Image: Nattanan Kanchanaprat, Pixabay
Last year was all about mega-rounds, as investors piled billions into fewer companies. In the US alone, there were more than 180 $100 million+ funding rounds. But at the other end of the spectrum, investors such as Tom Chapman of MatchesFashion, Stephen Welton of BFG, and David Tisch of BoxGroup were thinking long term with a raft of smaller early-stage investments.
This year things are different. The likelihood of a global slowdown is increasing, and big-name, deep-pocket investment funds are already signalling a move towards constraint. With no real appetite out there for seed funding, which was down around 15% last year, the winners will be early stage startups. Here are three more significant reasons why.
Chasing the zeitgeist only works if you’re first
The Financial Times recently reported that 40% of AI startups don’t actually have any artificial intelligence in their products. If this sounds familiar then you’re likely thinking of the boom in companies that added ‘blockchain’ to their brand name a couple of years ago or ‘dot-com’ 20 years ago. It worked, and hundreds of investors jumped to fund any business built around little more than a spreadsheet.
Buzzwords, especially tech ones, are a powerful lure for investors and clients. Investors piled into AI at a huge rate driving deals from 150 in 2012 to 698 in 2016. But that was then, and this is now. The investors who put their money into AI startups in 2012 reaped the reward. Today, investors putting their money into a company just because it has some form of AI, or says it does, without any other regard for its products or services, are unlikely to see the profits that the AI tag suggests.
The next generation are now venture capitalists
It’s easy to forget that by some demographic calculations the oldest Millennials are now nearing 40 years old, if not older. Not only are they in a position to become investors, but also many of them already have set up their own successful venture capital funds. And regardless of the hype, they really do think about investing in a very different way.
Younger people and Millennial-led VCs are drawn toward impact investing with the focus on responsibility, sustainability, inclusivity and the environment. They’re likely to spend more time searching out startups that fit these criteria, and anecdotal evidence suggests that they are more likely to invest smaller amounts in many more early stage companies. Mega-deals do not push their buttons.
This attitude is compounded by the marketplace, where consumers and younger business owners are more likely to put ethics and meaning over profit. Combine this with high-degree tech skills, a change-the-world approach and a desire to know the story behind the brand, and you end up with a boom in early stage funding.
Companies that attract mega deals are already looking out of date
This is a controversial opinion, but when you look at a list of last year’s US mega-deals, many of the companies seem, well, quite boring and a bit out of date. Taxi services, food delivery, bike-share schemes, crypto, automated vehicles. Anyone who has been an investment watcher for more than a few years must be getting déjà vu.
Early-stage investment is a process that opens your eyes to the next generation of products and services, and when you start looking, you find that it’s not about pizza delivery at all. Instead, many of the most attractive and exciting startups capturing the attention of investors are in sectors such as healthcare, insur-tech, agri-tech, clean energy and new lifestyle products such as cannabis producers.
All this signals that the chances are good that we’re on the verge of a revolution in the kind of businesses that end up getting the funding, and go on to have the biggest impact worldwide. The last few years, investments have been all about making life easier and more convenient. It’s possible that the next few years, driven by younger investors, will be much more altruistic. Don’t bank on a record year for mega-deals again anytime soon.
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