The Future of tech investing: a venture capitalist tells all.
Updated: Dec 4, 2020
Is blockchain doomed? How much of a future does AI really have? Is cleantech making a comeback?
Venture capitalists take a gamble every time they invest in a new company or technology, and according to VC Annika Lewis, this means accepting that 1/10 investment will actually turn out to be a hit - the others are either a flop, or just sort of okay. Being able to successfully weed out the home runs is an art.
Founder Jonathon Narvey sat down with Vanedge Capital’s Annika Lewis, to talk about the future of tech investing, the wins (get your wallet out) and losses she foresees, and how one might become a successful venture capitalist.
Here’s some highlights from the fascinating deep-dive we took, with some extra pointers.
First things first: what’s the difference between public and private investments, and where do venture capitalists come into that equation?
“Public investing involves any company that is publicly listed -- basically anything that you could go out yourself and buy a stock in. That’s where a lot of mutual funds play: financial advisors are primarily found in the public markets.
“There’s different types of private investing. I would say the major two would be private equity and venture capital. Private equity tends to come at a later stage, when companies are closer to going public and are more established. Venture capital is sort of like ‘Dragon’s Den’ at its simplest level. Venture capitalists are generally investing in relatively unproven ideas, early-stage technologies that have a high rate of failure, but a high potential rate of return.”
To put it into real life context, Goldman Sachs is a private equity firm, Sequoia is a venture capital firm, and Accel is actually both.
Anyone can put their money on a sure thing, but venture capitalists have to predict the future. Private equity firms look for established companies with established revenues - high predictability, low risk, and potentially low reward.
Venture capitalists are just private equity investors, earlier on in the game. They’re often found at Series A through D of funding, or even at the seed stage of tech investing. Their success and ability to survive all depends on how well they invest.
Menlo Ventures was around for almost 35 years, hovering just below the big league VCs -- until Uber started looking for investors. One well made decision later, and the company has turned a $66.5 million investment into $3.1 billion. High risk, high reward. Speaking of...
So what’s an example of a company a venture capitalist might invest in?
“Let’s look at Uber. In its early days, people thought it was a crazy idea. Ride-sharing, getting into a stranger’s, there’s technology that’s going to connect you to these drivers: people didn’t really understand all this. At that point, Uber really needed venture capitalists to really believe in it, fund it, and allow the company to grow.
“Now that Uber is ubiquitous in pretty much every city, it’s well understood, so the public markets are able to effectively price it and act as funders to that kind of technology -- whereas 10 years ago, that wasn’t the case.”
Some suspect that investors might be more inclined to invest in local companies -- this isn’t totally untrue, but as the video calls and time differences become less of a hurdle, it seems venture capitalists are expanding their geographical horizons.
AI has become a typical bet, as Annika later shares. Boston-based Activ Surgical recently raised $15 million in venture capital for the “development of machine learning and AI-based visualizations that can provide guidance to surgeons and surgical systems”. Robots supporting surgery, who saw that coming? Venture capitalists, apparently.
Now we know what a venture capitalist is and does, where do you see the money going in the future? What the leading edge technologies and cool companies would venture capitalists, or others, be interested in?
“The majority of interest in the last few years, and probably the next few years, is artificial intelligence and machine learning. Part of me hates to say that, because everybody’s saying that, but it really is the equivalent to being in the year 2000 and saying, “Hey, this internet thing is going to be really big.”
“They’re proven technologies. Data is essentially the new oil. There’s so much more that can be done through detailed analytics and better predictive modelling, but it’s obvious that the movement is going to happen.
“The big question for investors at this point is: where? There are so many companies these days that are slapping ‘.ai’ on their domain names, or calling themselves a machine learning company, but there isn’t really any burden of proof required to do that, so it’s up to investors to future out where the applications are going to end up panning out, and what companies are the real deal.”
It’s tough, but how do you best distinguish between a company of the future, and a company that’s not going to make it? What do you look for?
“As someone with a data and maths background, I usually ask: What is the data advantage that a company is looking to obtain? How is it differentiated - do they have access to data that somebody else doesn’t have? How will they be able to scale that access up? Have they done all of the ugly, unsexy data cleansing, data engineering, and data pipeline management?
“Having worked at a large company that managed very complex data at scale, I know that these things are not easy. As an investor, you need to dig into this kind of early, ‘unsexy’ stuff, and understand what’s going on under the hood. From there, figure out if it’s something that could generate a 10x plus return. You have to ask, is the team capable of doing complex analysis and technology building?
“It’s still early days, so you need to go into any of these assessments with a healthy degree of skepticism.”
Before even looking at the specific companies to invest in, how do VCs sift through potential projects and decide? A selection of venture capitalists indicated that the most influential factor in the successes and failures of their investments, was their management and team. Aside from this, “timing, luck, technology, business model, and industry” held equal importance.
The lesson? To be a successful VC, it may be more about building a strong team and reliable management, than other factors.
How do you go about risk evaluation when betting on what succeeds in tech?
“Let me compare it to the public markets. Think about your retirement fund, or any sort of mutual fund that you have. It’s probably very diversified in a number of relatively safe stocks that you hope will go up over time. Some of them won’t do so well, some of them will do well. Overall, if you get yourself a good 10 percent return on equity each year, you’re doing pretty well.
“Venture is more about looking for potential home runs, with every bet. With every company we assess, we’re looking at whether this company could grow, 10x, 20x, into a billion dollar company. The general rule is that 8 out of 10 will fail, 1 will do well, and 1 will do really well. Venture is about those power laws, and looking for those home runs.”
