Looking Ahead To 2016
Earlier this week, I tried to boil down the top trends that defined the startup and investing landscape for 2015. Next up, I want to think about what will shape our experiences in 2016. This isn’t going to be a post about pontificated predictions like “Digital Healthcare is going to take off!” Rather, I’m trying to anticipate more specific events that I expect to (1) occur within the next 12 months and (2) have a material impact on the early-stage company formation and investment POV. Here’s a short list of things that I believe will impact my work and our early-stage ecosystem over the next year:
1/ Seed Stage Cliff: Now with the market shift hitting private early stage markets, many of the companies seeded after 2011 and that’ve either raised huge seed rounds and/or booked extra fundraises via post-seed or seed extension or second seed or debt rounds will begin to see their runway run out. Not only has the market cooled, many downstream investors want to see real momentum after a seed round and most seeded companies simply just don’t have it. This isn’t something to be ashamed of, this is just how it works. The difference before this autumn is that people felt runways were infinite, whereas now most are starting to realize they’ve been taxiing on the runway the whole time and running out of fuel. There will be more Medium posts. Seeded startups will just run out of money. A few teams may get scooped up by larger companies, but folks can’t count on it. Overall, this is rational behavior and healthy for the ecosystem to divert extension capital from experiments which haven’t worked and allocate them to new areas which seem riper for venture investment. (More on this below.)
2/ IPO Watchdogs: 2015 was a slow year for tech IPOs. The fall and winter came quickly and the end of the year can be distracting, but in 2016, I suspect there will be more intense focus on every single tech IPO filing, specifically with spotlights aimed at what the public market valuations will be compared to what the private growth rounds were for the last two years. The issue now is that even if 1-2 companies go out and have a smashing IPO, they’ll be labeled as outliers whereas the market overall is now expecting the rest of the IPOs to be priced below what the previous private round price was. Those news stories will compound the narrative of multiple compression up and down the stack. This will provide venture investors with even more ammunition to ask for more ownership and keep valuations in check.
3/ Virtual Reality Will Begin To Seep Into Mainstream Conversation: Please note, my dear VR-haters, that I used the words “begin to seep.” The reason I believe this will happen in early 2016 is because Facebook — the best-run company in the world right now — has over 200 people across two buildings on campus working on all sorts of technological and ecosystem issues within virtual reality. Facebook along with other OEMs will start to distribute more headsets to consumers, and there will of course be a wide variety of sophistication among them. There are some people who think either VR is overhyped and will never happen or that it will take many more years, but I’m entering 2016 with the assumption it will happen and that it will happen much sooner than most people think. And with Facebook putting so many resources behind just one flavor of it, I take that seriously. At the same time on the venture side, it’s not being reported (I’ll explain why below), but some of the best VC firms in the world are pouring serious, serious money into VR infrastructure and content creation tools. They’re not even opening the emails about companies seeded three years ago (see Point 1 above) and instead focusing on the future here.
4/ Apple TV As A New Platform: Speaking of next battlefields for at-home entertainment, Apple’s revamped TV will start to see more developers building apps for the ecosystem. This isn’t an area I’ve followed too closely, but I’m planning to spend more time here in 2016. I’d love to read any good posts you’ve read or hear your thoughts on how this could unfold.
5/ Many VCs Have “Moved On” From Yesterday’s News: There’s plenty of innovation and corresponding investment in new areas of robotics, autonomous driving systems, drone systems or application companies, virtual reality and TV (see above), and a host of other areas that rarely show up on the tech blogs or have their financings announced. So people can worry about what they read in the news, but rest assured the majority of the best and most experienced investors are ahead of the market. This will also impact how institutional rounds will get done, or not get done…for example, companies that are doing somewhat well in an out-of-favor category like online-to-offline logistics may get quite a chilly reception from VCs.
6/ The Era Of Promotion Is Over, For Now: It has felt as if the past five years has been about promotion of founders, of companies, of investors, of up-rounds, of valuations, of up-ticks, of raising more and more money, and so forth. Everyone participated in the promotion of technology as a force, and while I personally believe the fundamentals are strong for technology as the foundation for the global economy, the markets finally ended up disagreeing with the pace at which prices were growing. Right or wrong, that’s what happened. Now, people are carrying a more sober gait. VCs realize some of their best portfolio companies will have valuation adjustments or even down-rounds. Entrepreneurs are now internalizing the chilly response they got in the fall and winter and readjusting expectations for Q1 fundraises. After the era of promotion, I believe we are entering a new, more muted era of “results.” Companies, firms, and people with public profiles (myself included!) will be called on to demonstrate output and results. Over the past few months, many of the top VC firms on Sand Hill have been keeping their newer investments quiet, partly out of a market-competition fear, but also — I believe — an implicit realization that the value of investment promotion has a limited shelf-life. Even one of the hottest consumer apps to get rounds of VC funding remains mostly under the radar.