It’s that time of year, time to look back and reflect on the most significant storylines in the tech, startup, and VC world. A comprehensive post on this topic could be 5,000+ words, but we do not do such things here. We kept detailed notes month by month and today, I tried to organize them by key sections, what you’ll see below. There’s a good chance I’ve missed something — if you feel that way, by all means, please share your point of view on Twitter (or email) and link to the post.
And, with that warning, I offer to you, the big stories in the startup and investing ecosystem of 2018, written in ascending order of importance and magnitude…
6/ Venture Capital In Expansion Phase
Technology is, like water, flowing and seeping into nearly every sector and eventually into most of the global economy. And as more economies worldwide seek to shift their investment strategies offshore and seek out technology, hubs like Silicon Valley and Shanghai, among others, have reaped the benefits. Add to the mix that high growth companies now often prefer to stay private longer and some altogether shun public markets, venture capital firms have bulged in size, many of them leading $100M rounds, going multi-stage (from seed to growth to pre-IPO), going global (investing down the street and across the Pacific), and making sure they have enough assets to defend positions in their best companies. Traditional seed funds have gotten bigger, many armed with opportunity funds on top. Hundreds of new micro funds somehow keep getting into the market. More and more angels will be minted as the 2019 IPO class emerges. Public investors, cross-over investors, and even traditional private equity firms have taken notice, further blurring the lines of what constitutes true venture capital.
In such a bull market, rather than just share my two cents, I wanted to cite some of the best posts (in my opinion) on venture capital from this year: Fred Wilson of USV on how VCs can and should take money off the table; Ashmeet Sidana of Engineering Capital on how VC is no longer a life-cycle investment business; Elad Gil on why we saw so much large preemptive round behavior among VCs; and Eric Feng of Kleiner Perkins on a data-driven and historical look into how the VC sector has expanded. If every sector is to be transformed by technology, and if private markets keep growing, it makes today’s conditions understandable.
5/ Early Effects Of The Softbank Effect
In 2017, Softbank rounds caught folks’ attention. Now in 2018, there’s been significant rounds they’ve led or participated in — Pitchbook here recaps some of the biggest. And, privately, many investors up and down the stack are discussing what the true impact of these mega rounds will be. As more investors have more touch points with a “Softbank round” in their portfolio, a picture emerges — rounds here often take a long time to close. The fear of them investing in a competitor is real. During this time, there’s financial leverage used in the transaction to help buffer the firm’s cost of capital (e.g. the firm may have a right to raise up to $100B but may not call all of it). Also during this time, the underlying metrics in that business can change positively, potentially trapping companies to accept the initially-agreed upon valuation. And earlier investors who may have been expecting healthy secondaries for liquidity on the backs of these rounds found instead either no such tender or offers at very steep discounts. The original conventional wisdom was that capital could be a weapon for the winning company as private markets hold longer, but now as 2019 begins, I am not so sure. Perhaps we will look back on cases on like Bowery Farming vs Plenty in the urban plant growing market — one company raised a massive round early, and one just raised one to compete nearly two years after having more sustained growth. There are a number of battles like Bowery vs Plenty we can track, and I plan to do so over the years.
4/ Global Trade Wars Are For Real
This is a huge topic and one that I will address separately in the new year. The short story now is that I believe we as a society and economy are not only underestimating the rate of acceleration in climate change, we are doing the same with respect to the severity and intensity of global trade wars. And, this goes well beyond the current resident of 1600 Pennsylvania Avenue. China’s growth over the past few decades has been remarkable. Frankly, the scale of it has snuck up on the U.S. Over the next few decades, I expect forces in Washington DC to use economic and monetary policy to attempt to rebalance the trade relationship between the world’s two most dynamic countries. That will take a long time to settle.
In the meantime, we have what we have today. Governments blocking acquisitions, the curtailment of company expansion, more scrutiny on overseas operations of U.S. companies, more sensitivity around technology IP and security. This is again a much deeper topic to explore and I will do that in early 2019.
3/ Crypto Hibernation
It’s winter in crypto land, and the bulls are hiding with the bears now. This is probably the darkest hour crypto folks have faced. There was an insane level of hype, of course, so perhaps it was called for. Privately, friends who are deep in the industry have confided in me that they see the competition for talent cooling dramatically; that they believe it could be 18+ months before there’s enough confidence back in the market; that crypto solves problems below the application layer, but not really above it (yet); and that the SEC and regulators will begin to slowly clip the wings of a number of projects who aren’t properly operating under guidelines.
