The current wave of start-ups is exciting, especially as the number of big ideas being turned into viable businesses by investor funding and mentorship appears to be growing exponentially. Here are three current trends in investing among venture capitalists, angel investors, and incubators:
1. New Business Segment Focus
Similar to the rabid investment wave of the 1990s where investors flocked to tech start-ups and Silicon Valley was the hottest commodity, a similar intensive interest is going to grow in the investment community around start-ups. However, this time the investments are focused on new business segments, including biotech, cleantech, FinTech, and IoT (Internet of Things.) Tech Republic also identified other business segments that are seeing the most investment because they are pegged to be the game changers in 2015. These are Artificial Intelligence, Big Data, Mobile, and Security, which are already being incorporated into daily personal and business environments.
Gartner Identifies the Top 10 Strategic Technology Trends for 2015, which includes an interest by investors in funding those start-ups with an impact that offers a “high potential for disruption to the business.” Also, three major themes for the emerging and existing business segments that are arriving now in 2015, include the integration of real and virtual worlds, the intelligence everywhere movement, and the technical impact of the digital business shift.
2. Growing Size of Funding But Fewer Rounds of Funding
TechCrunch reported that more than $47 billion of funding was offered up to startups in 2014, a 62% increase over 2013, with indications that 2015 will offer up the same – if not more – funding from venture capitalists. There appears to be more money available, but this is being distributed as larger sums that come in fewer funding rounds. As TechCrunch further reported, the size of Series D funding rose 80% to nearly $29 million in 2013 and 2014 from the $16.1 million of previous years.
AlleyWatch recently reported an incredible jump in funding for specific start-ups and the expectation that these large sums would continue throughout 2015. As they noted, “Research firm CB Insights released a report recently highlighting just how much money is rushing into startups like Uber, Airbnb and Instacart. Investment activity is red-hot, with funding rising to $4.1 billion in 2014, a jump of more than 500 percent year-over-year.”
At the same time, valuations of these start-ups are also creeping back up to the billion-dollar mark. Yet there are so many more start-ups that have lower valuations and still offer a viable and sustainable business model, suggesting that a conservative approach to valuations should be the focus in 2015 to avoid a repeat of the dot-com bust. As Whitney Rockley of McRock Capital noted, “Although valuations on companies are creeping back up to the billion-dollar mark, there are literally hundreds of millions and multi-million-dollar valuations that illustrate a much more conservative approach to valuations to avoid a repeat of the dot-com bust.”
3. Increased Foreign Direct Investment
Foreign direct investment will continue to offer more funding opportunities for start-ups in 2015 as the laws continue to change and open doors for Asian, Middle Eastern, Latin, and European investors to back up existing U.S tech start-ups as well as establish incubators and a physical presence for greater involvement. In a June 2015 report from the Organization for International Investment on the extent of foreign direct investment in the U.S., the figures shows that “first quarter 2015 foreign direct investment in the United States flows are the strongest on record, nearly quadrupling from the fourth quarter in 2014 and are a dramatic turnaround from a large disinvestment in the first quarter last year.” The first quarter of 2015 showed $192 billion in foreign direct investment in the U.S., which was a 267% from the last quarter of 2014.
Of note is the increasing foreign direct investment from China as detailed in a report by the Asia Society with no signs of a slowdown in 2015 and beyond. A 2014 Forbes article quoted two experts on the advent of Chinese investment in U.S. tech start-ups. In the article, Jackie Yang, Co-Found of TransLink Capital, an Asian VC firm that invests in the U.S. said, “Three years ago the Chinese companies were interested but maybe 10-20% had a plan to actually invest. Now I’d say 60-70% of them have a plan already.” David Lam, Managing Director of WestSummit Capital, added, “We recently took one of our companies to meet with 15 strategic partners in China, and 6 came back and said that they are interested in investing. The interest level has continued to rise in the last few years.”
Final Thoughts
When companies like Uber are getting close to a billion dollars in funding, it’s hard for an entrepreneur to not dream of getting that same funding support with their big idea, but the reality is that there are no fast tracks to wealth and a profitable business. These trends show that there are many business segments attracting significant investment dollars on both the domestic and foreign front, providing a way for many to turn their big ideas into a viable business. Investors are looking for a solid investment in a proven solution that addresses the current and future market need.