2017, the Year of the Fire Rooster — according to the Chinese Calendar.
“THE ROOSTER BEING THE SIGN OF DAWN AND AWAKENING, TRIUMPH AND SUCCESS CAN ONLY BE ACHIEVED AT THE PRICE OF HARD WORK AND PATIENCE IN 2017.”
I am not into astrology, especially not into Chinese zodiac signs, but for curiosity I read some predictions for 2017. Most of them pointed out that this year is a promising one in terms of financial investments. However, we need to make efforts and wait for the right timing if we want to harvest the fruits of our ventures.
This blog post is not about analysing 2016. I am not even a fortune teller to tell what comes next. I have already bumped into a lot of prognoses and I do not want to repeat them. This is rather a reflection on the year behind us, and the sketch of my expectations regarding the upcoming year.
Cash Cows
There are a few industries, technologies I would still bet on: artificial intelligence (AI), autonomous vehicles, robotics and fintech. However, there are certain spaces in these hot segments where I think it is already too late to get in. FOMO (Fear-Of-Missing-Out) can be a bad advisor.
Let’s take an example: in 2015, when we (OTP-Day One Seed Fund) invested in AIMotive (formerly AdasWorks), which develops a full range of products for Level 5 self-driving vehicles, there were only few, but definitely big fish competing in the autonomous space. Looking back now, even the general vision was quite blurry. Since then, many dominant industry players and new-born startups have appeared on the scene. In case of automakers it is rather about the FOMO phenomenon, while new ventures want to take on the opportunity. This rush resulted in the followings:
- There is a fierce competition for the talent pool; companies try to outbid each other on offerings for their (future) employees.
- Development has accelerated so much that we already see self-driving cars and trucks running around. There is hardly a day when we do not run into a photo or video on an UFO-like car, which either prevented or caused an accident; or simply just demonstrated a new feature for the public.
- News was full of announcing forming partnerships, mergers&acquisitions. Just a few examples: GM acquired Cruise Automation; Intel bought Movidius; Uber acquired Otto; Samsung bought Harman.
I believe that the long-term winners can be those who have a very strong vision and a firm R&D past with enough data gathered and generated. Safety and implementation will be crucial for sure, so either existing players will embrace these factors or others will enter the space. Therefore, I think there is still great potential in these “niche markets”, which have not been so much in focus yet. While there was less buzz around V2V (Vehicle-To-Vehicle) and V2X (Vehicle-To-Everything) solutions for instance, I see this technology as a very important and protective component of future traffic. So does the U.S. Department of Transportation, which wants to make V2V communication mandatory. Our new portfolio company, Commsignia enables this desired cooperation between vehicles and their environment.
One more thing that I would highlight: while this is a very capital intensive industry, I strongly believe that champions will be the ones providing affordable solutions for the automotive space. This way everyone can have access to a much safer, efficient and comfortable transportation system. I also assume that autonomous vehicles will first take over public transport and cargo transportation, while the usage of fully autonomous cars on an individual level will become widespread later.
From an investment perspective, I expect more transactions from strategic investors than from VCs. The reasons are partly presented above: strategic players do not want to miss out, and the competition is huge. We will probably see more partnerships and acquisitions in the near future led by industry players (including chip manufacturers, Tier1s and OEMs). Meanwhile, many financial investors find that the autonomous space is very expensive by now to enter. However, a proven technology with a strong vision and expansion roadmap can still be convincing. Also, technologies complementing self-driving solutions can draw VCs’ attention.
Not only driving, but many other segments of our life are heading towards automation. Our home, our jobs, even our communication will be automated, robotized. This is the scary future that many envision. There is no question that artificial intelligence and robotics are already part of our present and will be definitely part of our future. But I think investors have to watch out here: these are the magic words that many startups use to lure VCs in order to get financing. It is our task, moreover, responsibility to identify the ones, which can be a valuable contributor to the future, and will make sweet dreams, not nightmares become a reality. I do believe that robots and smart devices can bring in more efficient and reliable production as well as satisfying and entertaining services to our lives. And if so, we will think of robots not as the smart machines taking our jobs, but as the ones that facilitated more innovation due to leaving more time for humans to learn, think and create. When it comes to investing in this segment, I am looking for ventures which focus on the safe, balanced and sustainable co-existence of humans and machines.
