Why do VCs invest in what they invest and founders build what they build?
Whilst it may seem irrelevant to analyse how a certain tech theme came to be, looking at the historical trends of technology entrepreneurship might provide a glimpse into whats to come.
Early-stage venture capital as a financial instrument historically has worked to finance enterprises with high upfront costs (headcount + R&D), expansive margins and outsized potential payback realised through a liquidation event.
The key underlying unit is return on investment; in other words which investment opportunities are going to return the most on a per dollar basis. Thus, VCs must ask themselves which companies within which industries or themes at this moment in time has the highest future upside potential? Value creation can be two-fold: either creating a new market (new market disruption) or disrupting an existing one (low-end disruption).
Through in the recent (last 25 years) evolution of technology venture capital, we’ve seen entrepreneurs and financiers tackle “low hanging fruit” problems. Initially these weren riffs existing consumer business models which could be improved by reducing friction in the value chain using technology. We saw an explosion of these execution based business models starting in the mid 90s, such as Amazon and Craigslist. The late 90s saw some web based business model innovation such as Ebay (marketplace) and Paypal and Napster (P2P transactions). Subsequently the late 2000s saw an increase in new market creation, as the web + mobile began to create online-native businesses which leveraged a deeper tech stack such as the mobile web, GPS and the camera sensor.
1990s: internet infrastructure + e-commerce + consumer marketplaces
2000s: social + mobile
2010s: mobility + real estate + fintech + fintech
2020s: ? healthcare + education + energy + construction ?
Many of the aforementioned “low hanging fruit” problems, especially in a saturated consumer market, have been tackled, from ecommerce (Amazon) to search (Google) to marketplaces (Alibaba) to social (Facebook) to content (Youtube/Netflix/Spotify).
Today, we find that a marked increase in venture dollars, as well as the saturation of many of these consumer models, has turned the attention of founders and VCs alike to asset-heavy, capital-intensive industries such as mobility and real estate. We’ve also started to see heavily regulated/protected industries such as healthcare, education and energy emerge into the line of sight.
Will this trend extrapolate out indefinitely? Unlikely. If the disruptive technology has taught us anything, it’s that disruptors will at some point be disrupted. This point is well illustrated by the current average age of an S&P company which is 18 years v 60 years in the 1950s - whilst many of the large-scale pre-2000 companies enjoy incumbency, we can expect their business models to come under attack as new emerging technology paradigms emerge.
With a continued rise in information technology companies who require funding for intangible assets (IP v fixed assets), I believe we’ll see a continuing increase in venture dollars (VC as an asset class is still relatively small compared to its societal impact: in 2018 VC was $130bn v Hedge Funds $3trn+ v Private Equity $3trn+). This may mean we see founders and VCs alike tackle bigger, heavier and more expensive problems!