Before I began my career as an institutional investor at Indicator Ventures, I spent years as an active angel investor, as well as an advisor and mentor to early-stage businesses. When I decided to take my venture capital activity to the next level by creating a fund, I had to convince potential investors why this was an exciting time to be involved with early-stage venture capital.
Specifically there were three observations that I saw that helped to paint a picture for the landscape and encapsulate the opportunity in my mind.
First, the landscape. This can be described in a number of ways, but let’s look at three distinct pieces. These three trends are directly related and together drive an incredible cycle.
1. Proliferation of technology
With more than one billion smartphones shipped in 2014, there are now more connected devices than people on earth – a staggering statistic that will only increase with the commercialisation of wearables and the internet of things. On the software side, open-source programming and APIs spawned countless new applications and platforms, both on the web and mobile. In other words, digital technology growth seems to be moving faster than ever before.
2. Surging adoption and usage
Innovation across all technologies has enabled consumers and enterprises alike to enjoy massive efficiencies in all aspects of life. From getting a taxi (Uber) or vacation house (Airbnb) to messaging friends across the globe for free (WhatsApp), people are using mobile and web technology at unprecedented rates. To put this in perspective, more data was passed through the internet last year than in the entirety of history. Needless to say, there is a clear linkage between usage/adoption and technological innovation.
3. Infrastructure built to support demand
To support the global shift to connectivity, specifically web, mobile, cloud and the internet of things, broadband and mobile speeds have drastically increased, wifi hotspots have become ever more prevalent, and data analytics have risen to the forefront to help people and businesses understand how to more effectively use technology. Now even Google has entered the broadband arena, claiming fibre-optic connection speeds exceeding those offered by existing providers by more than 100 times.
So to recap, we see digital technology moving faster than ever, we see more people adopting this tech and using it more than ever before, and we also know that the infrastructure to support all this activity is scaling to meet the increased demand. If this isn’t enough to get you excited about the prospects in the space, let’s look at why we see a bright future here.
Given that the first observation is the ‘proliferation of technology’, one might sensibly wonder whether this might slow down at some point – surely no sector can experience snowballing growth forever. Yet from everything we can see, sector growth is not slowing. In fact, all forecasts show increased growth. Between 2013 and 2020, mobile, social, cloud and big data are projected to drive around 90% of all growth in IT – a multi-trillion dollar addressable market. User adoption rates and usage frequency will continue to rise, if not accelerate. The amount of new technical information is set to more than double in size every two years, driving further innovation and infrastructure.
While it’s great to see that more and more technology is being deployed, and more and more people are using it, what does this mean for investing in digital technology businesses?
What we have witnessed and continue to witness is an environment that fosters hyper-growth. To put this in perspective, it took radio 28 years to reach 50 million listeners; with the breadth and scale of today’s landscape, it took the mobile application Draw Something only 50 days to reach 50 million users. The current environment will continue to disrupt markets like never before. While an anomaly of sorts, Uber has quickly scaled to more than 250 cities around the world, booked more than 140 million rides in 2014 and is currently valued at $51 billion; Airbnb is now valued at $24 billion (higher than large publicly traded hotel chains Wyndham Worldwide Corp and Hyatt Hotels Corp).
While digital technology companies continue to grow quickly to what many argue are inflated valuations, in many cases tremendous value is being realised.
Exit opportunities are improving: the stock market is relatively strong, corporations are ripe with cash and liberalised IPO rules are taking effect. The new venture fields bring new acquirers to the table, breaking down the acquirer concentration that has suppressed exit values and numbers, and smaller and more nimble venture funds, such as Indicator Ventures, can achieve strong returns for investors from realistic exits. Most notably, 67% of all 2013 acquisitions happened directly after seed or series-A funding, which is the precise opportunity we are looking for. Not surprisingly, early-stage VC investing has shown the best performance of any asset class over the past 25 years, with an annualised return of over 25%.
Learning from experience
It is for these reasons and many more that we are clearly bullish on early-stage investing. However, it’s important to note that with all this exciting activity comes a lot of noise. Just like with any industry that’s booming, people will flock, looking for their own piece of the potential upside. It’s critical that you have an understanding of the investments you are making and the risk profile associated with them. I can confidently say that I am significantly more disciplined and measured as an institutional investor than I was as an angel investor. However, if not for the many mistakes that I made in my early days as an angel investor I might not have learned the things that led me to launching my own fund. For me, being an angel investor was the best way to get into institutional investing. But it was a long road and it may not be the best road for others. For me, the journey began with starting my own business and selling it several years later; if not for this I would not have had the capital to get into angel investing in the first place.
If you’re looking to become more involved, my advice would be to jump right in… but do so cautiously, very cautiously. Early-stage investing is very, very risky. Be prepared to lose every penny. If you can tolerate this kind of investment, try to learn as much as possible from it. How was the deal structured? What were the terms? It’s incredible how small legal terms can end up having a significant effect on an outcome at exit – they could mean the difference between losing your entire investment and actually seeing a return. Make sure you know and trust the team. Look at lots of investments before actually pulling the trigger on your first one (it will help give you better context). Make sure you can be involved on some level (this helps you learn and should also help you stay informed). Try to invest somewhere where you have some sort of domain expertise (this way you can actually help on some level). If you want to just place a bet and hope for the best, you might be better off picking stocks! Either way, good luck!