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What's in Store for Venture Capital in 2018

It’s been an interesting summer for the venture-backed asset class. While the broader market has zoomed ahead, private tech growth companies have lagged. However, that’s not the only curious development in the asset category this summer. As part of our “feet on the street” approach to research, we have identified a few emerging themes for 2018. These trends are based on our observations at some notable events over the past few months, including the Code Conference in Palos Verdes and the Fortune Brainstorm TECH Conference in Aspen. Our highlights and takeaways include the following:

Outlook Remains Upbeat

Venture capital (VC) outlook remains upbeat despite mixed 1H:17 exit trends. In our conversations with private tech investors, a common theme emerged: The supply of money is at an all-time high. The record-high fundraising activity of the past 18 months has been driving the growing amount of dry powder. The upshot is that valuation discipline has returned to the Valley. The investment thesis has shifted from “growth at all costs” to “growth with fundamentals.” (For more, see: The Stages in Venture Capital Investing.)

From an exit standpoint, the upward trend in IPO activity is encouraging despite an increase in the number of down-round IPOs. Investors have breathed a sigh of relief that the predictions of “countless dead unicorns” haven’t come true. Investors also appear surprised that large tech companies have been relatively quiet on the mergers and acquisitions (M&A) front, despite record high share prices. Looking ahead, investors believe that both M&A activity and IPOs will rise in 2018. This expected pickup in exit activity, while a somewhat self-serving prophecy, stems mostly from fact that entrepreneurs and companies have adopted a “wait and see” policy around the volatility of the Trump regulatory regime.

SoftBank’s Shadow

SoftBank’s shadow looms large over Silicon Valley. Announced in late 2016, SoftBank’s Vision Fund closed its first round of $93 billion in May. It could total up to $100 billion by the end of 2017. While SoftBank has committed 30% of the capital, sovereign wealth funds (SWFs) from Saudi Arabia and Abu Dhabi have committed roughly 60% of the capital. For context, we estimate that during 2016, private companies raised roughly $100 billion in capital and that the 20 leading VC firms have less than $50 billion in dry powder on their hands. We continue to believe that SWFs are increasingly interested in private tech growth companies. While Sand Hill VCs have developed a love-hate relationship with such “tourist investors,” we think nontraditional investors such as SoftBank have the dry powder to exert their influence on the private tech investment landscape over the next few years.

Sensitivity to Political and Corporate Governance Growing

In the VC ecosystem, sensitivity to political and corporate governance issues is growing. The past six months have hinted at the growing impact of political climate and corporate governance on private tech companies. These issues include the ongoing immigration debate, VC activism at Uber, sexual harassment allegations at leading VC firms, and diversity discussions at tech companies. (For more, see: How Many Startups Fail and Why?)

At the Code Conference, former presidential candidate Hillary Clinton discussed the growing political significance of big data analytics, cybersecurity and digital content marketing, with anecdotes from the email investigation, alleged Russian hacking and fake news. At Brainstorm TECH, Niniane Wang bravely recapped her years-long journey of uncovering sexual harassment by a VC investor. Also noteworthy at the conference was the general consensus that deal terms have become more founder-friendly over the past several years.

Self-Driving Cars

Self-driving cars approach the peak of the hype cycle. Artificial intelligence (AI) and machine-learning initiatives continue to occupy a substantial “share of mind” among tech leaders, but we were surprised by the escalating “share of wallet” for self-driving cars and related initiatives. Over the past few months, we have attended presentations of C-level executives from numerous self-driving car companies including Cruise, Zoox, nuTonomy, Drive.ai, Argo AI and Mighty AI. At the Code Conference, Marc Andreessen argued that we shouldn't be concerned that self-driving vehicles will lead to job losses - in fact, just the opposite could occur. Not only could self-driving tech lead to fewer traffic deaths and a boost in productivity, it could also cause a boom in exurbs, communities that exist beyond suburbs. At a recent Silicon Valley event featuring over 15 start-ups focused on some aspect of autonomous vehicles, we observed almost twice as many investors as entrepreneurs in attendance. Clearly, we are rapidly approaching the peak of the hype cycle regarding self-driving cars. (For more, see: A Look into the Secrets of Venture Capitalism.)

 

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