Sean Parker (Founders Fund) and Shervin Pishevar (Menlo Ventures) at Le Web.
Nothing says the end of December like prognostications for the new year. In 2011, the breakneck pace of early stage investing continued to grow, with new market segments like “collaborative consumption” (think “Airbnb for…”) and box-mail services (Birchbox, Blissmo, Trunk Club) tickling the fancy of investors. NYC continued its rise, and between Groupon, LinkedIn, and Zynga, 2011 will be remembered as the year that the tech IPO got its swagger (or at least pulse) back. So what’s in store in 2012?
In no particular order, here are ten trends that will shape venture capital in the coming year:
1. Differentiation will be the name of the LP fundraising game, and VCs will get more aggressive about seeking out international opportunities
Investing internationally is a double-edged sword for VCs. On the one hand, emerging startup markets offer fresh terrain in which to scoop the biggest and most interesting deals at more reasonable valuations than in the US. On the other, investing internationally is hard. Understanding not only legal but cultural differences takes time and work; understanding differences in the market opportunity takes work. Still, as companies like recent TC Disrupt winner Shaker continue to push foreign-born startups into the limelight, and as more dollars try to press into the very top tier of firms and VCs feel increased pressure from LPs to differentiate themselves, creating strategies around frontier markets is going to become more and more appealing.
2. There will be massive competition for the most promising companies in areas where software hasn’t yet eaten an obvious and important industry (such as politics, pets, and education)
Maybe the most read startup content of the year was Marc Andreessen’s essay "Why Software is Eating the World," published in the Wall Street Journal. The point of the piece was simply that it was only a matter of time software and internet services had disrupted every single industry and activity space on the planet. 2012 will be a year in which you see intense competition among investors to get into deals in companies in spaces where software has still had only modest influence (at least relative to the opportunity). Three of my top bets for the industries where this will happen:
- Politics - as much as we like to talk about how much social media changed politics in 2008, there is so much more opportunity. It’s already happening, with companies like Electionear are poised to completely change field organizing for campaigns, and Change.org - a company having immense influence shifting day-to-day policy in business and government - is quietly becoming an 8 figure revenue company.
- Pets - the lack of activity in the pet space is insane. $10 billion spent on pet supplies, $3.5 on per services, and nearly $500m on pet insurance. These are big, big markets with highly inelastic demand and very little in the way of great startups. This will change. Check out Dogvacay for an example of how.
- Education - Education is more than 8% of our annual GDP. More than a trillion dollar US (and about 3x that worldwide) industry, with an incredible flowering of innovative for-profit companies building products and services that engage with formal learning as its currently constituted as well as shifting the nature of formal learning all together. 2011 definitely saw an uptick in general VC interest in the space (a notable example is Greylock & Benchmark’s co-led 15m investment in social learning platform Edmodo), but 2012 will be the year when investors flock in.
3. New York will carve out even more mindshare with young entrepreneurs
New York continues its ass-kicking entrepreneurial ascent. It’s no longer just Foursquare - but a whole host of companies - from Tumblr to Etsy to Kickstarter to Skillshare and beyond - that are making the Big Apple home. Warby Parker has exploded on to the scene as one of the most talked about startups in the world. General Assembly (in the LearnCapital portfolio) is one of the coolest startup spaces in the world and their startup education programs are second to none. Union Square Ventures continues to command incredible mindshare among early stage entrepreneurs, and Lerer Ventures and Thrive Capital are quickly becoming sought after by entrepreneurs on both coasts. In 2012, I think you’ll see more and more startups on the West Coast carving out space in their rounds for NYC investors. What’s more, I think you’ll see continued gravitational pull towards the city for young entrepreneurs trying to decide where to base their companies.
4. Series A (and later) funds will grab more and more of the conversation and “cool” that has recently belonged to the angel investors
On the backs of a massive uptick in incubators and seed investors, the last couple years have seen a startup Cambrian explosion. 2012 will see more and more of those companies running out of cash and coming to the all important proving ground of Series A. As that happens, you’ll see “the hot” funds become the coolest funds doing Series A and later deals with the most interesting companies. And my guess is that a lot of the investors that grab this attention won’t be the Sequoia’s and KPCB’s, but the Lightbanks, Menlos, Founders Funds and Andreesseens. It will be interesting to see if and what impact any shift in “what’s hot” when it comes to a VC trickles to people who have come into the field as angels in the last couple years. I wouldn’t be surprised to see some of the better known solo angels or partners at seed funds jump to bigger firms.
5. E-commerce will be the investment vertical that looks the most different from the past couple years (and look out for the “We are the Fab.com of x…” analogies)
The past couple years have been the years of the flash deal sites, culminating with the Groupon IPO. And if some of the wind has gone out of the space’s collective sails, it has and still commands incredible attention (not to mention revenue and investment dollars). 2012, however, will be about a fundamentally different type of e-commerce, anchored in quality and curation rather than discounts. Fab.com is for sure the poster boy of this - with tens of millions of new dollars in the bank, 100,000 orders a monthly and a nearly $100m revenue run rate already - but there will be many many more as online retailers try to move away from the feel of walking into a big box store or coupon flyer in a newspaper, and instead tap into the feel of walking into an awesome boutique where everything looks awesome.
Interested in the rest of the trends that will shape VC in the coming year? Check back in at the beginning of next week for part 2
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