds, fundings and events. The company claims to have more than 50,000 active contributors. Members of the public, subject to registration, can make submissions to the database; however, all changes are subject to review by a moderator before being accepted. Data is constantly reviewed by editors to ensure it is up to date. CrunchBase says it has 2 million users accessing its database each month.”
Mattermark: From Telegraph Research: “Mattermark provides a tool for finding, tracking, and researching technology companies. The tool analyzes businesses with data including social media traction, website traffic, and press mentions. Venture capital funds use Mattermark to prospect investments and conduct analysis.”