Considering 8 out of 10 investments could end up losing money, tech startups need to be on the ball, alongside those VCs. What helps one tech startup succeed over another?
Getting a head start on funding, and being generous with company shares, might be one way of increasing a startups’ chance of success. On the other hand, too much capital might give you a false sense of security based on an attractive valuation. There’s a fine balance to be reached.
Speaking of home runs, where are the home runs of the future in tech?
“I already talked about artificial intelligence and machine learning - one other area that’s generated some home runs in the IPO market is a business model called ‘product-led growth’.
“These are companies that are able to sell into businesses, but with a focus on the end user, so it’s almost like a blend of B2B and B2C. For example, Slack has generated a ton of B2B revenue, massive corporations have adopted it. It got into big companies - not by knocking on doors, - but through creating real end user value.
“So hypothetically, me, sitting in a Fortune 500 company; I like using Slack to message my friends, and I’d like to start messaging my colleagues. I start using it, then someone else wants to join a discussion, and suddenly everyone’s using Slack and the CIO becomes aware and starts asking how we can save money on that.
“That's what product-led growth is about. Creating something that has massive end user/consumer value, and through that, garner enterprise adoption. There’s an explosion of these types of companies (Zoom, Twilio) and I think it’s a fascinating shift in the way that enterprise and business sales are done.”
Product-led growth isn’t the next big thing, it’s the current big thing. Companies like SurveyMonkey, Dropbox and Shopify, to name a few out of many, have adopted this approach.
The approach isn’t necessarily new, but recognising its value is.
They’re companies that grow through word-of-mouth or by encouraging sharing of the product. Signing up is easy, value is delivered almost immediately (and often initially for free), and the end user is always the priority.
So product-led growth is our future, but what are the flops of the future? Where should our money not be going?
“Blockchain had its heyday a couple years ago when Bitcoin went well above $10,000, and everyone was super bullish on it. Then we had the crash, and though there’s a bit of a resurgence, for me Blockchain is an area where I still struggle to see and find problem-led companies.
“Most companies in this sector focus on ‘blockchain as a service’ or ‘distributed ledger’, but it’s not totally clear what underlying pain point is being solved that couldn’t be solved by blockchain.
“I don’t view currency as a problem that needs to be solved by the blockchain - I think that needs to be solved through technology, and there’s enough going on in the fintech space. Where I do see potential application for blockchain is in areas like identity management.
“It is a pain today to have health cards, insurance cards, your passport, and not have a safe centralized place that is a good gatekeeper for all that information. Given the distributed ledger nature and immutability of the blockchain as a technology, it could potentially work, but for that to take off you need to have policy and consider governmental implications. There’s so many things that need to line up and get on board so ultimately I think it would need to be state or government driven.”
The uses for blockchain outside of cryptocurrency seem to be endless. Blockchain is relevant in other areas of finance, business, healthcare, media, and more. The problem isn’t what is being used, it’s how it’s being used.
China is even considering using blockchain for governance, having recently mapped out a two-year plan, after the launch of their central bank digital currencies. Though said to be entirely different to bitcoin, the plan still threatens public privacy, so perhaps government involvement has its downsides too.
Are there interesting developments in technology investing in the energy sector?
“I was thinking actually the other day about the clean tech bubble back in the early 2000’s. There was a massive bubble of investment, and unfortunately it all flopped. There were a couple things going against it in terms of timing - it was right before the Great Recession, and people were starting to pull back.
“I think cleantech is having a resurgence. The questions to ask are - is the technology there yet, and is the timing right. It’ll look different for different industries -- there are some clean tech companies that rely heavily on very developed IOT devices, there are some which require much more complex hardware.
“I’m generally quite bullish on the cleantech sector in the very long-term, but as I said there are all sorts of companies and they each need to be assessed individually on a case-by-case basis.”
Even the government is keen -- Canada’s federal government recently invested in 17 cleantech startups through their Sustainable Development Technology Canada seed fund.
The focus of these startups range from improving the life and quality of electric vehicle batteries, to deploying drones for reforestation, to supplying digital services to the indigenous people of Canada.
Do you think that the biggest obstacle is just that the technology is unproven and whatever money and resources we have wouldn’t really help?
“To some extent, yes. But there are some cases where the likely returns would already outweigh kind of the technological challenges.
“For example, there's a company that I was helping out a little bit that helps builders build homes in a much more energy efficient way. It's a win-win-win for everyone because the builders are able to build these homes more cheaply, the consumer is able to get a more durable home that requires less energy and effectively pays a lower rate, and obviously for the planet there's just less emissions coming from that. I think companies that can get adoption in the ‘builder space’ then there's great potential, even with the technology that's already out there.
“The challenge is that a lot of these types of technologies require very complex distribution to massively fragmented groups that are all over, are still very analog, and hard to reach through your traditional digital channels. I think there are definitely pockets and companies to be to be found that are already solving problems in a way that is profitable.”
Let’s say someone wanted to become the next Annika Lewis and get into venture capital. Have you got any advice for people who want to become venture capitalists?
“I would say the preconditions for someone that’s looking for a role like mine is to be abundantly curious, to love learning, to love talking to people, and to be self-motivated. I think if you are interested in these topics, I suggest finding a job that allows you to be a journalist and look into lots of different areas, whether that’s working at a startup and being able to see the early stages on the company side, or being a management consultant and getting exposure to a variety of industries. Just getting as diverse of an experience both personally and professionally as possible.
“Investing is going to change. Public and private markets are going to increasingly emerge and become a little bit more blurred. Overall, I'm excited for the future.”
We’re excited too. A new venture capital investment is a chance for your company to hit the headlines and brag about your future. Who better to help you with that, than us?