As the year winds down, I’ve been thinking about next year and what will be different from 2014 in startup tech and public market land. Below are some predictions. Below that are my predictions from December ’13 on what would happen in ’14, so we can grade how I did.
Themes for ‘15
1) US Internet Will Venture to China – The trickle of activity in China amongst US internet companies such as Evernote and LinkedIn will become a steady stream. At least one large US internet player will find a way to be truly open for business in China and will announce themselves with a formal launch. Once this occurs in ’15, I expect you’ll see more US internet companies start to explore this possibility. The failures of eBay and Google in China will fade as new successes emerge.
2) There Will be a Security Breach at a Government Agency & the US Will Declare a Cyber War – I actually drafted this one before the news of the Sony hack hit. The prediction here is that what happened to Sony will happen to a federal government agency. Major hacking incidents have become commonplace, and more and more companies are prioritizing the need to try to protect themselves. While troubling for the population, we’ll see a huge growth in IT security spend and this will drive strong capital markets activity. We’ll see large private financings for growing security players as well as some potential IPO activity. Despite this investment, expect to see more hacking incidents however.
3) m-Commerce Replaces e-Commerce – e-Commerce will continue to surge ahead in ’15 but we’ll see a decided shift in ’15 toward the popularity of mobile platforms for shoppers for a wide variety of goods including food, soft and hard goods. Mobile apps can be context and location aware, they’re with you on the go and technology advancement is enabling richer and simpler user experience on mobile. We’ll see this shift on college campuses and in urban centers first, but Middle-America will also be part of this move.
4) A Lack of Big IPOs – There are many rapidly-growing, attractive companies at IPO-able scale in the private universe such as Uber, AirBnB, DropBox, Palantir and Spotify. In ’15, I expect to see these companies continuing to tap the private market for capital, where the deal sizes are larger, the pricing is better and the path to capital is quicker so management teams waste less time on this process. Notable exceptions may come from the enterprise world where the premiums in the private market over public market haven’t been as large (such as Nutanix, Pure Storage, Cloudera, Box, which is on file, etc.) and the specialty lending area, where Lending Club and OnDeck Capital indicate a high degree of investor interest. (Note – I’ve purposely excluded all GGV portfolio companies from this prediction so don’t read anything into exclusions of any of these companies.)
Predictions for ’14 – How did I do?
(1) Here Comes China – Big, powerful Chinese technology companies such as Tencent, Alibaba and Baidu are not only spending more time in the United States, but also staffing-up here. These companies will be very active investing in and acquiring (mostly mobile) startups in the US in 2014. The China influx will impact the venture capital business, M&A, and IPO scenes. These companies represent a brand new, well capitalized set of buyers and investors in tech.
- All three of the big Chinese tech players have increased their presence in the US. Alibaba had a very active year with investments in Tango, Quixey (alongside GGV), Lyft and Kabam, to name a few. Tencent has made many investments in the US as well including Snapchat, Weebly and lots of smaller bets. No major US M&A from these players… yet.
(2) Hedge Funds as Tech Investors – Hedge funds (and mutual funds) are the newest actors in the pre-IPO investment stage. What began as a trickle of hedge funds in venture this year will increase to a torrent in 2014. Companies now stay private longer — as a result, they’ll seek private rounds to fund growth. Hedge funds are structurally different than venture firms, and founders need to know the differences, which present both opportunities and risks.
- Hedge and mutual funds are investing but we’re not quite seeing a “torrent” of activity from this group. The ‘14 market downdraft from February through May for tech stocks, especially B2B names, punished the tech focused hedge and mutual funds and they’ve been slightly less active in venture deals since then. That said, they’ve continued to line up to participate in pre-IPO winners such as Uber, AirBnB, Box and Palantir.
(3) A More Serious Shift To The Cloud – Incumbent technology vendors face serious headwinds, caused by the rise in public cloud computing options. IT spend will shift even further away from traditional technology capex spend to lower price opex with SaaS and cloud vendors. Losses felt by incumbents are potential gains for startups. Native mobile and cloud companies are surging ahead in this environment, stealing market share and exhibiting very high growth.
- The shift to the cloud is happening even faster than I envisioned. Despite the above-mentioned public market downdraft for many cloud companies from Feb – May, underlying performance of the cloud stack companies has been very strong. New cloud IPOs for Zendesk (a GGV portfolio company), New Relic and Hortonworks, have all been well received, and there are many other strong private cloud companies gearing up for IPOs.
(4) A Wide Open IPO Window – Native mobile and cloud companies benefiting from the shift described above in #3 will continue to be viewed favorably by public market investors. Expect several successful IPOs from mobile and cloud companies, especially those focused on the enterprise and SMB, in 2014.
- Despite the strength in underlying performance of many cloud companies mentioned above in #3, the IPO marketplace has been pretty tempered. Of course, Alibaba (a GGV portfolio company) executed the largest IPO in history, companies such as Lending Club, GoPro and Zendesk have performed very well and the headline numbers in ’14 weren’t bad (up 20-30% in terms of number of IPOs from last year), but in terms of overall depth and breadth, 2014 will not go down as a banner year. Lots of the best companies continue to sit on the sidelines and many who’ve filed haven’t gotten out yet.