The Future of Venture Capital: 7 Trends to Look Out For
Venture capital has evolved a lot since its inception. Like in many industries, there are certain trends that shape the decisions that are made. Those trends are changing all the time, even for venture capital!
For those new to the concept, venture capital is the very early stages of a business -- which is followed by private equity capital, mezzanine capital, and the liquidity phase later on in the process. Venture capital encompasses the money that is invested when working to get a start-up off the ground, helping the growing business with marketing and advertising, and generally growing the company as much as possible.
As an industry, VC started out as small partnerships between investors and startups. It has transformed into a thriving industry with multi-billion dollar institutions, and will only keep growing and changing. What trends do we need to watch out for in the coming years? Let’s find out.
Algorithms and Machine Learning
Machine learning has been growing a lot, dubbed the “next big thing in VC.” But don’t be fooled -- a venture capitalist’s input is still essential. An algorithm can detect the uniqueness of a company, which is exactly what you need for a successful start-up.
But what about the logic and the facts behind an idea? Is it actually unique enough to be successful? A venture capitalist needs to determine that. Still, algorithms and machine learning can do a lot of the work for you -- not just in VC, but in many industries these days!
The End of Chasing Themes
There are certain themes that have emerged in startup culture, such as “the sharing economy,” which includes companies like Uber, Airbnb, Lyft, and Fiverr, just to name a few. It’s a fine line because a theme can almost guarantee the success of a new company -- it’s worked for other businesses, so why not for this one? However, once that theme is thriving and embraced by consumers, it’s probably too late to try something similar. Be as innovative as you can with your ideas!
Plus, emerging markets have the unique opportunity to learn from the mistakes of startups past. If there is a theme that you want to try out, but you’ve seen how others have failed in that area, take that idea and run with it -- with a twist. Make it your own and follow the path that is right for your business!
Seed Investing Firms
Seed funding is the earliest stage of the early stage. Seed investing firms have become increasingly popular as stand alone funding for startups. Many people are particularly interested in getting in on this phase of funding -- starting a new company is exciting!
Seed investors often do what they can to help companies get off the ground -- financially or otherwise -- with a one-time investment, while investors in other stages may contribute more over time. Typically, seed investors bow out after a certain amount of time to start receiving returns on their investment.
These investments produce less return, since the investment is usually a one-time thing. However, seed investing firms are growing in popularity because of the opportunity to move onto other projects, so in the end it evens out.
New VC Hotspots
Silicon Valley has long been seen as the hub of all things innovative and creative, which of course includes venture capital. It is still seen as the most mature market, and somewhere to look to see what is trending. However, things are changing and new venture capital hotspots are emerging. Much like the increasing presence of seed investing firms, this only means good things for startups everywhere.
Boston has recently produced many billion-dollar companies. According to Sarah Hodges, who works for a venture capital fund in Boston, a lot of the new technology is coming from Harvard and MIT -- right in her company’s backyard.
In fact, there are quite a few venture capital firms in Boston that have worked with some extremely notable companies including HubSpot, Wayfair, and Drizly. Many of them have been around for quite some time, but many of them are fairly new, and they are all contributing to Boston’s newfound status as a VC epicenter of the country!
Seattle has also been producing promising startups as of late. The city has proven to be a new VC hotspot, with many large companies -- including Facebook and Uber -- opening offices in Seattle. This means that tons of people are becoming more interested in the area, eager to get in on the action!
Play the Long Game
Venture capital takes time. The early stages can take years, so don’t get discouraged if your startup is not succeeding as quickly as you had hoped.
Larry Bohn, a managing director at a VC firm, emphasized that, “The successful companies take a meaningfully longer time to grow and be successful.”
Venture capital is particularly tumultuous in the first three years of a company’s growth, which is why many startups fail. As the experts have said, though, it takes a long time for a successful company to become successful, and venture capital is the best way to grow your company, though it can be complicated and time consuming. Basically, you need to be patient, but it’s usually worth it in the end!
Cross Country Startups
California, New York, and Massachusetts have long been the startup centers of the country -- but all of that is changing. These three states are still bringing in a lot of revenue, with startups popping up left and right. However, all 50 states and Washington D.C. are now producing many promising companies, too.
Venture capital AUM (assets under management) is also expanding outside of those three main states. AUM includes all of the investments that a single fund manages -- in simplest terms, that’s all of the startups that venture capitalists are working with. Ohio, Iowa, Washington D.C., and Minnesota are emerging as VC AUM hubs, having the highest AUM increases each year.
Artificial intelligence is at the height of its popularity. Everyone is interested in it, from college students majoring in computer science to venture capitalists everywhere. Startups using artificial intelligence raised billions of dollars -- yes, billions -- in 2019, so it’s safe to say that those startups won’t be the last to use artificial intelligence!
Like anything in life, venture capital trends are sure to keep changing over time. However, these specific trends are on the rise, and it looks like they might be here to stay! Plus, as technology develops, things like artificial intelligence and machine learning will become more intuitive, and therefore even more beneficial to venture capitalists.