WHERE ARE EARLY-STAGE INVESTMENTS GOING?

Smart money from startup investors follows ever changing trends in terms of sector, region, stage, and instrument. Startup investors, including business angels, VCs, family offices and corporate VCs can invest directly into startup investment rounds, or join co-investment funds, syndicates or invest in other funds. Funds are increasingly set up as specialised sector funds. They also differ depending on the active or passive involvement that they exercise in the startup. Blockchain technology and ICOs are also changing the landscape of startup investments, even though, similarly to crowdfunding, they are relevant only to some companies depending on the business model and characteristics.

Sectors are key to the majority of startup investment decisions. What business angels invest in may be more varied, depending on recommendations and special interests, but many funds tend to look for specific sector investments based on the latest trends. Technology and business model is becoming key to any new venture’s success. At the moment, AI and machine learning, blockchain, B2B and enterprise-related business models, as well e-commerce platforms tend to catch the investors’ attention. Early-stage startups in sectors that are not among the current top trends, may have a harder time getting through to top investors, but they have the option to concentrate on investors who specialise in their industry, as well as to adapt their business model to the current growth trends. Even more diversified investment funds tend to look for specific sectors, due to FOMO (fear of missing out), by following the lead of experienced investors and funds. Increasingly, many VCs are opening specialised funds, or are born specifically to invest in a particular sector, which helps the fund become an expert in the field, and to market the fund to their respective investors more clearly.

Blockchain companies have become a ‘must-have’ in many portfolios, as the sector could potentially have very wide applications. Many startup investors are also participating in ICOs and crypto-investments, which may have taken away some liquidity from the traditional startup fundraising market, and may have taken attention away from other technologies and business models with high-potential. It’s difficult to foresee the impact of ICOs: on one side, they bring the much needed liquidity and exit possibilities that early-stage investors need, while on the other side they do little to increase trust and transparency in startup investments. To avoid regulations, many ICOs have been in the form of utility tokens, with unclear regulations, no real traction for many, uncertainty in investor returns (as the future of the utility token market is hard to predict) and currently little utility, which resembles more reward-based crowdfunding. Occasionally some small investors also seem to believe that they are investing in a company, in ownership, in equity, which adds to the confusion. In the future, it is likely that utility tokens will take place mostly for growth stage companies that will sell a real utility to investor, and that more ICOs will be in the form of security tokens, once regulations become more certain.

Some say that ICOs have allowed for investors to put their money in teams that they have never met, on the other side of the world. But in reality, in many cases nothing stops investors from doing the same with traditional startups. Early-stage investment risk is mostly about the team and their ability to implement their business plan and sell, that’s why, at least for the lead investor in a round, it is important to know the team, possibly over several interactions, which is difficult to do with overseas investments. ICOs instead, have made risk acceptable, as investors have been attracted by the potential huge returns of these investments and the hype, but that doesn’t eliminate the team risk of seed stage startups that raised millions without having a finished product.