Last February, Digital Ventures’ Corporate Venture Capital team had a great opportunity to visit Israel, a country who enjoys one of the world’s strongest startup scene. A discussion with investors and experts about challenges that will emerge and affect the startup ecosystem has been summarized to 3 topics as follow:
- The Entrepreneur Dilemma
In the past century, the prominence of the world’s tech companies is recognizable. This can be observed from the 2018 most valuable companies in the world which includes Apple, Amazon, Alphabet, Facebook, or Alibaba which are all tech firms. The might of these companies can influence young startups in at least in 2 aspects.
- Giant firms entering new markets. Giant tech companies have a strong drive to compete and challenge new industries where they don’t yet have a market share. For instance, Google has greatly invested in the autonomous vehicle while Amazon is entering the healthcare sector. This has caused anxiety among current players and startups in the industry. No single startup can relax with competitors such as Facebook or Alibaba.
- An upper hand with more resources. Tech giants have an advantage in terms of funding so they can attract better employees. As a result, experts in the tech industry think twice about the high opportunity cost before resigning to start their own company
- The transition from The Age of Consumer to The Age of Machines.
Many believe that we will soon enter the golden age of AI, Internet of Things, drones, and autonomous vehicles. We have moved past the peak of consumer technologies such as smartphone, social media, open-source software, and big data.
Investors are turning to deep tech startups that use machine learning. An example is AI that creates end-to-end services for users and not just AI as a part of business operations. At present, there is an oversupply of startups with AI as just a part of the operation, thus, it difficult to be different.
Yet, The Age of Machines or end-to-end services needs bigger investments when compared to general startups. Also, this is a blue ocean with doubtful successful companies or business models. Thus, new entrepreneurs may hesitate to start new businesses to support this wave of change.
- The scarcity of seed money
Tech startup investments rise annually. In the 3rd quarter of 2018 alone, there was an investment of 100 billion USD, more than the overall amount in 2017. Also, numerous unicorns (startups valued at over 1 billion USD) emerged than ever before. However, from the statistics, over 40% of the investment is over 100 million USD. It can be implied that most investments are given to startups in the growth stage while investments in the seed or early-stage startups have decreased from 2017. Also, the number of startups who received funding has also decreased.
In Israel, several seed funds have closed down and many are moving to growth stage startups. Then, they evolve to become VC funds with larger assets because of the more flourishing market.
The 3 aspects have shown a contradicting issue in the tech industry that as they enjoy higher investments, the number of startups has continued to decrease during the last 3 years. However, there are opportunities for startups with machines or AI who can create end-to-end services which are in demand. When coupled with the aforementioned contexts, this is a chance for new startups with such features to add value like never before.
A story by Porlanee Jeamsaksiri, Principal, Corporate Venture Capital, Digital Ventures who was recently selected as one in the Top 100 Global Corporate Venturing’s Rising Stars at the GCV Rising Stars Awards 2019.