What the Future Looks Like: Top Trends in 2016 Startup Investing

“The best way to predict the future is to invent it. The second best way is to finance it.”​ — John Doerr

At AngelList, the largest platform for startups, I get to see the future being built. We host over 500 early stage venture deals a year — 20–30% of the market in Silicon Valley alone. These seed startups, often just a few people in a loft, figuring out what to do with the million bucks they raised, are the ones inventing the future.

It’s been a privilege to see what they’ve done in 2016. I’d like to share some of it with you.

Many of the startups haven’t announced their fundraising yet and are still in stealth mode, so I can’t give too many details. I also don’t speak for AngelList; these are my personal thoughts.

Here are the top trends I’ve observed from the early stage venture market this year:

1. Infrastructure for the Post-Job Society

The Post-Job Society is a colossal trend, long in the making. Fifty years ago America reached its apex as a “society of laborers”, as Hannah Arendt put it. Then the advent of automation emptied the factories and liberated mankind from its oldest burden, “the burden of labor and the bondage of necessity.” Meanwhile computing, software, and the Internet made it more efficient for the remaining white-collar work to occur outside the corporate-job structure.

In the last 10 years we saw the seeds of the Job Society’s complete unraveling, with sub-trends like the “gig economy” and the rise of globetrotting “digital nomad” workers.

Now in 2016 dozens of companies received funding to build out the infrastructure for this uprooted, post-job world. This is the largest trend I’ve observed in the B2C space. Some examples include:

  • Living: co-working spaces are in every city. Next will be co-living spaces. Common, Roam, and WeWork’s WeLive make it easy for affluent digital nomads to forgo not just homeownership but home rental, hopping between rooms in a network of communal living spaces around the world.
  • Earning: the Online Marketplace is replacing the Employer. The biggest ones are already here — like Uber, AirBnB, and Etsy — but there are still more niches to build out, like Josephine for offering home-cooked meals or Teachable for hosting your own online courses. Backend infrastructure businesses are also getting funded: Jobble helps businesses find and vet on-demand workers and Jobbatical connects wannabe nomads to short-term gigs overseas.
  • Finances: a new bank focuses specifically on independent contractors, offering cash advances and loans to grow your Uber or AirBnB business. Many startups are tackling the outdated credit scoring system, which is primarily based on your domestic employment history. PayJoy offers microfinancing tied to your phone, SoFi offers loans based on your education, and Pave and Upstart will finance your coding bootcamp.
The biggest B2C trend is startups building the infrastructure for a post-job society

2. Business is eating the software

When Marc Andreessen wrote that “software is eating the world” in 2011, he told a story of tech companies competing head-to-head with traditional enterprises. Netflix taking on Blockbuster, Amazon bankrupting Borders, Uber and taxis.

Businesses are finally catching up. The last half decade was dominated by horizontal cloud apps and SaaS business models, like Salesforce and Box. Now startups are succeeding at selling vertical solutions into highly traditional sectors.

The biggest B2B trend is the surge of vertical SaaS startups that sell self-serve solutions deep into traditional and opaque industries.

Startups are selling into all levels of these organizations. Think:

  • Facility management software for schools to rent out their gyms
  • APIs for insurance providers to cross-sell warranties for similar products
  • Workflow software for hospitals to improve the patient handoff process

And the biggest category:

3. Rise of Govtech

Government technology is the sector I’m most excited for in 2017. Most investors shy away from Govtech’s long and opaque sales cycles but startups are quietly proving that they can get it down to under 3 months. And the spoils are massive: with US government spending over $7 trillion even small niches, like a startup replacing actuarial reports for pensions, have billion dollar market sizes.

Many of the early startups have been funded by one small VC, ron bouganim’s brilliant Govtech Fund. But 2016 saw greater interest from a larger group of VCs, angels, and the top accelerators. Govtech may soon be as big as FinTech or HealthTech.

4. “Come for the Tools, Stay for the Network” goes B2B

Last year, Chris Dixon, a partner at Andreessen Horowitz, wrote about how consumer startups like Instagram would offer “single-player” tools to bootstrap a network. This strategy is even more applicable to B2B startups.

When a startup sells a vertical SaaS tool they don’t just on-board their customer but a network of all the other businesses that the customer works with. The SaaS tool shines a light on an opaque market, surfacing valuable data and social graphs. There’s a huge opportunity for the SaaS provider to connect the network, charging fees for transactions and referrals like a marketplace business.

