Start-up investments set to cool under pressure, except for one hot sector


28 Jan 202011.72k Views

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Forrester’s Carlton Doty forecasts that private capital funding for start-ups will flatten in 2020, but one sector will see investments double.

After several years of sustained growth across most start-up markets, private capital funding is expected to flatten in 2020. There are a few key reasons for this, but the abundance of ink spilled in anticipation of a recession is not one of them.

We at Forrester have examined what to expect in VC-backed start-up markets this year. So what will moderate venture capital and private equity investments in 2020?

More scrutiny on both sides

First, investors will exert more scrutiny over high start-up valuations. To woo investors in 2020, founders will need to skew toward substance over style.

Charismatic unicorn CEOs such as The We Company founder Adam Neumann sought exorbitantly high valuations while frivolously bleeding cash in 2019. And unicorn IPOs of years past, such as Uber and Tesla, have struggled to meet expectations since going public, leaving investors of all stripes wary of start-ups that sound like they’re overpromising and underdelivering.

Second, the start-up founders will scrutinise the sources of funds from would-be investors.

2019 surfaced stories of some well-known venture funds that took money from questionable sources such as the Saudi government and Jeffrey Epstein. In an economy increasingly sensitive to social values and ethics, start-up founders will need to dig deeper into the details of where their funding is sourced.

‘To woo investors in 2020, founders will need to skew toward substance over style’

More scrutiny on both sides of the fence is a welcome change after a year highlighted by so much turbulence. This will drive average deal sizes down in the aggregate in 2020.

Adding to that downward pressure, Forrester sees far fewer new companies entering hot markets such as artificial intelligence.

Regtech will buck the trend

With smaller deal sizes overall coupled with fewer early-stage deals in large markets, 2020 is sure to be a year of moderation in private capital. There’s one relatively new market, however, that will buck the trend.

In the first three quarters of 2019, regulatory technology – regtech – grew 103pc year on year, and it shows no sign of slowing down. In fact, we at Forrester expect funding in this category to double again in 2020.

Corporate data breaches, consumer privacy concerns and a wave of new GDPR-like regulations create demand for technology tools that help enterprises meet compliance challenges. Unicorns such as Rubrik, Netskope and Verafin represent a new class of disruptors in regtech.

By Carlton Doty

Carlton Doty is vice-president of emerging technology research at Forrester, leading a team that helps clients dissect these markets to find innovation, M&A and partnership opportunities.

Download Forrester’s Predictions 2020 guide for more information on the major dynamics that will impact firms this year.

A version of this article originally appeared on the Forrester blog.