What are the big questions investors are asking themselves this year?

7 Feb 2018386 Views

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What are the hot investment areas for funders? Image: TZIDO SUN/Shutterstock

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With more than 20 years of experience in the world of venture capital, Ed Sim offers his thoughts on the business trends to come.

Ed Sim is the founder of Boldstart Ventures, an enterprise seed fund that has invested in more than 50 start-ups in enterprise infrastructure. He is also a co-founder of HyperFab (now known as MState), a growth lab for enterprise blockchain in partnership with IBM.

He has helped a number of entrepreneurs to scale from seed to market, including GoToMeeting, which was acquired by Citrix, and Divide, purchased by Google.

Siliconrepublic.com spoke to Sim about the pace of change in the world of funding, software and automation.

What trends are you seeing in terms of tech and the enterprise sector?

Every Fortune 1000 company is a software company, which is one of the biggest opportunities as these corporations replatform from legacy to cloud or hybrid cloud. We’re seeing tremendous dislocation, and need platforms for better developer productivity, security and multi-cloud support. There is also a lot of interest in serverless.

Can you comment on potential major tech IPOs such as Spotify, and the state of public offerings in the enterprise space?

The big question is if this crop of IPOs can live up to their valuations from the unicorn funding craze from a few years ago. Many think that Dropbox, despite amazing growth, may not reach the $10bn from the last round.

Secondly, there are more options for some of these companies, like the repatriation of massive amounts of cash to the US for large tech companies, so we can expect to see some game-changing acquisitions.

Finally, private equity firms are also doing massive buyouts, and then there’s the SoftBank Vision Fund, which is buying out existing investors. What this all means is, the need to go public to generate liquidity for earlier investors is just one of a few options that are viable today.

Ed Sim, founder of Boldstart Ventures. Image: Boldstart Ventures

How do you think investing and VC will change this year?

What is coming up is how VCs think about ICOs and whether to invest in equity, tokens, or both.

There are two trends: the SoftBank Vision Fund is a mega-fund and causing VCs to raise much larger pools of capital, like Sequoia raising $5bn to respond to this.

Given this fact, there seems to be data showing that seed rounds are declining in number and money raised, which I view as one of the most inefficient and attractive times to invest.

Second, ICOs are potentially disrupting some of the VC model – $4bn raised in 2017. The issue is that VCs have traditionally bought equity and, if a VC buys tokens in an initial coin offering, then they are not buying equity; they are buying coins or crypto-tokens, which are freely tradable.

So, the questions VCs are wrestling with are:

  • Are ICOs here to stay?
  • Do I invest in them or avoid them, since there’s a different economic model?
Can you comment on M&A activity in the industry and tech solutions that are currently the most favourable with investors?

M&A activity will be rampant, with many large tech companies bringing back cash to the US due to favourable tax repatriation. Flush with cash, we will see some mega M&A deals in the billions and also many smaller start-ups acquired.

One area that will be ripe with consolidation is cybersecurity, where start-ups last year raised over $3.5bn alone, and where there are too many niche products, which should be part of a larger company’s suite of offerings.

What areas of investment will grow in popularity and/or decline?

The biggest issue in 2018 will be GDPR and how companies handle PII [personally identifiable information] and privacy information. There will be massive penalties, and I’m a believer that this will be the next Y2K problem.

Many large enterprises doing business in the EU are scrambling to meet regulatory requirements coming in May this year. We have one of the leading companies in the space now, BigID, and this will be a big year for them.

On the rise is automation, more specifically intelligent automation – how large enterprises are leveraging machine learning to automate routine, repeatable business processes like data entry.

Also, blockchain – it’s early, but enterprises are opening up budgets and this is the year we will see some pilots going into live production environments in areas like supply chain track and trace.

Finally, enterprise moving to cloud native infrastructure is one of the biggest replatforming of tech in history. Yes, cloud vendors will gain market share but multi-cloud will become a big deal.

Investing in early SaaS companies is dead. There’s too much funding, very little differentiation and limited opportunities to create new systems of record.

All of the first-round smart money in SaaS apps was invested in three to five years ago, and what we will see is some of these SaaS companies break out into larger rounds of funding – like one of our portfolio companies, Front, which just raised $66m from Sequoia and DFJ. Hence, this is pointing to a rotation to more infrastructure and deep-tech enterprise companies.

Updated, 9.44am, 8 February 2018: This article was updated to reflect Ed Sim’s 20 years of experience in the venture capital space, as opposed to the 15-year figure published in a previous version.

Ellen Tannam is a writer covering all manner of business and tech subjects

editorial@siliconrepublic.com