2016 marked the first time in 5 years that the growth of the stock market slowed down. It is not likely we will see any significant stock market growth in 2016 either. This prediction is due to things like interest rates and less of a demand for oil. The venture capital market is no exception to this fall.
After many years of experiencing rapid growth, it seems the venture capital market has calmed down. Business valuations for startups began to flatline in 2015, meaning that investors have had reason to focus their money on other industries. This is not only problematic for startups just entering their industry, but it is a phenomenon driven by flawed principles.
When investing In a company, venture capitalists are now looking for ‘unicorns,’ or companies that can quickly earn a lot of money. Another flawed principle is that the software industry is the only industry worth investment; the hardware industry has fallen by the wayside. These are followed by the belief that the only worthwhile startups come from Silicon Valley.
Some careful research and examination would prove these three principles to be foolish. The truth of the matter is, unicorn valuations do not equate with a company’s actual value, the software industry is not the only worthwhile startup industry, and, of course, successful startups exist in places other than Silicon Valley.
The unicorn valuation is a widely disputed concept in the startup world. There is a risk behind investing too much money in one company, no matter its projected potential. Even Uber, which is now a household name, does not have a value that matches its valuation. Venture investors would be better off investing smaller amounts in multiple companies. Furthermore, studies have been done that prove focusing on one concentrated geographical area is detrimental to the startup industry as a whole. Also, software innovations are creating industries that make hardware necessary as well, which means that the software industry is no longer the only worthwhile industry in which to invest (take, for example, 3D printing.)
All of this information together predicts different trends in the 2016 venture investment industry. Entrepreneurs and investors alike have to look at all of their options, in terms of which industry to join. The software industry cannot be the sole focus. Also, what many have learned about ‘unicorn companies’ needs to be unlearned as quickly as possible.
All in all, we cannot do the same things and expect positive change in 2016.
For more information on venture investment in 2016, read this Forbes article.