Venture capital is a type of financing or private equity provided by individual investors to startups and small businesses that have the potential for explosive growth. Venture capitalists fund start-ups with exceptional growth potential, or companies that have experienced rapid growth and have the potential to keep growing and expanding in the future.
Being on the cutting edge of innovation comes with a short time horizon for inertia so the venture capital industry is, by definition, fast-changing.
To help keep pace with the changes and developments in the ecosystem, entrepreneur and Venture Capitalist Dale W. Wood shares his own insights into the top trends in the venture capital industry. A veteran investor in several top-notch businesses, Wood is the CEO and founder of Dubai-based venture capital firm Dale Ventures. His firm has active investments in the financial services, real estate, technology, and media industries.
Here are the top trends in venture capital investment that investors and entrepreneurs should know:
1. “Zebra” companies
While you’ve probably heard of “unicorns” – start-ups valued at $1 billion or more – “zebra” companies bring more to the table than their initial value. While unicorns may appear impressive, oftentimes sustainability and business ethics are the first casualties in their growth model. Zebra companies, on the other hand, focus on business sustainability and how their operations affect both the environment and society.
Essentially, the zebra trend of funding focuses on investments in businesses that are successful, sustainable, and good for society as a whole. The annual revenue targets for zebra businesses range from $1 million to $5 million and, while these companies might not be tech companies, they are technology-enabled. A zebra company is both black and white: It strives to better society, while also being profitable.
Zebra companies often enable local communities to grow economically, and they’re able to respond quickly to changing consumer needs by adapting their business models and functions, which make them attractive to investors. Zebra companies are realistic businesses that work to achieve both revenue growth and cultural inclusion without sacrificing one for the other.
Investing in the cryptocurrency ecosystem is a trend that gathered steam during the COVID-pandemic, and it doesn’t seem to be letting up completely. Compared to other industries, the cryptocurrency sector is relatively new and has capitalized on the demand for digital capital. And although investing in crypto is risky, it can also be profitable if done astutely to diversify portfolios.
For any cryptocurrency project to be successful, widespread adoption is necessary. A cryptocurrency project’s success is not guaranteed, but early investors in a successful project may become wealthy over a relatively short period of time.
Although other risk factors still exist, the cryptocurrency industry matures as its adoption rates increase. So companies and investors that confidently invest in this sector get a direct hold on new cryptocurrencies.
3. The growth of the SaaS sector
Even though the pandemic affected almost every industry, investments in Software as a Service sector – known as SaaS – have been profitable for many market players. The demand for more cost-effective and efficient cloud-based models has only increased because of the rapid digitization that the changing business environment demands.
SaaS is one industry that is expanding quickly among all subsectors. The Software as a Service model is subscription-based and centralized on a remote cloud network. They are growing in popularity for several reasons, including flexibility and affordability.
SaaS products differ from other technology-based options because users can run and update the application or platform directly on their existing devices needing only an internet connection, eliminating high upfront costs and the need for regular downtime during software updates.
The key benefit of investing in the SaaS sector is the sheer demand for the technology service. Entrepreneurs worldwide can quickly deploy a solution that solves specific problems faced by businesses, meaning a select few influential players can no longer control the game. This competition provides favorable investment opportunities to venture capital firms and individual investors alike.
4. Themed investing
Thematic investing is a recent trend that has gained prominence. Thematic investments target investment opportunities in broad trends instead of relying on a single company’s financial fundamentals. Investors prefer this approach because it enables them to invest in various specialized industries for concentrated exposure consistent with their beliefs and values.
Venture capitalists follow a systematic process to analyze thematic investments.
Defining and considering thematic trends: This is the first stage in the process, where the venture capitalist conducts an internal evaluation to weigh the potential investment trends and gains.
The investor needs to consider and answer several challenging questions during this process, such as if the trend is conjectural or short-term, what the possible effects could be when such businesses become successful, and the impact of the trend’s success on researchers and the general public.
Holistic impact of trends: Investors should be able to recognize how one sector generates more revenue than other subsectors. Investors will only benefit if they consider the speculative effects of the business over more than one region or society.
Selection of themes: Venture capitalists select themes that support their investors’ beliefs or innovative trends that are becoming increasingly popular.
Many factors come into play when choosing an investment theme, and the venture capitalist needs to reconcile their beliefs and values with the financial upsides. Among other concerns, investors will consider the theme’s investible value, its ability to stand out from the competition, and whether it fits into the investor or firm’s current portfolio and investment guidelines.
Creating an investment thesis: The investment thesis should focus on the practical application of the investment theme. This theory should explain the need to invest a specific amount throughout a period of time. How the trend’s success will affect the industry should inform the development of the investment thesis.
Building the investment roadmap: The final step is to create a scan and screen process highlighting the best themes, potential targets, and success rates for each trend.
5. Portfolio Diversification
If the industry suddenly changes course, a venture capitalist risks losing all their money at once, so firms and investors tend to adopt a diversification strategy to hedge against sudden, precipitous events.
Investing money in different companies spreads out the overall risk associated with the portfolio. Its main goal is to reduce investment risk if any one company or approach turns unprofitable. By diversifying portfolios, venture capitalists have a greater chance to minimize the specific or inherent risk to a particular business or market sector.
By using the extensive experience of Dale W. Wood, we hope the breakdown of these trending approaches will help investors make profitable decisions, and help budding entrepreneurs prepare better to capitalize on the latest investment trends. For both sides, research, viability, and security must be at the top of mind to allow both an investor and an entrepreneur to capitalize on a successful partnership.