Looking Back On Tech Startups And VC In 2017

Here’s my “Year In Review For Tech VC & Startups, 2017 edition.” For the past few weeks, I’ve jotted down notes on my iPad w/ Pencil, and sort of dreaded the act of writing this given the overall stench of 2017. Yes, there were some bright spots. Focusing now only \in the world of tech startups and the investment firms which fund them, most of the major stories and developments are hard stories, but you’ll also see below many are thankfully moving (even if slowly) in a better, more equitable direction — though the process of getting there is a bumpy road.

The key thread running through the big stories in tech startups and investing in 2017 centers around the increase in three characteristics: 1/ the distribution power conferred to incumbents; 2/ increased global money supply seeking alpha in tech; and 3/ significantly more transparency in the information market.

And, with that warning, I offer to you, the big stories in the startup and investing ecosystem of 2017, written in ascending order of importance and magnitude…

6/ The Facebook Effect On Snap

[Truth be told, I added this in at the end as my friend Adam suggested it. I think he’s right. I’ll keep it brief. Snap went public, which is a noble feat, but then both Instagram and Facebook — two little social networks with quite a bit of market power — copied Snap’s most original product feature: Stories. And then, all of a sudden, we were once again reminded of the power of distribution over all else, and the specific power Facebook wields. While Snap has other woes (such as sitting on inventory of Spectacles), the scope of that FB-style power is reflected in part in the drop of Snap’s shares.]

5/ The Amazon Echo & Alexa Effect

We have one Echo and three Dots around our house now, along with one FireTV Stick. I will never understand how Apple didn’t use AppleTV to get Siri into the home, but Amazon beat everyone to the home market with the best product. Amazon’s speed and might were no match for Google (with Google Home, which will always be at a distribution disadvantage relative to Amazon) nor Apple (with HomePod, which was announced but delayed in production and never shipped). As Google and Apple scramble, Amazon is lapping them with Alexa, more devices, more integrations, and frankly more value per dollar invested. When it comes to voice at home (to start), so far it’s game, set, and match.

4/ The Softbank Effect

In the world of venture capital, Softbank’s massive Vision Fund has come to embody the amount of global money increasingly entering the market. With a $100B debut fund and rumors of a $200B second vintage in the works, Softbank has not been shy about investing large sums into traditionally growth-stage tech startups, as well as companies that are large enough to have gone public years ago. Some notable investments by The Vision Fund to date include ARM, Slack, SoFi, WeWork, and Roivant, among others. And of course, there is the currently-under-negotiation mega-deal to invest in Uber at a substantial discount to its most recent valuation. There also seems to be credible rumors on nearly monthly basis of new investments Softbank is considering.

This all presents interesting challenges and opportunities for the startup ecosystem. On one hand, earlier investors and shareholders could find liquidity faster in a highly illiquid environment. On the other hand, larger investors (especially VC firms, as Sequoia is rumored to be countering with a $5-6B global growth fund) have recognized that Softbank has changed their own exit calculus and ownership models to the point where we could see the traditional Sand Hill firms bulk up even above the current $1B-$1.5B size many have gravitated toward recently.

3/ The Crypto Effect

A year ago, for my “Looking Ahead To 2017” post, my final point started like this: “Digital currencies will be offered as part of a sophisticated investor’s portfolio.” Wow, what an understatement.

Right now, as everyone searches for the next thing, there is little doubt that “crypto” — shorthand slang for the burgeoning global trading market for cryptocurrencies — is the single biggest wave in tech right now. Banks like Morgan Stanley conservatively estimate that in 2017 alone, well over $2B was invested just in funds which aspire to buy, hold, and trade these currencies. Of course, the real number would feel much larger, with the overall “market cap” for cryptocurrencies already at over $0.5T and more funds bulking up their AUM figures as their own holdings appreciate. Recently at the Bullpen Capital annual meeting, the partners shared a well-researched presentation from a variety of sources, conservatively estimating there are over 220 ICO-funded startups, that ICOs have returned 13x (that number will fluctuate, of course), and that overall ICO funding may have surpassed all seed funding during a similar time frame.

We could present 101 plausible reasons as to “why” there’s been a big runup in this sector, such as increasing levels of distrust in institutions, the rise of Ethereum to help developers build decentralized apps (“dApps”), the creation of venues like Coinlist, where consumers can participate in new ICOs, the creation of new investment funds designed specifically to buy, trade, and hold tokens, the fact that traditional VC firms amended their charters to hold tokens as a custodian, the rising popularity of The Breakout Tech Company Of 2017 — Coinbase — in being an onramp to this new world for new investors worldwide, the fact that much of this nascent industry is funding itself with house money, and the increasingly mainstream name recognition of Bitcoin across mass-market audiences such as the NFL, or the announcement by Goldman Sachs of opening a new crypto trading desk, and so forth.

