As the calendar flips to a new year and decade, the temptation to opine on trends for the year ahead becomes almost a parlor game for those in the technology sphere. Predictions in this industry are inherently broad. Oftentimes, so many things must work in tandem for a prediction to play out in the time allotted that one must give prognosticators partial credit if even some notion of what was predicted reasonably pans out. With that caveat, I offer the following — not so much as predictions for the year ahead but as a collection of things I will be watching closely over the next twelve months.
1. Green shoots, but no Chef’s Salad. Saying 2010 will be a better year for technology companies and their investors than 2009 is hardly a bolt from the blue. Fortunately, there is now compelling evidence that the IT backlog is loosening up and businesses are investing again in their IT infrastructure which should provide a nice collateral uptick for devices, software, services, and support. In this new, frugal world, a disproportionate share of the spoils will go to companies offering scalable solutions, often in the cloud, that are cost-conscious, flexible for their customers, and customizable on the fly.
2. Physical Media dies..a little more. Been passing a lot of empty storefronts that were once a Blockbuster Video or Virgin Megastore? It will only be getting worse in 2010. Not a believer yet? Pick up a newspaper. No, wait, on second thought that’s not so easy any longer either. This also applies to new technologies replacing our old ways of consuming media. Amazon’s Kindle is a runaway hit and Apple’s Tablet is enjoying buzz not seen since the debut of the iPhone. These might prove to be the first real wave of consumer devices (after so many flops) to finally live up to the promise of shifting media consumption and media spend from the brick-and-mortar to digital world.
3. Strongest IPO market in (almost) a decade. The moribund exit environment appears to be improving, albeit not as quickly as most in the venture community would like. While M&A continues to dominate as the traditional exit path of least resistance, IPOs are becoming more numerous as well. Prepare to see 2-3 high-profile tech companies go public in 2010 which will have a positive effect on overall tech valuations and provide much-needed coattails to other public technology companies in waiting. Possible 2010 IPO candidates? Facebook, Zynga, LinkedIn, Silver Spring Networks and a handful of smaller cleantech and game companies. If only a few of those marquee names actually consummate public offerings, 2010 could be the biggest year for tech IPOs since the Google offering of 2004.
4. Entrepreneurs Rule Supreme. In a December 2007 post, I offered the notion that entrepreneurs were becoming increasingly relevant again. This came after several years of professional CEOs regularly being brought in by frustrated investors to replace ostensibly prodigal 20-something founders that investors felt were ill-suited for those ascetic post-bubble years. While ‘gray hairs’ and competence will never go out of fashion, the unique qualities of a compelling, charismatic founder who can envision and develop products that can change the world cannot easily be overstated. The Marc Benioffs, Mark Zuckerbergs and Sergey Brin/Larry Pages of the world are often the builders of companies that most directly shape our world and create the greatest value for investors. If Facebook ends 2010 as a multi-billion dollar market cap publicly traded company, helmed by its 24-year old founding CEO, it can only bode well for young, visionary entrepreneurs everywhere and for venture firms willing to take a chance on first-time CEOs with potentially game-changing ideas.
5. Changing of the VC guard escalates. Talk has swirled for years now about a winnowing of venture firms, to little effect. 2010 may change things. Now that ’99 and ’00 vintage funds have wound down (or will shortly) there is a bit of a case of the emperor’s new clothes. LPs can now see in the harsh glare of red ink on white paper how poor many investments in some storied venture firms fared over the past decade. The old saw that ‘no one ever lost money buying IBM’ was also a prevalent view among some LPs who, overly focused on brand, generationally backed storied firms almost out of habit. This trend is on the wane as limited partners get more serious about sharpening their pencils and closely evaluating what firms they want to be investors in over the new decade. The ivy league venture firms ten years from now will not likely resemble those considered ivy league firms today. Limited partners that take a chance on younger venture firms doing riskier, earlier deals may well be rewarded when the ball drops on 2020.
6. Vertical Social Networks catch fire. Some argue that ICQ and Friendster begat Facebook and Twitter, and that Facebook and Twitter have sired companies like Athleon, Gowalla and Foursquare. Sure, Social Networking has gone wireless but it has also gone vertical, and usage is exploding. Users are demanding the rich content, ubiquity and connectivity of social networking platforms but they are also demanding richer tools more focused on their specific needs, like coaches who use Athleon to communicate with their team’s players, parents, and sponsors as well as using the platform’s suite of applications like playbooks, stats trackers, game film storage, and the like.
7. EnergyTech has its moment. Sure, biofuels and hybrid engines may be more intriguing (and capital intensive) but the “energytech” sphere of cleantech, such as the smart grid arena and Demand Response companies like eRadio, is where many of the first exits in the broad cleantech space are likely to come. Watch investment into the space increase substantially in 2010 with participation from unlikely sources.
8. Early stage VC returns to form. Building companies from the ground up is sexy again. Perhaps it was the bloom coming off the buyout rose in 2008, but many investors are realizing that clever financial engineering and interest rate arbitrage plays do not generally build great companies of lasting value. Limited partners who shunned early stage venture firms after the dot-com bubble are returning in force and looking to again be part of the creation of the next generation of great technology leaders. It’s hard to buy your way into that party after the fact; one needs to be there at the beginning to truly realize substantial returns. Just ask Ron Conway.
9. Alternative fund models gain momentum. I’ve spoken of Pledge Funds and Search funds and a variety of other venture/private equity hybrid structures that have gained prominence in recent years. The ’08 financial collapse has only raised their profile. As LPs pressure private equity and venture fund GPs on everything from clawbacks to management fees, more GPs are going off the reservation and debuting new funds with LP-friendly terms and structures. Some are a bit hyped, but many have some real merit and can address specific needs of certain LP groups.
10. RIP the 2 & 20 Fee Model. As a follow-up to #9 above, the traditional 2% management fee/20% carry structure that has supported the venture industry for decades is now under attack and is not likely to survive unscathed or unaltered. True, there have been previous attempts at LP mutinies that have come to naught, but this time LPs seem better organized and more aligned than ever before. They also now confront an industry somewhat chastened by a tough decade and willing to re-appraise prior assumptions about how to work with long term investors than was the case during the dot com haze when we rang in the year 2000. Oh, what a difference a decade makes.