2020: Looking Ahead in Venture Capital
The views portrayed in the 2020 Looking Ahead in Venture Capital report are subject to change at any time based upon market or other conditions and are current as of February 14th, 2020. While all material is deemed to be reliable, accuracy and completeness cannot be guaranteed.
Before we look ahead to potential 2020 trends in Venture Capital, we believe it would be useful both to quickly review the "why venture capital" question discussed earlier, and then to take a look back at 2019, which was certainly an interesting year for the industry!
On the "Why venture capital" angle, this is a question we have discussed in more depth before, but for reader convenience, a few key points to note include:
Historically low correlation to equities and fixed income, offering diversification potential in the context of the investor's overall investment portfolio.
Even if individual VC investments may be volatile given the nature of the business, the overall early-stage portfolio may still be stable.
Given the high growth potential, early-stage may offer an inflation hedge, particularly in a low interest environment.
While perceived as risky, VC also has outsized growth potential that is difficult to find with larger stock or fixed income opportunities. In fact, many of the world's largest corporations such as Apple, Google (Alphabet), and Facebook derived large growth from initial VC investment.
This is by no means an exhaustive article, and for readers interested in reading more, we highly recommend the books below, all by world-class experts who can provide insights far exceeding my own:
Peter Diamandis & Steven Kotler, The Future Is Faster than You Think
Hans Rosling, Factfulness
Leonard Batterson and Ken Freeman's "Building Wealth Through Venture Capital"
As a final installment of our series covering a 2019 review in venture capital, MedTech, and FinTech, we will now take a brief look at potential trends that we see emerging in 2020 and going forward.
Climate change is and will be a major issue going forward, and venture capital is no different. Between fossil fuel divestment, the increasing rise of ESG-favorable polices or even mandates by many large investors, and the rising middle class in countries like China & India that make cleaner technologies a necessity, green energy could be one of the major investment trends not just in 2020 but likely for our long-term investment horizon. A full discussion of green energy is well beyond the scope of our discussion here, but a few quick points to keep an eye on include (but are certainly not limited to):
Solar energy: As a renewable, naturally abundant source of power with zero depletion risk, solar could emerge as a very valuable asset class, particularly if storage and transmission efficiencies improve.
Electric cars: Similarly, Tesla's meteoric rise over the last few years shows that even if this area is nowhere nearly as scaled up as traditional cars, it is an area of high demand, and companies such as NIO and Rivian further validate this demand. There are still major issues regarding scale, the power generation itself, and what standards may emerge for charging, but this is an area we are closely watching.
Nuclear: Tragedies like Chernobyl and Three Mile Island have made nuclear a toxic - no pun intended - nonstarter for many areas, and a NIMBY in many others, but nonetheless another area worth watching, particularly if companies are able to come up with smaller, more controlled nuclear generation facilities.
Carbon capture: While still in the nascent stages, likewise an area we are watching closely, especially with the aforementioned growing economies and populations in Asia & Africa.
In an ever connected world, data privacy and the responsibilities of major corporations have emerged as a major issue, with even major VC's (& one of Facebook's initial investors) like legendary investor Roger McNamee expressing concern. Whether patient data like HIPAA, data breaches like the Equifax incident, and the Facebook/Cambridge Analytica scenario, this will be a major area to watch. More specifically, we believe companies that strike the right balance between giving users/customers a value-add experience while also respecting data privacy will be well-positioned to succeed, while those that act in a more cavalier manner may face stronger political and regulatory scrutiny.
A third major trend we are watching is artificial intelligence. We touched on this briefly in our prior discussions on MedTech (where AI can serve as a useful tool to complement physicians in fields such as radiology) and Fintech (where it can be used for lending, data analysis for investing, etc.), and no less a figure than Microsoft CEO Satya Nadella recently took an incredibly bullish position:
Microsoft CEO Satya Nadella on the rise of A.I.: 'The future we will invent is a choice we make ‘Speaking in front of an audience at the VivaTech conference in Paris, he said artificial intelligence (AI) is the “defining technology of our times.” Rather than fear the rise of this technology, which could be something that transcends even human capability, Nadella said that his developers, and their rivals, follow a set of human values and principles that guide the choices they make. “The future we will invent is a choice we make, not something that just happens,” he said.
We concur, and while this may well be an area where there is so much "we don't know that we don't know", it is nonetheless a major opportunity and one that applies across a very broad range of industries.
Other areas we are watching include:
Cross-border commerce: Between major developments like the signing of the U.S.-China Phase 1 trade deal, the USMCA for North American trade, and numerous other deals with countries like Japan, we cannot emphasize the potential for this to truly become the sort of "The World is Flat" economy that Thomas Friedman discussed. One of our prior articles focused on Africa as a particular area of interest, and this is a region we are closely watching given their favorable demographics. Large scale commerce via manufacturing and supply chain have long been active across borders, and we see venture-level companies as perhaps being a new major opportunity.
Cloud: As more and more companies move toward the cloud - for example, one major driver of Amazon's emergence as one of the world's most valuable companies has been its expertise in cloud via Amazon Web Services - this will continue to be an area of high demand, especially given the massive increase in data usage across nearly every industry.
5G: On a related note, 5G could also play a vital role as data usage increases at a near-exponential rate. In addition to the direct applications in telecom, there could be further uses in areas like telemedicine, data analysis via the cloud, Fintech, and so on.
Valuations: Our initial article in this series covered some of the recent unicorns like Uber, Lyft, Slack, and Beyond Meat, many which have seen their share prices fall greatly since going public, and WeWork's major writedown by their lead investor, and this is something to keep a close eye on, especially with AirBNB expected to go public this year after recently reaching $1B in valuation. A related point may be the increase of M&A as a liquidity event given the low interest rate environment and large cash balances of many major corporations such as Apple.
Medtech: We discussed this in far more detail previously, but some areas of high interest include precision medicine, genetic testing, big data, and telemedicine, many of which are tied to ideas such as AI and big data.
Fintech: Similarly covered in more detail in a prior article, but areas such as blockchain, smart contracts, cryptocurrencies, and supply chain are all areas of high demand.