What have been the leading investing trends in IT since 2000?
It is intriguing to see how throughout time we can identify some trends and patterns in the investments driven by Venture Capitalists, may it be in the form that they take or the sector that they are directed to.
We hear everyday about Buzzwords such as Artificial Intelligence, Big Data or about this new ‘exploding sector’ of the industry. It is difficult to sometimes know wether people truly understand the challenges and dimensions of the new technology of the moment or if this emulation is mainly due to a sheep-like behavior in the ecosystem globally.
Hearing Carl Eschenbach, partner at Sequoia Capital, made me want to go back and explore how investors and entrepreneurs have been seing the future of the world in the past 17 years.
I find it incredible to think that Sequoia Capital has been participating since 1972 in shaping the VC world that we know today. I researched and interviewed different investors to capture in a very simple list their point of view about what were the identifiable major trends in IT these past years, and what people at that time really believed in to make our future better.
Software as a sure value
Since 1995 until before the Dot-com Bubble collapse, software investments were the main leading trend. Throughout time, software has always remained an important part of the global venture investments, with an average of 20% every year directed to the industry in funding.
CleanTech
10 years ago, CleanTech was extremely uprising and concentrated many investments in technologies that developed solar panels or electric cars, the investments in this sector have declined gradually since then.
E-commerce
After the Dot-com Bubble collapse, starting from around 2005, investments were very focused on e-commerce which seemed to be the most obvious and quickly profitable market at the time. However, from 2010 to 2016 e-commerce has exited from the main trends of the industry.
Advertising
With e-commerce, online media and the emergence of social platforms such as Facebook or Youtube, the advertising industry has seen many changes and knew a real growth. However from 2010 to 2016 the investments lead in that sector declined of 100%.
Insurance Tech
One thing that is sure for all, is that the insurance industry has always been presenting incredible opportunities to find better models and processes. From 2010 to 2016 investments in that industry grew by 2000%!
FinTech
For many of the actors I interviewed, FinTech can be compared to CleanTech 10 years ago, it will remain a trend.
The Grid
For a time, people nurtured the idea that they could combine millions of computers seamlessly around the world to make processing power available on demande anywhere, rather like electrical power: the Grid. Very ambitious attempts were made but never resulted in a truly successful technology.
Biotechnology
The particularity of biotechnology and any investments made in human science is that they are not affected by trends. The investment cycles are much longer (around 7-10 years), which makes this sector independent and always part of the global IT investments throughout time, whatever happens. The sector was not touched by the Dot-com bubble collapse in the early 2000’s.
Open Source
Listening to Carl Eschenbach about this subject was clearly very interesting. Sequoia Capital only invested in one Open Source project. As he explains, Open Source is one of the toughest markets to find a successful business model: people are of course interested, but expect to have it for free and the bigger companies who could pay for it use custom solutions.
Telecom
Of course, Telecom has been one of the most important trends in investment with all the opportunities that represented the construction of the infrastructures at the moment when the market emerged. While the sector represented 30% of the annual VC investments, it now only represents roughly 5%.
What about now?
The main trends that we can identify for the current investments are very oriented towards a real technological disruption: AI, Cloud computing, Internet of Things, and of course Blockchain (originally devised for the Bitcoin) which is the current main topic of discussion.
Globally, we have witnessed a huge growth in the number of accelerators and incubators everywhere in the world (independent, company founded, university founded…), as well as a desire for a maximum of diversity amongst the teams and the VC firms themselves (especially regarding gender). Corporates (not familiar at all with technology) have become more and more interested by the startup investments as it is the current tendance, the number of investments lead by these actors has exploded these past years, they usually adopt a sheep-like behavior and follow the biggest Tech VC firms with a distance behind. This has lead to an increasing desire of focus on investor eduction and on the early/seed stage funding professionalization.
5 comments on “What have been the leading investing trends in IT since 2000?”
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What I find impressive about older VC firms, like Sequoia, is their ability to stay ahead of the curve. Many older and entrenched companies have difficulty being nimble and quickly adapting to market trends as they arise. But Sequoia has managed to keep up to speed with whatever the latest trends are an capitalize on it. Like you cited in your post, the trends from 10, or even five, years ago have changed drastically. It’s important for VC firms to ensure that their investors are remaining abreast of the latest developments so that they’re not caught flat footed during the next big boom.
