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Venture Capital Disrupted: Innovation Drives New Models, New Investments

16 Jul 2015 by Susie Steckner

Technology is constantly evolving — not unlike a living organism. It isn’t static. It isn’t constant. Which makes it disruptive. Businesses, even niche businesses, often forget to, or choose not to, evolve with technology and are turned upside down — because their products, their policies, their customer interface becomes, simply put, outdated. We live in a consumer-driven world, and we are often drawn to technology everything — from convenience to novelty. This is Insight’s Disruptive Technology series. We will be addressing how technology enters an industry and does exactly that — disrupts.

When Phil Bosua, creator of the Wi-Fi enabled LED light bulb LIFX, brought in $1.3 million for his invention in a matter of days, the feat was newsworthy as much for the speed with which the capital was raised as for the way he raised it: crowdfunding on Kickstarter.

Likewise, the inventors of a smart motorcycle helmet and family robot each attracted more than $2 million in unconventional funding through their Indiegogo campaigns.

Just as other industries are experiencing major disruptions, the venture capital (VC) industry is seeing huge shifts in how startups are funded, many through ground-breaking funding models.

“When crowdfunding first emerged as a popular model to raise money from groups of individuals, many pundits felt crowdfunding would create a competitive threat to the venture capital model of financing startups,” according to CB Insights. “Today, it’s apparent the crowdfunding phenomenon has indeed affected the VC ecosystem — but as a complementary force.”

Just as important, the industry is reprioritizing what gets funded. Investors are focusing on intelligent technology that is disrupting other industries, from 3-D printing and beacon technology to cybersecurity. They are also targeting on-demand startups, hoping to ride the next Uber wave.

New models, new choices

More and more, traditional VC firms are sharing the stage with new platforms and new approaches to the funding game.

“The story of venture capital is changing. Entrepreneurs have more choices for financing their companies, shifting the historical balance of power that has too long tilted too far toward VCs,” according to an article in Harvard Business Review.

Part of that shift comes thanks to passage of the JOBS (Jumpstart Our Business Startups) Act, which helps grow startups and small businesses by making funding more accessible through platforms like crowdfunding.

Among the more notable shifts in recent years:

  • Investing has reached a new level thanks to crowdfunding platforms like Kickstarter and Indiegogo. Kickstarter alone has propelled about 88,500 completed projects by offering an innovative investment platform through which people have pledged more than $1.8 billion. About 100 projects have each raised at least $1 million. A 2013 Crowdfund IQ report found that 58% of respondents were likely to invest in startups using these platforms. According to CB Insights, “With thousands of consumer-oriented hardware campaigns looking for financing for everything from smart watches to beacon technologies, crowdfunding platforms such as Indiegogo and Kickstarter have provided VC investors with a valuable source for deal flow.”
  • The new online platform AngelList is grabbing headlines as a game changer by pairing investors with startups. Last year, the company raised more than $100 million online from nearly 2,700 investors for about 240 startups.
  • According to No Startup Hipsters, new VC firms like Google Ventures and Correlation Venture are relying on a more data-driven approach to prioritize their early-stage VC investments. The goal: To reach investment decisions faster and boost their chances of success. Correlation Venture, using the tagline “Venture Capital Re-Imagined,” touts its commitment to making decisions in two weeks with ground-breaking analytics.
  • Startups are reeling in non-traditional venture capital from hedge funds and mutual funds, with dollars flowing to high-profile companies like AirBnB, Dropbox and Uber, an industry report from CB Insights shows. “These asset management firms have become among the most active (late-stage) investors in the billion dollar club and frequent drivers of the largest financing deals in tech today,” according to the report.

Next big thing

In addition to new models, investors are looking for companies and innovations that are disrupting industries.

Not surprisingly, the software industry is seeing high levels of funding, according to The Money Tree Report in 2014. The first quarter of that year alone drew $4 billion in software-related investments, while five of the 10 largest deals involved software companies.

“Investments into the software sector continue to remain healthy as investors look for companies with disruptive technology that challenges the norm,” said Mark McCaffrey, global software leader and technology partner at Price Waterhouse Coopers, remarking on The Money Tree Report. “These companies are attracting significant funding from venture capitalists and non-traditional investors alike as their business models continue to provide real value across all sectors and get access to global markets.”

On-demand companies are high on the must-have lists of investors looking for the next Uber or AirBnB jackpot. These online companies are disrupting a range of industries, from food and drink delivery to parking and home services.  Earlier this year, for instance, Instacart, a fast-growing online grocery delivery phenomenon, brought in $220 million in VC funding.

This type of VC funding is likely to grow as more and more on-demand companies enter the market.

“2014 was a big year for getting everything you could want from the comfort of your smartphone,” according to VentureBeat. “But (2015) is going to get even lazier.”

On the other end of the innovation spectrum, technologies impacting cybersecurity, cloud computing, analytics and the like are attracting a wide range of venture capital. The cybersecurity industry alone saw record-setting VC investments in privately held companies in 2014, according to the Wall Street Journal.

“Venture-backed companies in the U.S. that provide cybersecurity technology or services raised $1.77 billion from investors last year, topping the previous high of $1.62 billion set in 2000 during the dot-com boom,” the newspaper reported. “Globally, venture-backed cybersecurity companies raised $1.9 billion last year, also a record.”

The fast-growing data center industry is also luring investors.

“As you think about a lot of the macro trends going on in the economy today, such as how you use your smartphone, how you consume content. All of that information at some point needs to be stored and delivered from the data centers,” Peter Hopper, CEO and co-founder of DH Capital, tells Schneider Electric. “It’s one of the great areas of the economy to invest in.”

Innovations will continue to disrupt all sectors of the economy, critically seeded and driven by venture capital investments. To meet the rapidly growing needs, experts predict that the VC industry itself will continue to innovate with new funding models, new investment approaches and new priorities.