With economic and political uncertainties kicking off the New Year, many are asking what the outlook is for venture capital in 2017 and how the IPO market will evolve this year.
I recently spoke with industry insiders Ashley Larson and Ellie Wheeler to explore these topics further. Larson is a vice-president at Revolution Growth and Wheeler is a partner at Greycroft Partners. I also asked Gene Riechers for his perspective. Riechers recently joined MorganFranklin Consulting as a senior advisor. Previously, he was a cofounder and general partner in two venture capital firms.
Question: What do you see as important sectors to invest in during the upcoming years?
Larson: We invest in technology-enabled companies that are disrupting big markets and have the potential to change the world. Three of the areas I am particularly excited about investing in are retail technology, food and agriculture technology and industrial VR. Innovative digital and technical realities are being set in place to help shoppers and businesses in numerous ways, and Revolution wants to be at the forefront of this change.
Riechers: I am seeing more sophisticated uses of data collected from both consumer and enterprise applications. The data is being used for predictive analytics and decision processes. There are more cases where AI-like functionality is making the decisions, not just advising the users.
Question: Do you anticipate changes in the way VCs invest (e.g., changes in syndication, terms or other attributes) in 2017?
Wheeler: Changes in VC? Nothing remarkable for 2017, but there will be more recaps and more bridge rounds.
Larson: Departures of amateur investors at the early stages of the market have created funding gaps. Moving forward, seed rounds will be increasingly challenging as many angel and seed investors close up shop and capital becomes a little bit harder to come by. Series A will require continued discipline, and Series B and C will remain challenging for companies without reasonable scale and proven economic models.
Riechers: On the terms issue, West Coast investors continue to generally have somewhat more favorable terms for founders than East Coast investors due to competitive forces. But, the gap is definitely narrowing. Some East Coast investors have fully converted to simpler West Coast-style term sheets. Also, there are more organized angel investor groups throughout the world now. With the lower cost of starting certain types of digital businesses, this is often a very good route for early stage entrepreneurs.
Question: Limited partner pressures have concentrated more capital with fewer firms in the venture industry. How does this affect VC investment strategy, and should it affect how entrepreneurs raise capital?
Larson: The conventional wisdom that a concentrated number of venture firms investing in a concentrated number of companies in a concentrated number of geographies yields better returns is a catchy idea, but wholly unsubstantiated. We believe that the future of tech and startups is outside of the traditional Silicon Valley ecosystem.
Wheeler: Bottom line -- if entrepreneurs build great businesses, what limited partners do or don’t do is irrelevant. Good companies will continue to get funded.
Riechers: The effect of this consolidation on entrepreneurs is limited. They should of course make sure the VC firms they contact have capital to invest. Some firms look active, but are only doing follow-on deals. Great companies can be built in many places now. Management teams are often not even co-located. My advice especially for companies in non-traditional locations is to build relationships with capital sources well in advance of a raise.
Question: What are your predictions for the IPO market in 2017?
Wheeler: The IPO market will hopefully be robust this year. There is a string of good companies in the pipeline that will help kickoff a strong 2017.
Larson: After an unremarkable 2016, the IPO market is giving us every indication that it is ready to get its groove back in 2017. Many great companies sat out the IPO market last year for a myriad of reasons, including the abundance of private capital, funds flow out of conventional funds ($224 billion in outflows, to be exact), and more "blackout" windows than normal -- post-Brexit and post-Trump in particular -- where companies were afraid of political uncertainty. This year, companies are feeling more confident that the marketplace is receptive. We are finally starting to see an inflow of capital into conventional public equity funds. These are the fuel for the IPO market, and venture investors are eager to get the exits they need to keep raising funds. There are 17,000 venture-backed companies in the U.S., and there were only 39 venture-backed IPO exits last year. I think we can expect that there will be multiples of that activity this year.
Riechers: We are seeing indicators in the marketplace that give us high degrees of optimism. Many smart companies spent last year investing in the processes, systems and people so they are better equipped for an IPO when the market is right. There are high profile companies that may soon go public. These companies will be a great barometer for what we might expect the rest of the year and beyond.