Top VC Investment Predictions for 2014
With the new year on the minds of tech companies and investors alike, it’s time to look back on 2013′s startup crazes and forecast what’ll be the next wave in tech for 2014. What types of companies will prove the next investment feeding grounds and what’s gotten overhyped? Will 2014 continue the trend of large, even inflated valuations for young private tech companies while the mature ones look to go public?
FORBES asked some leading venture capitalists those very questions, from Silicon Valley to London. The predictions below come from a mix of established long-time Midas List staples with big wins to their names as well as those fresh to last year’s list of the world’s top tech investors. Their thoughts have been organized across three major themes–market trends and predictions for both consumer and enterprise tech–but it’s worth noting several recurring views.
When it comes to increased valuations for private companies and the allure of the IPO, the investors agreed that they’re paying more to participate in funding rounds right now–what one VC said is a 15% to 20% premium due to a frothy market. But given the nature of their business, investors aren’t simply going to stop considering new startups or maintaining their positions in their portfolios, instead being just a bit more careful in when to write a check. The opposite holds true for founders, as multiple investors said they’re advising entrepreneurs to raise whatever millions they need while the conditions are so favorable.
And the top area for growth mentioned across either consumer or enterprise tech was security–be it for mobile data, social media accounts or the cloud. Several reasons for security’s boost in 2014 are below, but the basic gist: more people are working more with more mobile devices, which is great for productivity and a nightmare for data protection. And corporate concerns post the Edward Snowden revelations don’t hurt.
Other views include bear and bull takes on e-commerce and education tech, opportunity working with financial services, plus one bold prediction that Apple is primed to make a major move.
(Included below are views from Michael Abbott of Kleiner Perkins Caufield & Byers, Todd Chaffee of Institutional Venture Partners, Asheem Chandna of Greylock Partners, Jeff Jordan and Peter Levine of Andreessen Horowitz, Jeremy Levine of Bessemer Venture Partners, Mike Maples of Floodgate Fund, Scott Sandell of New Enterprise Associates, and Harry Nelis and Richard Wong of Accel Partners.)
Todd Chaffee, IVP: The valuations will continue to climb and the IPO party will continue. At some stage of the game, we will have a huge unforeseen market correction come, a black swan event, that nobody sees coming, and we will have a massive correction. For us, it’s a very cautionary environment for us when valuations continue to part from fundamentals. We go, ‘Careful, we’ve been to this movie before.’
Raising money right now is absolutely what you should do as an entrepreneur and not what to do as a VC. For us right now, we are in the art of paying up. Even though the markets are frothy, there is still incredible innovation.
Mike Maples, Floodgate: Next year is likely going to be another acceleration in year. In years like that, more funds get raised and more investments happen. There’s going to be a lot more heat across the board. Some of that won’t be so good. We are headed to a crescendo, and I get nervous about it every day.
Scott Sandell, NEA: I think the industry overall is in a really healthy spot. We contracted significantly after the global crisis to 1996 funding levels. Going into 2014, I don’t expect money to rush back into the venture business. On the other hand, I see a continued rise of investment from the angel side. It’s now about 20 billion, and that’s great for venture for the most part.
I do think we are seeing a change in the IPO market in the last month or so. There have been a few IPOs that got pulled. Now until they file they can go through the process confidentiality. We’ve seen that happen a few times, so we know the market has cooled a little bit. My guess is there will be 1 or 2 of those next year [of IPOs from Airbnb, Box, Dropbox, and Uber].
Richard Wong, Accel: We are cautiously optimistic that 2014 will continue to be a big year both in the public markets and as the potential for IPO drives the M+A [mergers and acquisitions] market. The other leading indicator is that the quality level has stayed high. There’s a dynamic [sometimes] where when you see companies going public, lesser quality goes public. That has the impact of eventually shutting down the market. These [current] companies have great fundamentals.
Michael Abbott, KPCB: Wearable devices will rule. [This] extends from the meme of hardware is going through its own revolution like software has done (and is doing). Ephemeral content will rule. Secure messaging will continue to thrive as a result. Who wants certain content to live forever online? But passwords will die. How many passwords do you have? Are they strong enough?
Todd Chaffee, IVP: If I have a general theme across the board, it’s about market dominance for the key players. Facebook will continue to be the dominant social network, and Twitter the dominant information network, and LinkedIn the business network. Who is the second place to eBay? You don’t know. Once you have a marketplace, there’s the network effect. In the world of messaging, I think Snapchat and Instagram will continue to grow dramatically. The younger crowd, that’s what they use.
But I also think YouTube will continue to become even more powerful as a player in the network and media world. The sleeper out there is SoundCloud. I think it will grow in its dominance and be the YouTube of sound. It just seems like where we are at a point where a lot of these new things emerged and now it’s time for the big player to take over.
Jeremy Levine, BVP: My bear pick is ecommerce. Amazon is on the warpath, it’s going to steamroll everybody. The exception appears to be Zulily [which went public in November], and I can’t figure that one out. I think somehow they found a way to beat the Amazon pricing bots, but long term I would not bet against the Amazon pricing bots.