We are in the middle of a fast-paced global, unregulated, hard-to-trace, multiparty crowdfunding game driven by both optimistic speculation and ebullient house money booked during an unprecedented bull market run. At some point, the music will stop — lawsuits could arise in situations like Tezos, which raised an ungodly sum of money through a crowdsale and is now mired in controversy over how those funds are being managed, and regulatory bodies like the SEC and others could step-up activities to protect retail consumers and also better track ledgers for tax collections on gains. Overall, even when the music stops for a bit, there’s no denying that the effect of crypto as a new architecture for designing, building, and incentivizing online behaviors is a major breakthrough and one that will change how many tech startups are built and financed in the future.

2/ The “Tech Backlash” Effect

One could argue this is the #1 meta issue that surfaced in 2017 to a boil. Normally, I would agree, until you will eventually read below. This year, we saw numerous real expressions of distrust of and animosity toward “Big Tech” in ways we haven’t seen before. In 2017, we saw more grumbling about the political heat a company like Amazon may face, as the traditional retail sector is decimated (and its founder owns The Washington Post). We saw more talk about regulating “Big Tech” overall, as companies like Facebook, Google, and a few others have grown even stronger on the back of the web’s and mobile’s unprecedented network effects. More recently, in the forthcoming tax bill, we see a specific tax hit to “blue states” in America where many tech workers reside.

The big, big story (that’s still unfolding) is about how foreign groups (and nations) used U.S.-created and headquartered social media networks as a backdoor for infiltrating the flow of information, especially as it pertained to politics, elections, and online discourse. Hackers were able to create accounts that looked like people, leveraged technologies like automated bots and natural language processing to create fake stories, filtered conversations, and more. The increased transparency around these stories have turned up the scrutiny on tech platforms, especially social networks, and increased calls for their oversight as they know are the main way citizens worldwide get their information. [Some readers may react to this paragraph or entire post as “Fake News!” to which I would respond, “Hey, you may be right.”]

2a/ The “Uber Backlash” Effect

Uber needs its own sub-section. It is hard to overstate what a disaster 2017 was for Uber. We don’t really know the full story. It is all still developing, but if you had asked me a year ago, “Semil, do you think Uber would be a hot, raging inferno of a dumpster fire in 2017, with the CEO and key board member being forced out, with a rash of work misconduct findings, with a lawsuit pitted against Google, with other cities in other countries making moves to regulate and curtail certain company advances, with newly uncovered schemes to have informants at competitors?”, I would have thought you were crazy. But, truth is stranger than fiction these days, and as we seem to learn on a weekly basis (sadly), Uber may actually have so many skeletons in its closets it could severely put a cap on its product growth and company expansion.

1/ The Fowler-Weinstein Effect

While the biggest 2017 trend in tech startups was crypto, to me it wasn’t the biggest story. That honor belongs to the small but important changes happening within the world of tech startups and the groups who invest in them. When I look back on 2017, what I’ll remember is the wide-ranging effects of Susan Fowler’s whistleblower post against her former employer (Uber) and the far-reaching effects from the revelations surrounding and public backlash against Harvey Weinstein, among others. In addition to the overall mess at Uber, other companies like SoFi and UploadVR saw changes as a result of similar allegations.

This also spilled over into the world of VCs, specifically how much the face of the vaunted VC firms are changing as a result of rapidly shifting attitudes — and done with swift action. In 2017, we witnessed a number of high-profile male venture capitalists either removed or forced to resign amid allegations of sexual harassment or misconduct. We also saw some of the most elite VC firms, starting back in 2015 and 2016 a bit, and now picking up steam, recruit females to their GP ranks. So, we see small steps in the right direction, as the topic of diversity and inclusion is increasingly discussed within the tech/startup sector as it pertains to events, panels, investment groups, executive ranks, and more. While gender is beginning to be addressed, the topic of racial diversity still lags behind. This past year saw some real pain, some good, small advances, and a recognition that much more work lies ahead.

=====

And, there you have it — 2017. Not that pretty. Some bright spots, yes, and I sincerely hope those bright spots will help things improve and move in a better direction from 2018 and beyond. But, mostly we see the effects of having more money and more transparency in the market. My hope is that these forces will eventually lead individuals and groups in the startup world to change for the better, but along the way, we should’ve prepared for a bumpy ride. Later this week, I’ll write a separate post unpacking some of the year’s most notable startups exits, and then share my “Looking Ahead To 2018” post. Thanks for reading and Happy Holidays.