And yes, I still find Fintech Sexy. I have touched on this topic several times in my blog last year as well: Fintech in the UK and Hungary; Fintech in a Nutshell. I can only repeat myself. People want simple, low-cost, instant solutions when it comes to money no matter if it is about transacting, saving, investing, borrowing or insuring. While digitalization can certainly get new groups such as millenials or customers from 3rd world countries in the loop, it is even more important to me to see how innovation can fill in gaps, replace or complement the existing financial infrastructure in a reliable and sustainable way. I do not know if other investors agree on this ‘investment thesis’ with me, but I am sure that fintech investments will further rocket in 2017.
Much more could be said about each above industry, but there are other phenomena which are worth a note. I am definitely curious where live videos, Augmented Reality (AR) and Virtual Reality (VR) will take us. What will be the next big thing that let others be part of our reality and share our life moments? Will virtuality become an organic part of our future? What new combinations of these three will appear? While I am definitely aware of the popularity of this space, I am still looking for use cases that are not just ephemeral but will integrate into our everyday life over the upcoming years, decades.
Investor Behaviour
On a global level we can state that there is sufficient money available for innovative companies. However, venture capital firms have become more cautious: they want proof, not only promises (e.g. proven technology, marketing and sales skills; proof of execution); moreover, they had enough of exaggerated valuations — they look for more reasonable pricing. I believe that this trend will continue, especially if interest rates start to rise. Private investors will have more alternatives, thus fund managers have to be more prudent with savings that landed in their funds. But I am sure that the best ‘unicorn candidates’ can still generate competition among ‘starving VCs’.
I also see a trend of investing in syndicates. For investors this is another effective way of risk sharing. Not to mention the diversified knowledge base brought into the deal, which is beneficial both for the backers and the company. Depending on the participants in the round — business angels, venture capital firms, strategic investors — , they can add valuable industry insights, sales expertise, access to clients, partners & networks and tips regarding future financing.
When it comes to later-stage financing and exit opportunities, I expect that public markets will start to regain their importance compared to private money. While in 2016 uncertainty (e.g. Brexit, elections) caused some volatility, the stock market was quite bullish overall. This indicates that it is time for technology companies to reconsider going public and benefit from the inherent advantages (e.g. marketing effect, increasing credibility). It will not be hard to increase from a low base — 13 technology IPOs in the US last year: there are many good candidates among tech firms, which can become role models with a significant value increase, and eventually, can attract more issuers and investors back to the trading floor.
These trends show that there is enough liquidity on the market to boost startups, especially with tech focus. However, investors are more conscious: they are looking for real value, they do not poor money into overvalued superstars, and they pay more attention to thorough risk management.
The Human Factor
There is one more aspect I find extremely important in our hyperfast, digitalised and performance oriented world: PEOPLE. First of all, I see and feel the growing importance of quality leadership. While scientific knowledge, industry specific expertise, business skills are a must to make a successful company, people management is getting a top priority. Finding the right candidates, hiring, building a valuable talent pool, employee retention mean a real challenge in the current competitive environment. Therefore, I think visionary and empathic C-Level Executives will be the real differentiators for future investments. The task is to create a diverse team which can still fit together and is able to exploit the benefits of team work and cooperation. If this mission is successfully completed, the company will possess the most valuable asset from all.
As pointed out earlier, I believe that developments should not forget about the human factor either. Eventually, every technology solution targets and serves people — as users, clients, leaders, employees. Not the other way around. Thus, innovators cannot, and hopefully will not forget about the ultimate goal.
With that I wish you all an innovative, prosperous, and most of all, people-centric new year! May The Rooster Force Be With You!