I had the chance to interview a CEO of a VC firm a few days ago. One of the biggest problem that every VC firm faces is raising money. Unlike big companies like Morgan Stanley, it is very hard for small VC firms to raise money because people typically don’t have that much trust in them. What we see and what we hear are the examples of successful people, there are also people who are struggling and people who failed. I realized how competitive the VC field after the lecture!
Hey Alexandra,
Thanks for sharing your views, just a few comments on each of the sectors you mentioned.
Software: In your point of view what specific part of the software industry do you think has the most potential for future growth? It would be good to know what parts of the software industry attracted the most capital in different periods of time over the last few decades.
CleanTech: CleanTech, continues to attract quite a bit of capital, I guess it really depends on how you define it. It may be declining slightly from a VC perspective but in aggregate, if you include investments and CapEx in clean technologies by large scale utilities, car makers and other enterprises, I’d argue that investments in clean technology have been increasing steadily.
E-commerce: What I think was interesting regarding e-commerce over the last few years is the fact that its become not just a technology/software game, but also an infrastructure game. If we look at the top e-commerce players, the companies with the ability to deliver a wide range of products at the cheapest prices like Amazon have continued to outperform and gain overall wallet share in the e-commerce space. It’s been a function of their physical footprint as well as their ability to leverage advances in software like analytics, machine learning and artificial intelligence.
Advertising: What’s your view on why investments in the advertisement industry declined over the years? I’d say one of the big things was the fact that the ad market became dominated by a few players (Google, Facebook) that really gave them huge pricing power in the market and hurt the competitiveness of newcomers.
FinTech: What specifics of FinTech do you see that make it a trend? What contrasts do you see with CleanTech?
Biotechnology: Biotehcnology has been a hot sector for many years now. What I think is interesting is the shift in investors mindset. At the early years the flow of funds primarily went to companies that were targeting illnesses that affected a large swath of the population as this provided the biggest addressable market. In modern times, many companies now spend R&D dollars trying to develop treatments for rare diseases and orphan illnesses that affect a small portion of the population but provide huge potential for profitability.
Open Source: Open source at its core is great for society as it allows users to innovate; the downside is that it doesn’t make for a great business. I agree with Carl that its an interesting field that will continue to disrupt and play a large role in society and technology, it’s just hard to build a business around open source and make money.
Telecom: Telecom is a difficult industry for start-ups to compete-in and I think that’s a function of the high barriers to entry, increased regulation and large capital requirements. It makes sense that investments in this sector as a percentage of funds has declined over the years from the VC community.
Thanks for your share, just want to add few personal views about VC. As you mentioned that sheep-like behavior is observed in the industry. I think it may be because that copy of a proven successful business model can be less risky and have a lower cost. It is also a way to maintain the confidence of their investors. Startup businesses are also aware of this kind of investment trend, which sometimes make them to build their original ideas more attractive to VCs. Considering some recent conversations, it is interesting for me to realize that most of the VCs only have limited understanding of the industry they are investing. Although investor and running business are considered to be different, I quite agree with you about the focus of investor education.
Hi Alexandra and thanks for an interesting read.
I truly enjoyed your post on the VC-investment trends. Even though you mentioned some of the more recent trends (rising corporate involvement, AI, blockchain), the main focus was in the long-term trends we’ve seen in the industry. I think another step in understanding the current VC-world’s trends is to change the scope from years to months, to get a feeling on what’s happening right now in the industry globally.
For example, the audit-giant KPMG provides a quarterly “Venture Pulse”, a global analysis on venture funding (note: not restricted to IT-field). The analysis is often quite deal-centric, which means that the underlying or hidden trends can only be seen from the inside (e.g. by working in the VC-ecosystem). However, the key insights provided in the latest global pulse (Q2/2017) showcased some common themes with your longer-term historical view:
– Corporate participation has risen to record proportions, especially in AI where the technology has huge potential to add value to well-established coporations
– Exit volumes are down, even though valuations are still high (most likely cyclical)
– From Q1 to Q2, VC invested in Asia saw a huge boom (134%)
– Globally, VC rounds are getting bigger and bigger (so called mega-rounds are getting more common)
– Autotech and biotech have seen a growing deal-flow during 2017
If anyone has other good suggestions on regular reports/analyses on the VC-investments, feel free to share!