(This post is part of the Think Next thought leadership series)
2016 has been a year of consolidation in Venture Capitalists, and their future in the coming year is still a tad uncertain. Two world-changing events this year have caused a sea change in the financial sector, with their effects set to spill over into 2017 and possibly, carve a new path for VCs. This topic has found its way into every conversation we have had with VCs at the Accelerator this year.
Here is the summary of how these global events have (and will continue to) impact Venture Capitalists worldwide in 2016.
The Brexit Aftermath
Britain’s majority vote to leave the European Union has seen severe repercussions — not just politically but business-wise as well. VCs who were initially enthusiastic to raise funds from UK are now plagued with uncertainty over the country’s economic future. This has led to many VCs holding back on funding British enterprises, and in some cases, cancelling projects altogether.
However, while the world waits for UK to determine its new financial relationship with EU other countries have begun to woo unsure investors. Chief among them is Germany, which is preparing to win over VCs with its powerful infrastructure for Fintech businesses. Berlin’s capability to be the new Fintech center of Europe is so strong that British enterprises such as TransferWise and Revolut have even considered moving to the City. As Jochen Siegert, COO of Frankfurt-based payment platform Traxpay, sardonically tweeted after Brexit — “London has committed suicide as a leading Fintech center.”
Political Changes in the USA
Another event that has matched Brexit, in terms of affecting VCs worldwide, is the new presidency in USA. Silicon Valley is waiting in anticipation for the government’s next move on international finance and immigration, and how it will affect the future of its startups. Moreover, the Federal Reserve is now under increased pressure to curb overseas spending and keep as much American money within the country as possible. This is a move that has raised red flags in the VC community since it will lead to less money being sourced from USA.
However, VCs are still cautiously optimistic about their chances with American startups. Union Square Ventures partner Fred Wilson recently noted that over the years, many companies have risen to prominence in times of financial strife. Wilson added that despite the current climate, VCs will eventually continue to look for the best companies to fund.
What does this mean for VCs in 2017?
1. Do More with Less(er)
Due to these events, VCs’ popular sources of capital will see a reduction, leaving them with a lot less to invest in startups globally. Even if a VC firm is bold enough to continue funding prospective startups in this climate, it will have to do so with a lot more caution and care, especially while assessing the financial standing and growth prospects of these startups
2. Location, Location, Location!
Another upcoming trend in Venture Capital is a heightened emphasis on location. In the aftermath of Brexit and USA’s General Election, international VCs are looking towards the growing startup ecosystems of developing regions such as Africa and South-east Asia. Large enterprises are setting up entire departments dedicated to entrepreneurship and ready to aid startups looking to sell in these geographies. The US will continue to be the most dominant market in VC funding, but in the year 2017 the developing world may not be far behind.
3. B2B: The Bigger Moneymaker
The biggest change in VC funding in 2017 will be a continued shift in focus from B2C to B2B. Startups aimed at businesses rather than consumers are already winning more funding from investors, who want to see returns sooner than later. According to PitchBook — a Venture Capital database — funds invested in B2B enterprises rose to a whopping $11.9 billion in 2016, and show no signs of slowing down as we approach the new year. Aspiring B2C companies will thus have to be a lot more prepared to secure funding, lest they get caught unawares by the VCs’ shift in focus to B2B.
For VCs, 2017 looks to be a year of increased caution and unexplored opportunity. The paradigm of exponential funding and dominant consumer companies may be irreversibly changed due to the events of 2016. And with this change on the horizon, Venture Capitalists may just embrace a new wave of enterprise-focused companies ready to take on the world.
Raghav KherManaging Director, Microsoft Accelerator Seattle
This week, we’re proud to announce the latest batch of startups joining our Seattle Accelerator’s Fall cohort. With a combined funding of over $140 million, these 11 startups span AI, cloud, and IoT spaces.