Mike Maples, Floodgate: The smartphone is not just the next generation of computing, it’s as liberating as the car was. That’s become the way that teenagers and people activate their freedom seeking. If you take that as a premise, it leads you down some interesting paths. What does it mean for the car industry if people don’t want cars? What does it mean for the sharing economy? What happens in the world with how often I use my tools in my garage? Will a drone come to my yard and I pop them back in and call for the drone when I need those tools? With applications like Uber and Lyft, there’s a wow factor and experience that couldn’t exist before mobile.
I think e-learning is still very compelling but very, very crowded. Companies involved with e-learning will struggle unless they have a truly disruptive idea and a structural advantage.
Scott Sandell, NEA: Educational technology will reach the mainstream in 2014. It’s a sector that’s had a lot of lingering attention but there’s been question whether these are businesses. We see 12 startups in one way or another helping to reshape education. I think they will be sizable businesses. It will take a couple of years before the real winners are determined.
Asheem Chandna, Greylock: People are trying to access information from mobile devices and the devices have grown in prevalence. That data is leaving the [person’s] corporation and going beyond the firewall. And as more data goes to cloud infrastructure outside the firewall, data that was previously secured on servers has crossed over.
There are four areas in security where I think solutions will come from and profits be made: 1) On the mobility side, you will see existing mobile device vendors and others providing services on mobile, you will see solutions come to market next year and the following year. 2) Insecure clouds on the cloud side: You will see cloud vendors differentiating themselves. 3) Firewall vendors are also going to add to that capability, as data moves through the firewalls. You will see increasing control of SaaS applications and data leakage. You will see firewall vendors evolve these capabilities. 4) What Gartner is calling CASB. Cloud Access Security Brokers, a new category of vendors for corporate data and cloud.
The whole [Edward] Snowden incident from 2013 has heightened this issue for companies. And also many international companies want to be closer to the data, those in Europe in particular. That’s added fuel. This issue is important across large corporations, but it’s heightened in regulated industries like healthcare and financial services.
Jeff Jordan, Andreessen Horowitz: Technology is poised to disrupt the massive global financial services industry. Following the recent credit crisis, banks are becoming more risk adverse and more highly regulated. Also–Internet competitors have key advantages relative to traditional banks including lower operating costs and incremental online “signals” to inform credit decisions… We expect this activity to increase dramatically!
Jeremy Levine, BVP: I’m excited about really small businesses entering the world of software-buying companies. A lot of the software will end up being vertical specific, the yoga studio, hair salon, or fitness club. It’s specific to the category, mapped to the business. It’s a growth opportunity as opposed to a substitution opportunity–these businesses are so small they couldn’t afford this software before. Silicon Valley is supposed to be anti these businesses, because these companies aren’t billion dollar opportunities on their own.
Peter Levine, Andreessen Horowitz: What we’re seeing in the new data centers of today’s tech leaders—e.g. Facebook, Google and Amazon—is a dramatic departure from the old. No longer do applications require virtualized or carved-out, proprietary, monolithic servers. Instead of division, new and future applications will require infrastructures that aggregate or bundle together cheap, commodity parts to achieve incredible scale and processing power, efficiently and economically. And the ultimate the coup de grace will be an operating system for cloud infrastructures that basically converts your data center into one giant supercomputer.
Mike Maples, Floodgate: Security I think is obvious. The world of the Internet is a more dangerous world. The bad guys have been investing in technologies that make them more capable in a decade. There’s a lot of vulnerability. If you combine that with the mobile cloud breaking everything, all the existing security companies have big holes in them. We see lots of startups pursuing this who may take off.
If you think about traditional perimeter security, it doesn’t really make sense. You need a solution that keeps an individual’s private life private, and at the same time allows a user to protect that user. It’s very early and there are a couple other startups in the space. My guess is that over the next 24 months, there are 2-4 well-funded high quality teams.
Richard Wong, Accel: I could see a major acquisition by AOL, Yahoo or Microsoft coming, but add Apple to the conversation. They bought the number two player, Quattro, in 2010. That formed the basis of iAd today. But if you asked around developers, they’d say iAd is not a player for making money or acquiring users at scale. Apple obviously has a lot of market cap to work with. It’s strategically important that they get this right. It’s going to be really important for Apple and iAd to get better and make money.
Harry Nelis, Accel: What you’ve seen in the last five years is many consumer-oriented investments, including in the United States. I think the pendulum is now swinging back to enterprise-oriented investments, which means there’s a slight shift in the emphasis geographically. Israel, which used to have opportunities that were a bit more subdued, is now really interesting again with all kinds of opportunities on the enterprise side.
One area that is specific to Europe and the United Kingdom is new disruptive financial services for consumers and businesses. These guys are faster and better at underwriting small business loans for banks. It’s taking off for a combination of reasons: 1) London is the financial center of Europe so there are a lot of people with the expertise. 2) U.K. banks have been hard-hit in the financial crisis. 3) The regulatory environment in the U.K. is a bit more conducive to these startups than in the environment in continental Europe or in the U.S., where to target consumers you have to be licensed in all states.
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