Yet Another 2017 Prediction Post
The Australian venture capital landscape has matured rapidly over 2016 as the category continues to grow into a popular alternative asset class integral to a diverse portfolio. Compared to the preceding year, Australian VC will enter the new year with more than double the number of funds and more than 5x the amount of capital within the sector as a steady flow of global technology success stories provided the impetus for investors and managers alike to enter the space. Undoubtedly, 2017 will be another year of rapid change for the asset class, below are a few of the key trends to be expected:
1 The next wave of technology emerges
Recent years have been dominated by the emergence of on-demand and sharing economies within traditional sectors — Uber and AirBnb being two of the more successful examples. As per the below image produced by Gartner, virtual reality remains the most notable next technology horizon and is threatening to break through to mainstrean adoption in 2017. While at current VR is the domain of gamers, Snapchatters and hardcore technologists, many predict that the technology will be a fundamentally social medium that will redefine our approach to interpersonal communications. VR technology stemming from Facebook, Microsoft, Google and Magic Leap is expected to reshape traditional activities and services from architecture and design to therapy, travel and media consumption in general. Any area of life where “presence” is a part of the use case is set to be transformed by VR. While the key VR players are already heavily capitalised, many with venture backing, VR’s emergence will create an array of complementary products and services for which venture capital will play an important role in 2017. The applications and underlying software relating to the mobile and desktop operating systems of today will have to be reimagined and reconfigured for the interactive world of virtual reality.
2 Fledgling Australian VC grows up
With the proliferation of capital in the Australian startup ecosystem, fund managers will be under pressure to deploy larger cheques to later stage companies. Historically Australian startups have been forced to look overseas for larger funding rounds. However, in 2017, Australian founders will be able to raise bigger rounds locally with investors having to prove their value-adding credentials on a global scale.
3 Human capital flows towards venture capital and startups
An emerging trend of 2016 will come to the fore in 2017 with Australia’s best human capital shifting away from large, established corporates towards disruptive technology-led startups. While the most in demand graduate positions were formally with Goldman Sachs or Mckinsey, look for the best university candidates to join the likes of Deliveroo, Canva and Siteminder. Nimble startups are able to compete in areas other than cash compensation and the opportunity to make a real impact achieve work-life balance and have responsibility is alluring for many. Venture capital will simlarly piggy-back off this trend with thought-leaders trending towards the investing space looking to pick and back the next wave of winners. In the past Australian venture funds have been manned by a small number of experienced operators with either a finance or entrepreneurial background. As the industry matures expect deal teams to mimic the US and increase in size with analysts, associates, directors and operational post-investment teams.
4 Startup valuations face a reality check
Valuations across the US startup ecosystem have been in decline throughout 2016 but the trend has not yet reached Australian shores. Venture capital continues to operate in a price insensitive environment with fund managers preferring to back best in class founding teams solving pain points for substantial market opportunies rather than haggle over valuation. Convertible note structures are becoming more common as investors prefer to avoid valuation conversations with early stage companies. At some point investors will be forced to price funding rounds and expect valuations to be benchmarked to the more mature global markets in which prices have decreased. In 2017 the more sophisticated and experienced investors will become more price sensitive, leaving over-hyped expensive investment opportunities to corporate venture capital arms or angel investors who are typically less price conscious and often investing for strategic reasons.
5 Venture Capitalists deliver on their promises
More startups in Australia raised capital in 2016 than ever before. Many of these deals were competitive with venture capitalists differentiating terms as much on services and help, “smart capital”, than multiples or financials. In 2017 investors will have to live up to those promises with only the experienced operators able to add real value. Expect investors to be under the microscope in 2017 as much as the founders they back.