While the venture market has been good to startups and growth-stage tech companies in recent years, shifting investor perspectives could change how new money is being put to work.
That was one of the takeaways from a talk Geoff Yang, founding partner of Redpoint Ventures (Menlo Park, Calif.), gave on December 6 at Princeton Innovation Center BioLabs. He shared this and other insights as the latest guest speaker in the Startup Funding Series, hosted at the coworking space.
Yang has been in the venture scene for more than 30 years, backing such businesses as Machinima (Burbank, Calif.), TiVo (San Jose, Calif.) and Ask.com (Oakland, Calif.). He is also the chair of the Princeton Entrepreneurship Council Alumni Advisory Board, and he noted that he was starting a project with actor and hip-hop artist LL Cool J.
The VC spoke about a variety of topics, such as the rise of China as a tech powerhouse and how the latest domestic deals show that the venture capital market has reached a whole new scale of measurement.
For instance, he said that a company that had recently raised $80 million referred to this funding on social media as a “cute, artisanal round.”
It is no secret that in the recent bull market, technology companies have been lavished with high valuations and ongoing demand for their services. Despite that positive trend, Yang cautioned the audience of local innovators that they should be concerned about another development: the fact that more than 80 percent of the companies that went public in 2018 are not profitable. Further, the tech darlings of the stock market ‒ Facebook, Amazon, Netflix and Google (the FANGs) ‒ have taken hits to their value, a cycle that Yang said began in the spring.
“The petals have been falling off the technology rose,” he said. “Technology is not as attractive as it was six to nine months ago.”
This does not necessarily mean that investors are fleeing en masse from tech. The FANGs may have lost some of their luster, but the desire to throw money at young startups remains strong. For example, Uber is rumored to be courting electric-scooter rental startup Bird (Venice, Calif.) to the tune of $2 billion. Yang noted that Bird is just 19 months old.
He pointed to this as a sign that investors still have a healthy appetite for tech startups. He said that some $250 billion in venture capital had been invested globally through the third quarter of this year, up 40 percent from last year. “About $88 billion of that is early-stage [investing],” he said.
There was a time when the venture capital market regarded a pool of $400 million as a “megafund,” Yang said. These days, the SoftBank Vision Fund weighs in at $98 billion. “People are raising enormous amounts of money. Now a modest fund can raise $1 billion. That’s huge.” For its part, Redpoint Ventures manages about $6 billion, Yang said, with early-stage and growth-stage companies in its portfolio.
The types of tech investments that interest interestors now extend beyond popular sectors such as artificial intelligence (AI), Yang said. The ubiquity of AI has made it more of an “overlay technology” that is applied to most every device and platform, much like the use of software.
Likewise, machine learning, blockchain, and the internet of things have started to become regular fixtures of the world’s infrastructure. Yang sees the market’s interest shifting towards more enterprise-driven technologies that provide solutions to business needs. “There is a lot of evidence that enterprise is the place to be,” he said.
Yang also said that there are opportunities to provide technology for small to medium-size businesses in such areas as Software as a Service, inventory management, revenue analysis and customer relationship management.
Another startup sector he believes might take off is autonomous vehicle technology, including LiDAR (light detection and ranging) for sensors, as an alternative to manufacturing the vehicles themselves. This is because of the high capital investment involved in vehicle production.
Local startups may want to look overseas to China for guidance on how they can pursue their ambitions, said Yang. Among other features, the size of the country’s population means that tech companies there have a vast sample set for testing and developing their ideas. “China is a huge behemoth that is rapidly rising,” he said. Innovative companies in China that Yang pointed out included Tencent and Alibaba.
In the third quarter, there were 10 IPOs) in China, compared with three in the United States, Yang said. When it comes to unicorns ‒ companies that reach a $1 billion valuation ‒ he said that China has 131 such companies, while the U.S. has 82.
One of the advantages that tech companies in China have, Yang noted, is that the national government has a direct hand in setting trends. For example, digital payments caught on more quickly in China because the government legislated the widespread adoption of such systems for the sake of efficiency.
In the U.S., such changes come with regulatory hurdles. The relationship between China’s government and businesses did generate questions from the audience about competition and choice, but Yang said that there were lessons to learn from the dynamics of that market. “I recommend that the management of companies visit China at least once per year,” he said.