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Trends Watch: June 21, 2018

EisnerAmper’s Trends Watch is a weekly entry to our Alternative Investments Intelligence blog, featuring the views and insights of executives from alternative investment firms. If you’re interested in being featured, please contact Elana Margulies-Snyderman.  

This week, Elana talks to Steve Socolof and Jim Gunton, Managing Partners, Tech Council Ventures II LP.

What is your outlook for venture capital?

Overall, we have a positive outlook on the opportunities for venture capital.  Of course, there are many changes going on in the entrepreneurial ecosystem and venture capital market that will provide opportunities and challenges.  We’ve seen an increase of capital flowing into venture capital funds, from $20 billion in 2012 to $30-$40 billion in the four years since, a recognition of the opportunities in venture.  The pace of investment activity in startups has similarly increased, to $80 billion per year from $40 billion.

It’s not all happening in the Silicon Valley.  There is a startup ecosystem blossoming across the country, with universities becoming startup institutions, municipalities and states fostering innovation ecosystems, accelerators and incubators proliferating, and more angels and microcap seed funds supporting startups.  Corporations across every sector have opened up to looking for sources of strategic innovation by investing in and partnering with startups.  Additional funding channels are developing such as crowd-funding platforms and ICOs and, in general, forces are making it easier for venture-backed companies to go public. 

As with the public markets, the biggest challenges will come from the heightened valuations that we are seeing in the venture market.  Investors will be faced with the dilemma of staying disciplined without missing out on the breakout successes.  The costs to start businesses have been reduced, which means that many will be able to survive as small businesses. While this could lead to proportionately fewer breakout successes, it should mean more sustainable opportunities.

What makes the Mid-Atlantic region compelling for venture right now?

The Mid-Atlantic region is becoming a very exciting place for venture, and for good reason.  First of all, it now accounts for over 20% of the venture market nationally. The densely populated region has reached a tipping point for startup creation, investment, and success.  In addition to New York, the region is anchored by Philadelphia, Pittsburgh and DC, and boasts great universities and more corporate headquarters and research centers than anywhere else in the country.  With the industrial base of the region across many sectors opening up to working with startups, there is tremendous opportunity for local startups to accelerate their contribution and success.  Finally, from an investment perspective, much of the region is still seeing reasonable valuations.

What are the exciting themes and technologies you are seeing?

There is an incredibly diverse industrial base in the region, with opportunities spanning many sectors and themes.  The underlying pillars of AI, cloud, IoT, and now blockchain are being applied to solving problems and providing new services across many sectors.  For example, industrial supply chains are being reimagined; enterprise business processes in functions like HR are being made much more effective.  Health care is going through massive changes leveraging intelligent use of data.  Financial services, media, education, and energy are all seeing great new approaches and innovations.

What keeps you up at night?

Valuations and time!  As mentioned above, the broader venture market is seeing some higher valuations.  In some ways this plays to our strengths as you have to be a very disciplined investor to manage risk appropriately.  The competition and pace of innovation are accelerating.  Any new idea or startup is but one of many in a competitive marketplace.  Speed is an advantage in developing products and services and in capturing customer and market attention. 

Elana Margulies-Snyderman is an investment industry reporter and writer who develops articles, opinion pieces and original research designed to help illuminate the most challenging issues confronting fund managers and executives.

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