For an asset class that ought to be reinventing itself on a regular basis, it’s stunning to see how resistant some enterprise funds are to vary.
As a companion in a fund of funds, I attend plenty of annual conferences, discuss with plenty of enterprise fund common companions and evaluate plenty of investor decks.
What has significantly stunned me is what number of funds inform precisely the identical story and spend money on precisely the identical areas: B2B SaaS, cybersecurity, cloud infrastructure tech, e-commerce manufacturers and crypto/fintech.
As I’ve written many instances earlier than, enterprise is about elephant searching. Nice funds have at the least one, and ideally just a few, enormously profitable, fund-returning investments. Possession and letting the nice corporations “experience” (and never promoting them early) is essential to getting outsized returns.
However, the outsized returns solely come from corporations which can be market leaders in monumental markets. The second-place firm, and generally, the third-place firm can win, too, however in fact won’t be as giant. However the corporations that find yourself at #300 or #99 and even #20 in a market don’t find yourself nearly as good investments.
I used to be serious about this lately once I checked out a map of martech SaaS companies that chiefmartec and MartechTribe ready lately. What’s superb is what number of advertising and marketing SaaS corporations nonetheless get funded:
Picture Credit: Scott Brinker of chiefmartec and MartechTribe
Whereas not practically as dangerous as advertising and marketing tech, we’re seeing an enormous inflation within the variety of cybersecurity and fintech corporations as nicely.
A remark that I more and more hear in my conversations with CISOs, for instance, is that they aren’t wanting as a lot for brand spanking new level options as a lot as a broader platform that can change tens of the numerous cybersecurity purposes they’ve of their techniques. In a market the place capital shall be more and more tough to boost, most of the hundreds of “me too” cybersecurity corporations will discover themselves turning into more and more “insecure.”
The identical is true for some areas of fintech. What number of extra fee corporations might be created? What number of extra e-commerce finance corporations can survive and flourish?
Marc Andreessen as soon as stated that “software program is consuming the world.” Sadly, me-too investing is consuming returns.
So, what ought to enterprise funds do?
As an early-stage VC, it’s not vital to spend money on what’s sizzling in the present day, however investing what shall be sizzling in 5 to 10 years from now. The VCs that spend money on the leaders of tomorrow’s markets would be the ones who generate outsized returns.
That doesn’t imply one must cease investing in SaaS, cybersecurity or fintech. There’ll all the time be disruptive corporations in these segments, however the stability must shift to the large markets ripe for disruption by applied sciences which can be underfunded.
In my opinion, there are 4 comparatively underfunded areas that would produce big winners over the subsequent 10 years:
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