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Venture Capitalists Hunt for the Next Big Thing

Posted by hkarner - 25. Oktober 2016

Date: 24-10-2016
Source: The Wall Street Journal

As they struggle to predict what tech might spark a new boom, investors spread their bets

Virtual reality is one of the technologies attracting venture-capital investment.

Venture capitalists are always chasing the next big thing. Of late, they are struggling to figure out what that might be.

Nearly a decade has passed since the smartphone sparked a startup gold rush. Silicon Valley investors have yet to identify the next product that will spawn a similar wave of tech companies and lucrative returns.

Venture capitalists are spreading their bets across technologies where the path to profits is unclear, including self-driving cars, drones, artificial intelligence, virtual reality, even food.

The drive to find the next big thing, coupled with piles of money that investors need to put to work, could spur foolish bets. Venture firms have raised $34 billion through September—on pace for their biggest year since 2007.

Veteran investor Steve Jurvetson of Draper Fisher Jurvetson said his firm is backing companies in agriculture, robotics, artificial intelligence and aerospace. “A ridiculous amount of money will be lost foraging into all these areas,“ he said. “But the greatest opportunities are in those sectors.”

Silicon Valley has seen this movie a few times since the 1960s. Its boom-and-bust investing cycles generally begin with about eight years of growth followed by six years of retrenchment, said longtime venture capitalist Arthur Patterson, co-founder of Accel Partners, a sequence some now refer to as the Patterson Cycle.

Faster, cheaper computer chips propelled tech-innovation cycles in the past as profits moved from mainframe computers to personal computers to smartphones and the software products they hatched. Between each transition, the investor outlook was uncertain, and venture capitalists, whose job is to spot technology shifts, scavenged for the next big thing.

Silicon Valley was saved from the doldrums of the 1970s by the PC revolution of the 1980s that propelled such companies as Intel Corp., Apple and Microsoft. By 1990, as PC sales slowed, venture capitalists shifted money into lower-risk, low-tech areas, including retail.

Then the World Wide Web resurrected venture capital. VCs invested nearly $200 billion from 1995 to 2000, and more than 1,000 companies went public, including Amazon.com Inc. and Yahoo Inc.

After the dot-com bust, venture capitalists largely moved away from internet companies. Some made bad bets on clean energy and nanotechnology, and missed the social-networking trend led by Facebook Inc. Others were late to the mobile internet wave led by Apple’s iPhone in 2007.

Today, capital is pouring into venture funds, but the funds aren’t pouring cash into startups at the same record clip. Investment in startups fell 30% to $41 billion through the first nine months of the year compared with the same period in 2015, according to Dow Jones VentureSource.

Some of the most high-valued venture-backed startups are products of the smartphone era, including car-hailing service Uber Technologies Inc. and messaging service Snap Inc. The internet also gave rise to such cloud-computing giants as Salesforce.com and Workday Inc.
Today, new smartphone apps rarely capture the attention of hundreds of millions of people—apart from flash-in-the-pan mobile games. And the best cloud-computing businesses are already established.

Venture investors are getting antsy as they sense a lull at the end of an investing cycle, said Elad Gil, founder of cancer-testing software startup Color Genomics Inc., and an investor in highly valued startups Airbnb Inc. and Pinterest Inc.

“Trying to find what’s next, you start investing in a lot of stuff you don’t understand,” said Mr. Gil. Venture capitalists, he said, are sitting on funds they feel they need to deploy.

Mr. Jurvetson said one way to avoid bad bets is to steer clear of capital-intensive projects, a mistake his firm and others made when they bet on some early clean-technology companies.

Uber’s explosive success encouraged venture capitalists to invest in almost any on-demand app that offered a service with the push of a button. Investors valued such companies like software startups, though the labor and marketing costs of these companies limit their profit margins. Many failed. Others are struggling.

Virtual reality was hot when Facebook bought Oculus VR Inc. and said it would be the next great computing platform. But sales of VR machines and headsets remain tiny compared with the billions of smartphones out there. Established game developers have so far only tiptoed into the market.

Complicating matters for investors: Big companies aren’t waiting around for startups to lead the way. Instead, they are spending mountains of cash to keep emerging experts from joining smaller companies.

Chris Dixon, a general partner at venture firm Andreessen Horowitz, cited self-driving cars. Apple, Google and Uber have hired hundreds of robotics and automobile specialists in recent years, essentially pricing them out of the reach of startups. “They’re getting ridiculous offers,” he said.

Mr. Dixon and other investors said they remain optimistic.

There are “still rockets being built in the barn and hopefully they’ll take off,” said Steve Vassallo, a general partner at Foundation Capital, who said many of today’s promising technologies will take time to develop. “It’s not just spinning up a server and burping out an app.”

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