Turning the page on 2017, here’s what I’m looking ahead to in 2018:
I want to keep this post brief as possible. Below is a set of predictions for 2018 in tech startups and VC. This is also a window into the principles and beliefs I hold and which, in turn, form my behavior and actions in the ecosystem. So, some of this is tipping my hand, but I would welcome being challenged on any and all of these claims 😉
Before I begin, a brief review of my four 2017 predictions, located in full here. For the first three, I give myself a C, F, and F, mainly because they’re boring and too broad. However, for the last one, #4, man… I hit that out of the park: “Digital currencies will be offered as part of a sophisticated investor’s portfolio.”. A+ and if I only acted more on that impulse and the clues I received in Q3 of 2017. Hindsight is 20/20, they say.
Now back to 2018…
–IPOs For 2018 Are Ho-Hum; All Eyes On 2019 IPO Pipeline: Exits have been slumping for the past few years. 2017 wasn’t much better. However, there are some promising signs, most notably that the IPO pipeline for 2019 is STACKED. A few many rush to IPO this year ahead of the 2019 wave, but I am operating as if these IPOs will begin to form a massive wave in 2019 and slip into 2020. If these hit the market with full force, that will bring significant liquidity to the Bay Area. More on the effects of that below. For now, everyone has no choice but to remain patient. Check out GGV’s Glenn Solomon’s post on current state of IPO market in his year-end review as well.
–2018 M&A Driven By Sectors Experiencing Most Existential Threats — namely, continuation in consumer retail, transformation of the automobile industry, and the meat and potatoes of technology infrastructure and software services.
–Bay Area Inflation Continues To Distort Early-Stage Market: If you follow my tweets, you know that I’m concerned about local cost inflation and its impact on a startup’s runway. I get lots of private messages expressing both support of this view, as well as those who believe the Bay Area is really the only place to invest. For me, and my investing behavior, what I’ve opted for is a bit of structured geographic diversity in the portfolio, such that for every dollar I invest in the Bay Area, I try to invest another dollar outside the Bay Area. Within the Bay Area specifically, I try to split that dollar between SF proper and in startups who have elected to HQ outside the city limits — the Bay Area early-stage ecosystem — just like the weather around here — has distinct “microclimates” for prices and types of entrepreneurs to partner with.
–Large VC Firms Get Cozier With Deep Tech: As the bigger VCs get bigger and diversify, we have begun to see them go beyond the app and infrastructure layer, and will see them go deeper in the tech stack (like chips, etc.) and even compete with focused Deep Tech firms. This will require them to take new risks and recruit a new type of GP. Easier said than done. Bilal Zuberi from Lux Capital touches on this trend (which he sees up close) in his year-end post.
–Crypto Fever Won’t Subside: I continue to see very strong founders and builders starting and designing new products, services, and protocols in the world of crypto. From where I sit, that is my first-principles evidence that this is a sector that’s just getting started and here to stay. Sure, we will see more ICO scams, likely more lawsuits, more scrutiny around how ICO funds are issued, managed, held, and governed. One area I’m particularly fascinated with is the concept of stablecoins, and it appears the timing may be right for this critical crypto-infrastructure to be put into place for developers to leverage. For more on this topic, start with 1confirmation’s Nick Tomaino on stablecoins here.
–I’m Optimistic About Another Startup Breakout For 2018: Every year, I like to dub a startup as “the breakout” of that year. This past year was Coinbase. A few years, I couldn’t pick one. I don’t know what it will be this year, but I am optimistic there will be 2-3 good ones to choose from and debate a year from now.
–Predictions for Changes At Uber: I don’t know him, but I’m a Dara believer. I suspect with his experience and travel chops, Uber will finally introduce a proper loyalty and rewards program, they’ll improve their terrible, over-designed mobile app, and create tighter app and business integrations for travel, dining, and hotels, as a company like Priceline may approach such an opportunity. Within two years, Masa will have likely doubled his money.
–Startups Shrugged: Someone whose tech thinking and experience I deeply respect — a16z’s Steve Sinofsky — elegantly argues in this recent post about how tech incumbents have historically focused on protecting their market power versus building new products. I agree with the theory. But as I argued nearly two years ago now in the Feb 2, 2016 issue of Stratechery, I still believe today’s crop of tech giants are less likely to be disrupted because they’re all mostly executing well, buying new companies and integrating them well, and continue to amass power each year via the greatest network effect we’ve ever seen. What’s opened up in crypto, for example, is an entirely new space. So, I believe startups can leverage technology to open up and play in new spaces, but the audience sizes and lock-in required to compete head-on or even adjacently with these large incumbents is a not a game I’d want to play. This is why I like playing the game around open source (including parts of crypto), advances in cloud computing (like edge computing), technology seeping into heavy industry (which is starting to see some M&A), and infrastructure which can support the growth of consumer and enterprise networks, to name a few.
The Ecosystem Overall
–The Political Economy Trumps Tech: No matter what advances technology, markets, and networks make, they are all still at the mercy of the political climate, and 2018 is set-up to be one of potential volatility. We will all digest the biggest changes to tax laws in over three decades, learning what the new rules mean in real-time; we will likely see much more from the FBI’s investigation into the Presidential Administration’s dealings, as well as the debate concerning the overall veracity of the findings it produces; and we will see more mainstream stories like this one from WIRED’s Erin Griffith on how “Big Tech and Startups” have compromised their trust with consumers, regulators, and society at large. This is against the backdrop of very strong tech incumbents, heightened interest in startup culture and participation, and a robust pipeline for private companies to IPO within the next 18-24 months. The more I analyze all these forces at play, I begin to wonder if many (not all) mistimed the cycle and will have waited too long to get liquid. Perhaps the one network effect which can trump Big Tech is a political network effect, and we began to see what that can do in 2017.