Startup and Venture Capital – 2012 – A Year in Review

Once in a while I get asked “How does the startup landscape look like?” or “What sectors are emerging?”. To address this question, I decided to write this post and summarize the landscape from a macro- as well as a micro- perspective, my personal perspective.

It’s a Great Time to Do a Startup

A while ago I wrote an article to the London Chronicle titled “It’s a good time to be a start up company”. This is true. Lots of seed money is available. In the 2nd quarter of 2012, one out of every five venture capital investment was a seed investment. Focusing on mobile and internet, one out of every three deals was classified as a seed investment. A year ago only one out of twelve venture deals was a seed investment.

Contributing further to the attractive environment are the liberalization of angels, the JOBS Act, and platforms like AngelList and CapLinked.

Personally, I expect that trend to slightly decline in the next 12-24 months: Calpers, a leading institutional investor in many VC firms, has announced it will reduce its portion of funds allocated to venture capital. This will also impact the decision making of other institutional investors, leading to less venture capital available for investment in the next couple of years. Finally, many of these seed investments will require follow-on investments.

A Mobile Snapshot – The Instagram Effect

Q2 ’12 was greatly affected by Instagram‘s acquisition. Investing in the mobile sector reached an all-time peak at 102 deals.  Focus shifted from advertising (I still think there are a lot of opportunities here), LBS (somewhat of a hype) to photo, video, conferencing and mobile gaming (I expect to see some more activity here). Photo and video related companies took home almost 30% of mobile related funding. Personally, I’ve met more than a few mobile photo related ventures; however, I think the opportunity in this sector is limited. One venture, taking a B2B approach is Rotary View, an app for taking 3D product related photos.

App discovery has also seen a lot of traction with Quixey, which recently securing a $20M round, and Chomp’s acquisition by Apple. AppFlow is an interesting product worth checking out, especially for its unique user experience.

Additional opportunities in the mobile sector

Once the web reached mass market, tools were introduced to allow non-technical individuals to develop simple web sites. This year I’ve seen a few platforms replicating that offering into the mobile sector and I suspect more startups will emerge in 2013 around this opportunity.

Conferencing is another sector that received a lot of attention in Q2 from investors, and rightfully so. Webex, Skype, and recently UberConference disrupted the conferencing sector by making it available without the need for special purpose equipment. These capabilities haven’t reached the mobile sector, though the use case is compelling and natural.

Online Consumer and Internet – Less Keen on Social

$3.1B of venture capital funding in Q2 ’12 was allocated towards internet related startups, a 14% increase from the previous quarter. Despite Pinterest’s $100M round, social networks has been less of a focus area for VCs in Q2 . The spotlight has shifted towards ed-tech. More than $429-million was invested in over 80 educated related startups in 2011 (up more than 20% Y-o-Y). Khan Academy, Piazza, Edmodo, Udemy, CourseKit, Knewton are just a few examples.

New distribution channels, a reform in education, and a change in the way kids spend their time are all reasons why education is transforming and offers a great opportunity for entrepreneurs.

Some of the areas I think offer great opportunity around ed-tech include:

– Interactive learning and the usage of video specifically

– Self study

– Benchmarking tools

Transportation Driving a Lot of Attention

Once a month I encounter another startup claiming to re-invent traditional transportation and unleash car ownership. Most notable subsectors include:

–          Cab riding – Uber and GetTaxi

–          Cab sharing –  CabCorner and GobiCab

–          Car sharing – Relayrides, Getaround and rent2buy

–          Ride sharing – Lyft and RideJoy

Personally, I’m doubtful about the sustainability of some of these companies for the two following reasons:

–          Scalability = high supply and demand – Many of the companies compete with one another over a market that is still somewhat niche. To ‘cross the chasm’ these companies need to provide meaningful supply and demand. Would you use a car sharing service if there are few members around your community? How about cabs? It’s a game of scale and one or two companies will scale over the account of many others.

–          Differentiation – Some of these companies differentiate themselves by further focusing on niche markets like luxury cars or rides on specific routes. These differentiators are not necessarily meaningful nor support future scale.

We have already started to see mergers of similar companies, due to scalability issues (HiGear merged with Rent2Buy  and CabCorner merged/acquired Hitchsters).

Big Data – Many Opportunities Still Exist

Over $1B in venture capital funding has gone towards big data ventures. A significant portion has gone towards big data analytics. Splunk and Palantir Technologies are probably the most familiar companies, but I suspect we will see more investments directed towards this sector given the mass of data available to industries like healthcare, customer service, sports, etc.

Small-Medium Business Still on the Minds of Many Entrepreneurs

In 2011 I came across numerous startups addressing opportunities in the SMB market: From productivity and CRM to marketing and online presence. 2012 was another year where many startups were targeting SMBs with different SaaS and mobile services. Gremln is helping SMB develop, manage, and mine their online presence. Schedulicity, helps SMBs optimize idle times. POSIQ offers CRM for restaurants.

The main challenge remains distribution in such a fragmented market.

Cleantech Going South ?

The amount of cleantech activity has been in decline. The number of deals has almost halved to 49 deals since Q2 2011. Total investment was relatively significant ($1.47B), mainly due to follow-on investment in Fisker, Bloom Energy, and SunRun.

in my view, this trend reflects the question mark around whether cleantech investing really fits the venture capital model, given the timelines.

A Final Word on Corporate VCs

Many corporations are interested in tapping into external innovation, yet in reality CVC activity has been in decline since 2011 in terms of deals and total funding. Q1 ‘12 CVC funding activity has declined to $1.1B (from $1.8 in Q2 ’11). Corporate VCs funding per deal on average is $5.5M more than the average investment done by other VCs.

However, Q2 is showing some potential recovery in terms of CVC activity: 40% increase in the number of deals and almost double (!) the total investment compared to Q1.

Early stage investments made up only 32% of all CVC deals. In contrast, aggregate VC stats show that 48% went to early stage deals.

Significant portion of CVC rounds were in syndication with other VCs.

Finally, corporate venture deals in the internet sector have increased for the third straight quarter and funding is up 37% in Q1 and 42% in Q2 (of total CVC deals). Majority if the investments were directed towards healthcare, online advertising.

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About shanishoham

After 14 years of General Management and incubating/scaling new businesses & organizations for enterprises (established a $55M mobile business and a $100M/400 employees global division), I became an investor Today I’m a board member/mentor with 5 incubators & micro-VCs and involved with many other private & public incubators around the world. I also founded a VC firm named 2020 and I'm a member with a number of angel groups so i get to see & work with many startups, innovation centers and other parties across the ecosystem. I’m an alumnus of the Stanford Graduate School of business - Sloan Master in Management program, a 10 months intensive program for 57 carefully selected experienced Executives and leaders from all around the world.

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