A ‘Silver Linings Playbook’ approach to venture capital

Silver liningThe venture capital industry is getting rightsized, with less capital raised and deployed, smaller funds, fewer active venture capital firms, and more regulation. The exit climate has picked up, but is still not at the level required. And valuations are overall more rational, with some exceptions at the later stages or in consumer-facing momentum companies.

However, with the confluence of not one but four big market drivers (discussed below), and the rise of a new technology cycle,  we think this is still a great time to be a venture capitalist or entrepreneur.

Recent VC industry data released by the NVCA confirmed the reality of a welcome flight to quality and rightsizing trend. Key findings include:

  • In 2012, the VC industry raised $20 billion vs. the almost $100 billion in 2000;
  • 92% of this capital went to existing managers (vs. first-time managers) and 48% went to 10 large firms;
  • Overall, about 522 firms are estimated to be active, and some believe this number even lower closer to 100 defined as firms that have made at least 4 investments over the last year;
  • The median fund size for 2012 was $150 million, and the overall deal pace has come down to slightly over 750 investments per quarter;
  • Although some momentum companies are being bid up, valuations are trending lower overall according to Dow Jones Venture Source data.

How does this data compare to the recent billion-dollar acquisitions of Waze and Tumblr and the healthy post-IPO performances of enterprise software companies like Tableau and Marketo?

In short, are we in a bubble or not?

I submit that we are not in a bubble, but in a unique climate of rational exuberance (with due credit to Alan Greenspan), especially in early-stage IT and consumer investing, which has been the core of the VC industry for 4 decades.

With the capital overhang contracting, there is the appropriate amount of dollars at work. The correction in seed and late-stage investing has resulted in a healthy appetite for Series A and Series B investments. Investors are bullish about entering the sixth technology cycle, crisply defined as wearable/everywhere computing in Mary Meeker’s 2013 Internet Trends report.

For the first time, we have a confluence of not one but four market drivers: Mobile, cloud, big data, and social are all going mainstream simultaneously.

Against this backdrop, bold entrepreneurs are building companies that leverage 10 innovation trends, which can represent outlier investment opportunities in a right-sized climate. In our view, these areas include:

  1. Crowdsourcing & collaborative consumption
    Everything is being disrupted by the power of the crowd and companies are leveraging shared resources to create communities and re-use idle capacity. Some examples include Kickstarter for funding, TaskRabbit for labor, Odesk for outsourcing development, Waze for smart navigation, Airbnb and Lyft for collaborative consumption marketplaces.

     

  2. Mobile-social marketplaces
    Peer-to-peer communities and social marketplaces with curation and frictionless commerce, along with anytime-anywhere access through smart phones, are creating the next eBay or Amazon. Companies such as Uber for transportation, Poshmark for fashion, and Fab for design are growing exponentially and building loyal user communities.

     

  3. Entertainment
    Old media has given way to new media and companies such as Netflix have proven the viability of vibrant business models. Spotify for music, Flipboard for publishing, and Ouya for gaming are leveraging mobile and social trends to disrupt their respective industries.

     

  4. Software-defined infrastructure
    Software is redefining everything in the enterprise from storage and networking — and even data centers. New companies are building open systems that are easier to manage and that reduce capex (capital expenditures) and opex (operating expenditures) at the same time. The acquisition of Nicira by VMWare illustrated the value of this model. Companies such as software-defined storage provider SwiftStack or hybrid cloud provider CloudVelocity are ushering in the era of the boundless data center.

  5. The consumerized, mobilized and measurable enterprise
    With proliferation of smart phones and tablets and enterprises endorsing BYOD (bring your own device), BYOA (bring your own app) and now BYOC (bring your own cloud), IT departments are being forced to become consumerized and mobilized. At the same time, as big data goes mainstream, the measurable enterprise has emerged. Evernote and Dropbox are examples of consumerized and mobilized platforms being adopted in the enterprise, and MapR delivers meaningful insights to businesses.

  6. Maker movement
    Even though the world is mostly digital, people are returning to the days of making physical things and the maker movement is on the rise. 3D printing is a hot trend with Makerbot and Shapeways as examples. Companies such as MakerMedia are hoping to move their MakerFaire real-world audiences online.

  7. Consumerization of health
    As consumers take control of their own health and Obamacare floods the system with new users, Q&A communities like Healthtap, online appointment platforms like Zocdoc, and price transparency services like Brighter or Castlight are emerging as exciting healthcare companies.

  8. Edtech
    With the rise of MOOCs (massive, open, online courses) like Coursera, online learning platforms like Khan Academy, and networks like Edmodo which engage teachers, students and parents, the education industry is being re-imagined.

  9. Fintech
    With the emergence of mobile devices and systems like Square for payment processing, peer-to-peer lending communities like the Lending Club and the rise of an alternative currency like Bitcoin, the world of financial services is being disrupted.

  10. Internet of Things
    Finally, with sensors being embedded in everything, and the rise of the quantified self movement, the era of wearables is upon us. Some examples include the Fitbit fitness tracker and Basis smart watch, which provide insights to consumers. The world of drivables, flyables, and scanables are not far behind.

In this era of a right-sized VC industry and unprecedented innovation, it’s a great time to be an entrepreneur or venture capitalist.

This post originally appeared on VentureBeat

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