What are the most significant lessons learned from 2016? And, what makes good investment sense for this year? Read on for a VC’s perspective on the year that was and what changes in 2017 present the best opportunities, from healthcare to personalized digital marketing.
Impact of Dodd-Frank: Public Vs. Private
While 2016 was a year of sweeping changes both around the globe and domestically, in the VC and entrepreneurial investment space the most significant trend we’ve seen in our work at BIP Capital actually began with the advent of the Dodd-Frank regulations. Prior to those regulations being signed into federal law in 2010, the average price or enterprise value of an IPO was about $450 million. Post-Dodd-Frank, we’ve seen that average rise to $4.8 billion. All of the super-charged growth companies that used to be public are now in the private market.
Going into 2017, we believe these are secular trends that will stick around. In private markets, in particular, VCs will continue to offer outsized returns for several reasons:
- More companies are electing to stay private
- More companies are being founded
- Better and more efficient ways to fund these companies have been figured out so it’s become a real asset class
Private investment continued its big momentum in 2016, and will continue to grow in 2017, we predict.
Investing in 2017: Quality Deal Flow Is Key
Across the investor spectrum, a key challenge will be gaining access to consistent and high quality deal flow. Larger funds are coming down-market and doing deals earlier, so that makes it harder for smaller funds, angels and other individuals to get access to high-quality deal flow. It also provides liquidity opportunities for smaller investors and angels much more quickly than they have had in the past.
On the other hand, more and more companies are moving later, as well, so we’re seeing a lot more multi-stage funds. They can go both early and late and competition is becoming more prevalent, which drives prices up and drives return efficiency in the asset class. We wouldn’t say private markets have become efficient, as there’s still plenty of opportunity and good deals to be had. But that being said, we definitely see that the industry and the sector for the asset class are maturing.
Leveraging Sweeping Changes as Investable Opportunities in 2017
Heading into 2017, we anticipate there will be a lot of change. This is where it gets interesting in terms of risks versus rewards for investors looking for a profitable return and entrepreneurs developing solutions and services. The potential swift-moving changes that are anticipated in healthcare in particular present opportunities—as well as potential pitfalls—for investors. We foresee that those who get it right in that space will be handsomely rewarded.
Anything that draws better healthcare quality for a lower cost is going to continue to be a winner. On the insurance plan, or payer, side of things, we’re going to see it get more competitive. For example, potential changes with the new administration talk about tearing down state line barriers to allow people to shop more competitively. The market impact of such a change is that as plans get cheaper, providers will also have to get more efficient in the way they deliver healthcare services to drive lower costs.
The same thing happened in the airline industry a number of years ago. The airlines took about 30 percent out of their cost model. We foresee that healthcare will have to do the same thing. Those technologies and companies that are on the right side of that will be huge beneficiaries of this new healthcare world.
Personalized Marketing: The Next Frontier of ROI-Friendly Investments
All things digital have been a rising trend. Those innovators who take digital advertising and media at large and figure out a way to connect with individuals in a more meaningful way will be the ones to cash in on the highest returns of this trend. Meaningful marketing that is personalized to just you or just me will become more prevalent as the established forms of online advertising—things like sponsored newsfeed updates in social media and banner ads—recede. Those who develop solutions that fit into people’s lives in this way and that add value will be rewarded.
Capital Efficiency: A Tried and True Lesson Proves Crucial for 2017
For entrepreneurial success, by far capital efficiency has always been and will remain the best policy. Many companies in 2014 and 2015 and even a few years before that took incredibly high rounds of capital on exorbitant valuations. Since then, though, they’ve been doing what we call “coming back down to earth.” Companies that were disciplined took in the right amount of capital at reasonable valuations and were efficient with the use of that capital. These companies tended to be in a better position than those that took the opposite path and flew too close to the sun. These were the ones you saw come crashing back down. Capital efficiency was proven once again to be the name of the game in 2016, and will continue to be so this year.
Diligence Through Difficult Storms and Human Talent Continue to be Bankable Assets
An ongoing factor in any company’s worth is how well it weathers the inevitable storms and difficult periods that always come along. We’ve been involved in 30-plus companies and every single one of them faced a difficult time at one point. Some entrepreneurs are very good at keeping a group of mentors, coaches and advisors around them from which they can seek counsel. Others are good at setting up systems and feedback loops that gather information, and creating ways to measure and produce metrics so they can make data-driven decisions. Whatever the case, entrepreneurs need to have a way to take in advice and optimize decision-making. This is particularly important in the tough times, because they will come.
And, in a year where we’re seeing the effects of AI and automation in some industries start to come to fruition, we’re also seeing that top human talent is a key differentiator to bank on for a company’s success. We’re going to continue our focus on bringing top-tier talent to our ventures earlier because it directly impacts capital efficiency, which helps the business progress. Everything is made better by great operators and great strategists. We’ve doubled our efforts to make sure our companies are laden with talent, and importantly, the right type of talent at the right time.