With optimism running high in venture capital, 4 trends to watch

Although most industry watchers expected the COVID-19 pandemic to take a toll on the venture capital industry, 2020 turned out to be a boom year for the sector.

“Everybody thought this would be the great reset,” said analyst Jeff Grabow, U.S. venture capital leader at Ernst & Young, who noted a “severe tightening” at the end of the first quarter in 2020. But by the end of the summer, “people said, ‘You know what? It’s really not as bad as we thought it was going to be.’ ”

The year of the pandemic turned out to be the second biggest year for venture capital in history, with funds deploying $141.9 billion in investments in 2020, according to EY’s analysis of Crunchbase data. (The biggest year for VC overall was $145 billion in 2018.)

“All pillars of the asset class are firing,” said Grabow — meaning fundraising; capital formation (that is, investing into startups); and liquidity, as when VC investors convert their investment in a company back into cash.

Also helping the matter is a favorable economic picture. Low interest rates, in particular, produce the “best possible opportunities” for early-stage startups, said David Fialkow, co-founder and managing director of venture capital firm General Catalyst.

Fialkow expects those conditions — and the boom time they enable — to continue. “There's never been a better time to do anything right now in technology and starting a business,” he said.

Fialkow was among several panelists speaking about trends and opportunities in venture capital at two recent finance conferences: the MIT Sloan Investment Conference and the MIT Fintech Conference.

Here are more of their insights:

1. VC funding and impact investing can be mutually beneficial

As impact investing continues to gain momentum, more investors are realizing that making money and having a positive societal impact can go hand in hand. In fact, being mission-driven can even offer an edge.

“We think about impact [investing] as not mutually exclusive with financial returns,” said Connie Deng, a senior associate in venture capital at Emerson Collective, a social change organization based in Palo Alto, California. “We actually think they’re mutually beneficial. If you have a choice between two companies that are the same, but one is a little bit more mission-driven, there’s an obvious bias there.”

2. Frontier markets require ‘a bit of trial and error’

Frontier markets —economies in the developing world that are less advanced — have recorded impressive growth in technology. But there are still country-specific dynamics that entrepreneurs must consider, said Amanda Cotterman, a Kenya-based founder and managing partner of Equalife.

Such markets are attractive to startups and investors, because of their large, untapped population as well as the opportunity to skip ahead technology-wise, moving from paper banking directly to mobile payments, for example.

“There’s a lot of excitement in these markets due to the volume of people,” Cotterman said. “But when we leapfrog these technologies, we have a lot to learn, and it’s a bit of trial and error as you go.”

Africa, for example, isn’t a monolith; every country is different. “I was in Côte d'Ivoire right before the pandemic. The literacy rate there is low, so they're trying to figure out how to roll out apps that someone isn't reading, but they're actually listening to. That’s something that we would take for granted in other markets,” Cotterman said.

3. Technology can revamp archaic industries

Another new area of opportunity that’s on investors’ radars is the use of existing technology to provide a facelift to legacy industries.

David Frankel, a co-founder and managing partner of Founder Collective, said his seed-stage VC fund has invested in companies that are using decades-old technologies to remake industries that are centuries old, such as floor installation or oyster harvesting. “The tech is not edge-of-the-ledge artificial intelligence or machine learning,” Frankel said, but it’s fixing problems for industries that haven’t yet been brought into the 21^st century.

Grabow agreed with that sentiment, calling the current point in time “a technology revolution.”

“I think we’re seeing massive gains in a lot of different industries driven by the application of technology,” he said.

4. Technology niches abound for creative startups

Panelists were bullish on new, underexplored opportunities for startups in financial services and elsewhere. Among them:

Tailored financial products. Financial products are moving away from a one-size-fits-all approach and becoming more tailored to specific audiences, said Jake Gibson, founding partner of Better Tomorrow Ventures.

“The fact of the matter is people and groups in different types of businesses have different financial needs,” said Gibson, who noted that companies are creating bespoke bank accounts for couples, parents, families, and teenagers. “If you think about audiences that we consider as huge niches, you can really start to do interesting things.”

Collaborative financial technology. The arrival of the COVID-19 pandemic made it a necessity to collaborate virtually on documents and projects. And some VCs expect this trend will carry over into finance, which has traditionally been a solo consumer experience.

“We’re trying to think about how you could design more collaborative social feedback products,” said Sia Houchangnia, a partner at Seedcamp, a European seed fund. Whether it’s educational content in the likes of Masterclass or a multiplayer mode for saving for investments, “We are quite excited to see what the new wave of consumer fintech could look like.”

Tap to pay and voice payments. During the pandemic, the fear of catching the virus changed many consumers’ shopping and banking habits.

“One of the things we’ve been thinking is the transformation in physical spaces and how that might apply to financial services innovation,” said Ben Savage, a parter at Clocktower Technology Ventures. “We’ve thought a lot about payment experiences in the pandemic, where for many Americans in particular, they discovered for the first time the power of tapping to pay with cards that have chips in them. These are experiences that, once you switch, you don’t go back.”

Peering into the crystal ball

As for the year ahead, what might 2021 hold? Many in the industry are predicting another strong year.

“There has never been more money available,” Fialkow said, noting that there’s likewise no shortage of problems that need fixing across industries, from payment systems to cybersecurity to health care.

Other experts made the case it’s a lot easier to start a tech company now than it was just 10 years ago because all of the fundamental building blocks are available — further boosting gains in 2021.

“There's a bunch of code you don't need to write,” said David ibnAle, a founding and managing partner of Advance Venture Partners. “There's a bunch of design you don't need to do. There are a bunch of tools that are there that accelerate all of these processes.”

Grabow said he wouldn’t be surprised if VC recorded another banner year, noting that in January and February, VC funds deployed $33 billion.

“Two months does not make a year, but the first quarter looks like it’s going to be a strong quarter,” he said. “If a pandemic can’t stop a bull run, what can?”