The year fast coming to a close was unlike any other in our lifetimes. In prior posts, we shared our observations on the state of venture and tech as the market swooned; we foretold the waning influence of Silicon Valley as smaller ecosystems benefited from the exodus of tech talent (and now VCs) from the Bay Area; and, during the market’s March bottom we made our Bull Case for why LPs should stay the course and continue investing in the VC asset class, market gyrations be damned.
Now, in these closing days of 2020, the Dow flirts with 31,000; two highly effective vaccines are being deployed around the world; and, we’ve experienced a wave of highly successful technology company IPOs and M&A transactions that rival any vintage since the heady dot-com days of the late 1990s.
As 2021 comes into view, we turn our attention to 4 expectations of what we expect to see in tech and venture in the coming year:
1. The “decoupling” of capital and geography, accelerated by Covid-19, expands and matures.
We at Catapult, as a venture firm founded on the premise that geography was becoming less relevant as an impediment for startups to access capital, have long argued that as cloud adoption and remote workforce collaboration technologies became mainstream, more companies would eschew costly tech hubs like Silicon Valley for smaller locales offering reduced operating costs, more diverse talent pools, and lower team attrition. With little argument, the pandemic has accelerated this trend by an order of magnitude. Stories of tech talent and VCs moving from the Bay Area to places like Miami, Austin, and Seattle have gone from a theme to a meme in the space of a few months. We wholeheartedly expect this trend to continue in 2021 as more venture funds both adapt to investing via Zoom and more unicorn-caliber companies emerge from tier 2 cities around the globe, fueling a virtuous cycle of experienced VCs establishing themselves in these smaller geos to generate deal flow which, in turn, increases the amount of capital in those hubs and the likelihood that local startups can break out of their regional markets and generate big outcomes which, in turn, attracts more VCs to the area, and so forth.
2. Numerous unicorn companies will be built on the Zoom platform as remote work becomes the new normal.
Even the most optimistic prognostications of how the global economy will recover as the pandemic fades from view envision a workplace that will be a hybrid one: a patchwork of the traditional in-office work experience with a WFH/virtual office arrangement. New tools and technologies — particularly around security, data, collaboration and productivity — will address the increasing needs we will all have for the workplaces we will inherit post-Covid19. Correspondingly, we will see a stacking of services which will sit on top of these collaboration technologies— particularly that of Zoom which arguably has itself become a platform — and several unicorn companies ultimately emerge from the Zoom ecosystem.
3. The “creator economy” picks up where influencers left off, enabling talent to go direct, own their brands, and their audiences.
While the pandemic-fueled ecommerce boom has been enormously helpful for many new and established Direct-To-Consumer (DTC) brands, a less frequently discussed trend has been its impact on the creator economy. In 2020, TikTok emerged as a formidable challenger to YouTube’s apparent hegemony as the de facto platform for creators to build and monetize their online brands and following. This was something of a wake-up call. Against the backdrop of increasingly restless governments willing to take on tech platforms, myriad scandals over user privacy, and strategic missteps by Facebook and others, creators of all stripes are more insistent than ever of owning their brands and audiences. Creators are opting to bypass traditional routes to building a brand and are, instead, distributing content directly across an increasing number of new platforms tailored to their needs. While companies like Patreon and OnlyFans are not new, the pandemic — with its halting of live events — alerted many creators to the imperative of building communities of fans and of not being beholden to third parties (or their fickle algorithms) for their livelihoods. We expect to see a flurry of new services and products tailored to creators which will have the long term effect of chipping away at YouTube and Facebook’s market power.
4. Innovation and disruption in venture will continue to fuel a renaissance across the asset class.
If the pandemic has radically reshaped the technology landscape then it stands to reason that venture capital investors, as the primary funder of technology innovation, are also being forced to adapt to these changes. And these changes mean more than simply getting comfortable investing over Zoom. The changes are structural; and, for many, existential.
That realignment is well underway. Like so many things we’ve experienced in 2020, change was afoot long before the onset of the pandemic. Covid-19 was merely a potent accelerant. This is evidenced by the hundreds of new funds, many of which are focused on investing at Seed stage out of small vehicles — i.e., $25mm and below— and that have a clearly defined sector or thematic focus. While these new funds have garnered much of the media’s attention, these are just part of a broad diffusion across the venture asset class which has blurred the lines of what constitutes a venture fund nowadays. Indeed, today there exists a veritable alphabet soup of new fund approaches, strategies and structures: “Rolling” funds, investor-operator funds, sweat equity funds, solo GPs, solo operator funds, startup studios, multi-operator funds, and so forth. Against this backdrop, many of the more successful legacy VC funds — which, for our purposes, let’s call funds that were formed pre-2000 — have gone on to raise larger and larger vehicles with every fund generation. That AUM creep has pushed many (but not all) of those firms further away from seed investing and, in some cases, away from classic early stage venture investing entirely. Others have raised so many separate funds across their platforms — late stage funds, early growth or continuity funds, SPACs, hyper-thematic funds, crossover funds, etc — that they more closely resemble multi-stage asset management firms than classic VC funds of old.
The good news is that all this innovation and disruption across VC accrues to the benefit of entrepreneurs. More sources of capital means more worthy entrepreneurs will get the backing they need to coax their startup ideas into their fullest expression; and, more available talent post-pandemic and falling prices for services and infrastructure globally means those investment dollars will go farther; hence, enhancing venture returns. The hundreds of operator-investor and nano funds will fill the gap at the seed stage left vacant as established firms move upstream, while legacy funds that consistently turned in mediocre performance the last few cycles will either downsize or wind down entirely, unable to justify the management fees they require to support expensive offices and layers of human resources in a market that no longer values such things in the way it did a few short years ago.
Jonathan Tower is Founder and Managing Partner at Catapult. Catapult is a global early stage venture firm with assets in multiple geographies investing in the best startups from fast-emerging tech ecosystems outside Silicon Valley and helping those companies achieve global scale. Jonathan’s previous investments include Dollar Shave Club ($1Bn acquisition by Unilever), Jet.com ($3.5Bn acquisition by Walmart), Freshly ($1.5Bn acquisition by Nestle), IfOnly.com (acquired by Mastercard), MapR Technology (acquired by Hewlett-Packard), Madison Reed, Qumulo, and many others that went on to great outcomes.
Jonathan writes frequently on venture capital and technology topics on his blog, Adventure Capitalist, and he’s been a frequent contributor to The New York Times, Fortune, The Wall Street Journal, FastCompany, Forbes, The Washington Post, The LA Times, and other leading publications.
Follow Jonathan on Twitter @jonathan_tower