The New Year is upon us and it is already shaping up to be an exciting one in the entrepreneurial ecosystem. I have several predictions for the year ahead that I want to share. Overall, my guess (and utmost desire) is that it is the year where reality starts to set in and bubbles begin to burst, from AI to crypto and beyond. Without further ado, here are my predictions:
- Valuations will begin to come back down to earth. The 2017 IPOs of Snap and Blue Apron saw the public markets making massive corrections to private market valuations. In 2018, hopefully these corrections begin to trickle into the private markets and investors become more wary about investing at inflated valuations. Furthermore, with impending rate hikes, LPs will start to shift capital away from VC/PE as an asset class and more towards a typical portfolio allocation with greater investment in credit assets. This will add further downward pressure to valuations with expectations of less capital in the ecosystem going forward (despite the megafunds of SoftBank and Sequoia).
- The ICO craze will settle down and a few valuable tokens will endure. In 2017, we saw meteoric rises in the value of crypto tokens like Bitcoin, Ethereum, and Ripple. However, with no fundamentals, crypto investing remains highly speculative and the bubble is bound to crash. There are a number of parallels between ICOs and equity crowdfunding, the most notable being an adverse selection issue where investors will begin to see ICOs as a path for “non-venture-backable” blockchain businesses to raise money. Furthermore, regulation will eventually be put in place, again adding pressure to burst the bubble. Nonetheless, there is real value in the promise of cryptocurrencies and particularly the underlying distributed ledger technology. I see a few valuable tokens enduring, most likely Bitcoin and Ethereum.
- Cloud SaaS and AI investment will continue to increase – watch out for voice and automation platform shifts. There are two themes I’ll be watching out for in 2018. First, I’m a huge fan of “boring” cloud SaaS products for old, slow-moving sectors and still have a lot of conviction that there will be valuable products built here. Software has only “eaten” a small fraction of the world so far and I will be eager to look for companies digitizing other parts of our economy in 2018. Second, AI has also been bubblier than ever in 2017 and I expect much of the hype will fade. There will, however, be interesting platform shifts around voice (given massive consumer adoption of Alexa and Google Home-type devices) and industrial automation (autonomous vehicles, warehouse robots, etc.). I predict these types of AI companies will make major splashes in 2018.
- The valley will begin to focus more on diversity and inclusion. 2017 was an important year in Silicon Valley (and for a variety of industries) with the #MeToo movement revealing major sexual assault and discrimination in the workplace. The tech ecosystem has a long, long way to go towards creating a more equitable and safe environment for all people. This realization is starting to set in and my hope is that 2018 is the year that VCs, startups, and large tech companies alike begin to focus more resources towards creating a diverse and inclusive environment. Funds like Backstage Capital are early pioneers in a movement that I predict will take the tech world by storm – not because they do social good, but because it’s simply good business.