A year ago, few would have predicted that a pre-revenue company could have been acquired for $1 billion, or that start-ups in the middle of the country would have access to Internet 100 times faster than the rest of the country, or that Groupon, once the world’s fastest-growing company with the highest valued tech IPO since that of Google, is now valued at essentially nothing more than its assets. In other words—and at the risk of stating the obvious—the future is difficult to predict.
For example, Bessemer Venture Partners, the 101-year-old firm with 104 IPOs under its belt and a premier reputation in the valley, famously keeps an “anti-portfolio” available for the public to see—the companies Bessemer said “pass” on, that, years later, have become massive companies. (A few you may have heard of—HP, Apple, Ebay, FedEx, and Google top the list.)
Nonetheless, for venture capitalists, their business entails banking on a vision of the future. The best venture capitalists (that is to say, the ones that are actually making money these days) are constantly forecasting future trends and developing, redeveloping, and reshaping their theses around consumer behaviours, buying patterns, and how technology will affect our lives. So Inc. asked several venture capitalists to talk about some trends they expect in 2013, what they’re interested in investing in, and some general predictions of what might happen in the New Year.
1. We will see a $10 billion marketing company — Ajay Agarwal, managing director, Bain Capital Ventures
One statistic in a recent Gartner report stuck out to Agarwal, who joined Bain in 2003 to focus on early stage mobile, internet, and software investments: By 2017, CMOs will be spending more on IT than CIOs. Driving this massive shift, Agarwal says, is the customer data that simply did not exist a decade ago.
'There's so much data that exists, but now marketers can now actually measure its efficacy,' he says.
Bain has already funded a few companies that leverage big data for marketing purposes, including BloomReach, a cloud marketing platform, and TellApart, an innovative predictive customer analytics platform.
Patrick Chung is the co-head of venture firm NEA's seed-stage investing practice and the founding partner of NEA and Harvard's Experiment Fund, and he does not say this to be glib: He genuinely believes a 16-year-old will get significant funding for a company he or she is building.
After all, it's not that much of a stretch. In November 2012, the 17-year-old founder of Summly, Nick D'Aloisio, picked up $1 million in seed financing, in part from Hong Kong billionaire Li Ka Shing.
'For us, we had real-life and then we had a television or a computer,' Chung says. 'Technology is not a peripheral anymore--kids are growing up natively online and so it's natural for them to create something virtual, just as it was natural for you or I to build our own skateboards or tin-can walkie talkies. The brains are wired differently by technology.'
Chung also believes that education has changed as well, and kids today are more focused on 'learning to do,' rather than 'doing something to learn.'
From a young age, you're pushed ever more into this mode of creation and business building in a way a generation ago you never would have been,' he says.
3. We will see a successful start-up that reaches 10 million users without having taken a dime of venture or angel money — Patrick Chung
'If there's one thing that we've seen at NEA, it's that the costs of starting a company are asymptotically approaching zero,' Chung says.
In other words, you (technically) need little more than an Internet connection and some coding skills to start a consumer Web company. Chung calls it the 'Zuckerberg effect'--the idea that a young person starting with absolutely nothing is able to create something massive simply out of his or her dorm room.
'Because the tentacles of social networks are so deep into everyone's consciousness and brain and every day life, it's possible that once you've built the company to go out there and build a brand and acquire customers for almost no money,' he says. 'We've seen amazing brands be built for essentially no marketing expense whatsoever. If you get a name and it catches you can have that name propagate over large swathes of the population.'
Start-ups such as eBay, Amazon, and Craigslist completely and irrevocably revolutionised the idea of a 'marketplace.' Purchasing (almost anything, from almost anywhere) can be done with a click.
But the marketplace for services--like teaching, cleaning, or construction--has yet to be truly disrupted. Companies such as Yelp may provide a link to these services, but Chin believes no company has yet to create a marketplace where purveyors of services can interact with buyers in a safe and trusted environment. But Chin believes that will change, and is on the lookout for what he likes to the call the 'next generation marketplace.'
'Our thesis is around services specifically,' he says. 'For a marketplace like that to work, you have to curate it. By curating, you're basically controlling and vetting the quality of the service.'
TakeLessons is a good example of this type of marketplace--and one that Crosslink has invested in. It's a platform for users to find music teachers. Users enter their location and instrument type to find instructors, and TakeLessons recommends a few teachers in their area. But the transaction doesn't end there. All payment is made over the site, so both users and providers feel more comfortable.
'TakeLessons becomes the brand,' Chin says. 'In other words, if you're unhappy with the rodent removal guy, you don't call the yellow pages... The marketplace will become the trusted brand for the transaction.'
5. More Web-commerce businesses will look to curation — Mike Kwatinetz, founding general partner, Azure Capital Partners
One of the greatest aspects of the Web is the seemingly infinite number of choices it presents. Kwatinetz, a founding general partner of Azure Capital Partners who specialises in software and infrastructure technologies, believes that's also a bad thing.
'The good is that if you know what you want to buy, it's very easy to find prices and work your way through it,' he says. 'But it's still a very time consuming experience. One thing that physical stores do well is curate--especially smaller boutiques. What they choose to carry is essentially what they think customers will want. On the Web, we have much less curation, and it's more that we have everything.'
But that falls short, he says, for customers that aren't exactly sure what they need.
One of Azure's portfolio companies, Education.com, seeks to mitigate this problem by offering parents a subscription-based model that offers workbooks and other educational products, billed on a monthly basis.
'The companies that are curating--and it's in a number of categories--they have an expertise, and they have subscribers who have loosely committed to buying every month,' he says. 'The company that curates it presents them the things they they think are the right things for them. It's gotten to the point of more personalised curation.'
Freemium has become the accepted business model in a few verticals, most notably gaming. In gaming companies, players download a game for free but spend money on virtual goods. But Moran, a general partner at DCM who specialises in online gaming, semiconductors, components, and cleantech, believes more verticals will adopt this model.
'We've seen a trend in the move towards freemium,' he says. 'But the interesting thing in 2012 has been the move into other industry verticals. For instance, wireless services. We're used to paying Verizon and At&T for our wireless data, but now you see companies like FreedomPop down in LA that have come up with free wireless data.'
The flashiness of Facebook and Groupon as consumer-facing companies might still excite some entrepreneurs and VCs, but Clavier says he's more excited about companies most people might find boring B2B software start-ups.
'Over the past 6-to-12 months, we've started to do more B2B deals,' says Clavier. A year ago, Clavier was doing about 60 to 70% of his deals in B2C companies. For 2013, he predicts that ratio will flip.
The companies he's investing in, he says, are typically 'vertical solutions in what we'd call boring or unsexy activities such as B2B sales automation. SaaS for IT. Things that people would typically yawn at, versus the more shiny B2C start-ups.'
Clavier isn't scared of big-brand competition from companies like Salesforce, or IBM, either. 'There has been a lot of progress since Salesforce was launched,' he says. 'And if you look at Salesforce, it's not the prettiest user interface. You can feel its age. And the software is very specific and there are other areas of the food chain.'
One company Clavier is particularly excited about is Farmeron, a farm-management platform (yes, you read that correctly) to help farmers manage inventory and purchase decisions.
'It's crazy,' Clavier says, 'but it's a massive opportunity.'
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