Consider the above paragraph versus how this year started. Telegram announced their ICO and raised over $1B from some of the best VC firms. Basis, a stable coin, raised over $100M from a similar caliber of firms. Coinbase, the largest crypto startup in the U.S. by a mile, continued to soar in volume and valuation. VC funds invested directly in MKR.
On the investment side, some of the best traditional VC firms made forays into the space, initially in the deals above, but eventually having partners break off to run crypto-native investment funds, such as Matt Huang leaving Sequoia (and joining Coinbase founder Fred Ehrsam) to launch Paradigm; Brad Burnham and Joel Monegro leaving USV to start Placeholder; and Chris Dixon teaming up with Katie Haun to launch a16z Crypto. These certainly are not the only funds playing in the space, but point to the quality of minds entering the space.
As the year ended, things changed. Prices for public coins dropped dramatically. People again began to question what the ultimate uses cases were. So far we know that you can make money in crypto by charging a fee for an exchange, launching a hedge fund to trade coins, raising through an initial coin offering, or being acquired. That so far may not be good enough. But, there are some positive signs on the horizon. The trend now seems to be bending toward incentivizing network participation, where those who see the opportunity will want to not just invest in a new network, but put their time and resources into participating by running nodes themselves.
2/ The Scooter Phenomenon
This was the big consumer behavior story of 2018, behind the rapid rise of digitally-native vertical brands (like the breakout, Hims), and the rise of prosumer-level data applications (like breakout Airtable). Influenced by the rapid growth of the bike-sharing craze in China, a savvy Uber employee spun out to create Bird. Launching out of Santa Monica, Bird grew like crazy, triggering U.S. bike-sharing company Lime to pivot to Scooters. Uber acquired Jump Bikes, and Lyft acquired Motivate. And, thus began the Scooter Wars, which saw consumers across major U.S. cities flocking to these machines, downloading apps for each network, and paying just a few bucks to get from Point A to B. The shift in consumer behavior and the intensity of the Scooter demand was undeniable. To follow this demand, some of the best venture capital firms in the world poured billions of dollars into these companies, making their valuations soar incredibly fast.
However, many cities and its citizens did not agree. If scooters were not being stolen, reprogrammed, vandalized, thrown into lakes, hung from trees, or pooped on, many city governments felt they were being hustled by these companies in a post-Uber world. Specifically, because scooters took up sidewalk space intended for pedestrians or would be too dangerous in mixed-traffic situations, and because of the public nuisance of having them strewn across the street after someone finished a ride, city governments fought back seeking to regulate how these companies would work in their confines, likely move toward using docking systems (a la bikes) and issue specific quotas to control the number of scooters on the street.
Scooters could’ve easily become more ubiquitous if it were not for these city interventions. Additionally, the wear and tear on these scooters, given the heavy use, put a strain on the asset, and when baking in the cost and operational complexity of recharging batteries and fixing broken scooters, the unit economics were materially affected. For me personally, it’s been fascinating to see just how much consumer demand scooters as an easy and fun option, and yet consumers don’t seem to want to charge or dock these items — the friction harshes the excitement of the ride.
1/ Social Network Interference
My goodness, where to begin. In 2017, we learned about how social media feeds were used to surface biased or planted information. By the end of last year, even Zuckerberg, in his annual proclamation to publicly set personal goals, vowed to orient Facebook more seriously toward stemming disinformation on the site. Then 2018 arrived. This year, in March, the world learned about the data techniques of Cambridge Analytica; in the summer, both Jack Dorsey and Zuck testified to Congress; Twitter removed millions of bot accounts that were active in the 2018 midterm elections; Facebook’s leaky APIs sadly led to newer data breaches (I don’t think I can cover them all here); and even the graveyard Google+ was hacked for PPI.
When I wrote last year’s review post, a friend replied by email to comment that he felt that 2017 also marked a year where society began to question whether social networks did more harm to society than good. That turned out to be a prescient comment. When I was in grammar school, the Berlin Wall came down and the U.S. ended the Cold War with the then Soviet Union. A concept discussed during that time was “glasnost,” a part of the new Russia’s restructuring to provide more openness and transparency in information.
Russia has evolved in a different direction, with tight information controls and state-run media. Next door in China, too, we see the government being careful with information sharing online within its own borders and restricting access to much of the Internet. Yet, we as a planet are beginning to understand just how much of the web is not true. In the west, we are programmed to believe open wins, but with 2018 entering the books, the big questions I have moving into 2019 is — does that still ring true, in real life? Are we just at the beginning of massive, widespread hacking and disinformation campaigns, even against corporations and individuals? And will society demand to have more of the algorithmic black box that feeds it information exposed in public? I don’t know the answers, but no doubt 2019 will open up new avenues to explore that none of us could’ve envisioned before.