Making predictions is almost as popular as making resolutions in January. Most forecasts tend to be static not dynamic. Thinking about the second order impacts can be revealing. Some of the events likely to happen in 2018 will mean long term change. In Scotland and other small markets this is what matters.
This struck me in force when reading Tom Tunguz predictions for the software market. Tom is one of the smarter guys in this area and his posts often make me think. So I am picking his ideas because they are better thought through than most not because I agree or disagree.
Tom made seven predictions. Here are my thoughts on the second order effects that might follow if his logic holds:
The tax holiday for repatriation creates one of the most active M&A environments of the past ten years
This makes sense from a US perspective. But that cash is being sent back to the US from other places, mainly Europe and Asia. In Europe, US investment dollars have helped. Both the volume and the risk appetite of startup investing have benefited. A reduction in this impetus could be one of the hidden effects of “America First."
The SaaS fundraising market remains ebullient through 2018 as vibrant M&A and an open IPO window trigger substantial liquidity for shareholders
I am with Tom that SaaS funding will continue to be strong. Despite some concerns raised by Clement Vouillon of Point Nine Capital. We may see that the corporate venturer share of this rises as VCs seek higher returns elsewhere.
Events already reinforce the IPO window point. Spotify and Dropbox have taken steps in that direction. I am not so sure. IPOs provide a liquidity event. As Travis Kalanick shows, this is great for founders. What about the VCs and institutions? Once you cash in, what do you with the money. Almost no other asset class looks attractive - see this article from the Wall Street Journal.
So maybe the pressure to exit is not so strong. Suppose SaaS and Technology investment continues to rise. Without a big increase in exits. Then the size of early stage investment as an asset class will go up faster than ever. That creates its own pressures and could lead to more of a flight from seed investing.
Machine learning fades as a buzzword
No doubt this is true. ML will go the way of mobile, VR and many other investing “trends.” Among knowledgeable investors this makes little difference. In many places early stage money comes from two sources. Angels with no tech experience or Government “schemes” in various forms. These sources can be naive.
The risk is that money gets diverted into “hot” sectors. And misses businesses with real potential. I live in Scotland and we need the technology sector to thrive. Its an uncertain business. Making decisions based on PR and buzz not fundamentals turns it into an outright lottery.
Blockchain in the enterprise takes the reign as the buzzword for 2018
The second order effect here is the logical extension of the previous point. I expect to see a lot of fantasy business plans for Blockchain related startups this year. This will be damaging. Blockchain has a future but in the main as an enabler rather than the raison d’être for a business.
Successful blockchains at scale will depend on global network effects. This is very hard for a company from a small market to achieve. Here we need to think about more targeted opportunities. B2B niches or public sector applications where the technology can do some good.
The classic open source strategy of the last fifteen years is abandoned because of the competitive threats from infrastructure-as-a-service (IaaS vendors)
I also agree with this prediction and it scares me. The same naive investing approach above places great store on defined intellectual property. This is false security. Open source is a great boon for innovators with limited access to cash. Placing walls around technology will make life much harder. Smaller or poorer markets will suffer most.
Everyone will lose in the end. Realising the potential of technology means developing applications that deliver real benefits to businesses and consumers. It may be harder to make money without protection. That is the reality of capitalism. Open Source is a bit like free trade. Introduce barriers at your peril.
GDPR becomes an important consideration in most SaaS companies
On a more optimistic note, this could be the start of something great. The right attitude to privacy and security changes the whole business culture. (See Estonia again). Perhaps founders will think more about real sustainable value in future. And less about the sales pitch.
The industry pendulum switches from fragmentation to consolidation in products as well as companies
Another credible prediction. This may offer a good exit for founders across the globe so positive in that sense. In the short term, it may also make life difficult for early stage companies. When size is the prize, startups don’t look so attractive. In time though, such consolidation is a damper on innovation. That will create new opportunities in the future.
The Chairman's View
Tom has produced the shortest and sharpest set of predictions I have seen for 2018. I am not as smart as he is so this article is a bit longer. Most likely neither of us is right but taking time to think about the future makes sense. By nature, entrepreneurs look forward all the time. Don’t limit your horizons to one year or restrict your thinking to the immediate next steps.
Kenny Fraser is the Director of Sunstone Communication and a personal investor in startups.