Examples of bigger tech companies pursuing this strategy include Houzz (for home design), Honeybook (for event planners), and AngelList (for startups). I’ve seen dozens of SaaS companies funded this year where the “come for the tools, stay for the network” strategy is front-and-center in their pitch decks. Vulnerable business networks include:

  • Commercial Construction: general contractors, subcontractors, and building owners constantly work together to manage bids, track purchase orders, and review projects.
  • Online Education: online providers and new models like boot camps are unbundling this industry. Administrative services that were once bundled inside the university — think career services, financial aid, the registrar — are now becoming SaaS startups. Each SaaS offering has an opportunity to reconnect the network.
  • Government Procurement: loosely connected departments, massive contractors, and thousands of subcontractors make up this extraordinarily opaque, trillion dollar market.

5. “AI for X” is everywhere

As Fred Wilson predicts for 2017:

AI will be the new mobile. Investors will ask management what their “AI strategy” is before investing

VCs preempted this trend perfectly. When corporate executives consider how they will execute an AI strategy they will find dozens of well-funded startups waiting to service them.

I can’t think of a single sector that AI and machine learning won’t disrupt in some way. Some early examples include Numerai for hedge fund investing, Appdiff’s smart bots that test mobile apps, and People.ai for managing sales reps.

The biggest problem for AI startups is that their machine learning models require massive amounts of data. One popular solution is to build a vertical SaaS solution that collects customer datasets. Some of those AI-enabled, vertical SaaS startups may even turn into network-driven marketplaces… bringing together 3 of the trends in this article.

Note: if this describes your startup, tell me where to send the check

6. Slack is the platform for mobile enterprise apps

Investors talked about mobile enterprise apps and the consumerization of the enterprise for years. It turns out that selling standalone apps to customers obsessed with integration and security is really hard.

A few startups succeeded — Slack and Symphony for communication, Dropbox and Box in file storage — but the many remaining use cases will have to be filled by startups that leverage the new incumbents as a platform.

Any one of those companies could have become the mobile-first platform for enterprise tech, but now Slack is pulling away. Slack announced an $80M venture fund for Slack-based apps in July and many great VCs have been co-investing alongside them. Dozens of companies have been funded so far, tackling use cases like mobile-first business intelligence dashboards, an HR bot to collect employee feedback, and a tool for accessing sales data.

7. Autonomous transportation

This is really an extension of the “AI for X” trend, but the massive flurry of deals for autonomous transportation startups in 2016 merits its own section.

It’s a hot and chaotic market, with prelaunch companies funded at seed valuations and then sold for 10–100x markups. First GM bought the prelaunch Cruise for $1B, then a month later Andreessen Horowitz invested $3M into the similar Comma.ai. Uber bought autonomous truck startup Otto for $680M just as one of its main competitors went through Y Combinator.

In less sexy markets these acquisitions would be in the tens of millions, but the market demand is so huge for autonomous vehicles that all bets are off. Nearly every car and tech company has set aside billions in R&D budget for autonomous tech and good talent is hard to find. The smart-money thesis is that most strong teams will be acquired at good markups.

8. Mobile Video

In 2016, the top-tier VCs lined up to pour money into their chosen winners in the mobile video chat space. Sequoia bet big on Houseparty and made a small investment in Tribe, Benchmark poured $20M into Marco Polo, and Greylock Partners and top-tier Chinese VCs put $100M into Shanghai-based Musical.ly.

The thesis amongst the smart-money investors is that Snapchat proved out the video chat use case and showed that it could be monetized. But with its turn toward public features like Discover and Stories, Snapchat may be ceding private use cases to newcomers. Hence the rush into this space.

9. Bitcoin is out, blockchain protocols are in

Excitement over Bitcoin as a widespread consumer payment technology has cooled. Investors are more interested in alternative applications for the underlying blockchain technology, although there have been no breakout use cases yet.

The most interesting trend in blockchain is on the investing side: the rise of ICOs — Initial Coin Offerings — for blockchain startups may upend the venture capital model. Teams of developers around the world are building blockchain-enabled protocols, open sourcing development, and funding operations by issuing digital coins sold in crowdsales. The value of the tokens track activity on the network, which range from prediction markets to a decentralized P2P marketplace.

The crowdsales can be massive: over $200M was raised in 2016.

ICOs are an existential threat to VCs, which are structured to buy equity stakes into private corporations. Yet many of the developer teams behind these blockchain protocols are not even companies. This is one reason why three of the leading VCs in the space — Andreessen Horowitz, Union Square Ventures, and Pantera Capital — invested in Polychain Capital, a hedge fund that invests in digital tokens and ICOs with a venture-style approach.

Full disclosure: I am also a small investor in Polychain.
The rise of Initial Coin Offerings for blockchain startups may upend the venture capital model.

The great thing about trends rather than predictions is that they are real. Everything in this article is happening right now. Still, most startups fail and many of these trends may never reach mainstream adoption.

Nor are startups responsible for all future-building: much of it happens inside Amazon or a Google lab. But in this era of unprecedented M&A, especially amongst old-line companies acquiring tech startups en masse, many enterprises are essentially outsourcing their R&D. That means that startups are more important to the future than ever.