2017 saw a rebound in overall VC funding, approaching dotcom-era amounts. This was fueled by continued investor enthusiasm over the venture asset class, including new late-stage growth funds. The sectors that showed the largest growth were those in the business and financial services and healthcare sectors. In 2018, I expect VC investments levels to remain high, but several developments will impact the ecosystem.
Here’s what I see happening over the next 12 months.
1. The IPO market for venture-backed companies will continue to open up. Many have predicted an IPO market comeback for some time. But they’ve considered predominantly tech-focused unicorns. But I expect biotech and life sciences to take the lead. With a new wave of innovation in areas like cell editing, and immunotherapy for oncology and infectious diseases, the biotech and life sciences sectors will be ready to raise money in the public markets to help realize their potential.
2. Fewer than 15 unicorns will go public — and the number could be as low as 10. These companies continue to raise almost limitless amounts of cash from an ever-increasing number of global investors. The availability of quick cash means many unicorns won’t need to go public. Others don’t yet have the proper infrastructure to operate effectively as public companies. Still others have raised money at valuations ahead of their metrics and will need time in the private market to grow into their valuations so they can provide a return in the public markets. For these reasons, most of the unicorn herd will continue to wait in the wings and stay private.
3. Venture funding will continue to hover at near-record levels. We’ll see continued high levels of VC funding throughout 2018 for a number of reasons:
The amount of capital raised for the venture asset class is at an all-time high and shows no sign of slowing. We could be in a cash bubble, with too much money chasing companies. Mega-funding events will continue to keep the dollar levels raised high.
The number of companies in the venture pipeline has never been greater. It’s never been cheaper to start a company — or more expensive to break away from the pack. These realities will help keep venture funding strong as companies will continue to raise capital to realize their potential.
The genie is out of the bottle for technology’s enablement of industries. Technology is just starting to impact several new sectors, including financial services, healthcare, insurance, transportation, and agriculture. This trend has a long tail and will ensure a significant amount of new company formation in 2018 and beyond.
4. Initial coin offerings (ICOs) will pull back, and won’t replace venture funding. According to ICO data, almost $5 billion was raised through ICOs in 2017, while over $71 billion was raised by venture-backed companies. In 2018 we will see a decrease in ICOs as the SEC continues to scrutinize these activities and starts to regulate them more like IPOs to protect investors.
5. Cryptocurrencies will cool down. Bitcoin and other cryptocurrencies have been on a tear this past quarter, producing incredible, unsustainable investor returns. With unrealized gains being posted, this market has assumed a life of its own but will start to cool before the summer. There will be a major correction, which will be the biggest test for the entire sector.
6. We will continue to see VC-funded companies fold or be sold. Some of the sales will be below the companies’ last rounds. This won’t be the end of the world. The natural process of the venture ecosystem is that companies are funded and go out of business almost daily. There are more than 18,000 venture-backed startups in the United States alone — all competing for capital, talent, space, and customers. It’s unrealistic to think all of these companies will survive as funding reverts to historical norms. Entrepreneurs will need to be vigilant about how they deploy the precious capital they have raised, challenging every assumption in their models and pressing hard to do more with less. They must distinguish themselves from the crowd and be positioned to raise additional capital to take the next major step in their evolution.