Equity crowdfunding platform Seedrs' Saul Gindill explores the common trends we see when investing in start-ups, and the usefulness of the Hype Cycle.
As we all know from our personal lives, the adoption of technology in wider society is heavily influenced by trends – what we read in magazines, hear in the news, and see our friends and colleagues doing. In fact, so common is the arc of such trends that Gartner came up with an visualisation it calls “The Hype Cycle”, charting visibility of and expectations for a new technology against time.
In broad outline it goes like this: first we have a “Technology Trigger” – the invention of a new form technology or commercial innovation, followed by rapidly inflating expectations (often massaged by hype, exaggeration and some early successes), which reaches its apotheosis at the “Peak of Inflated Expectations”.
As people realise that this new technology isn’t going to provide the panacea that they were first promised and failures start to mount, these expectations just as rapidly deflate, culminating in the inverse “Trough of Disillusionment”.
Thanks to a correction in expectations and the proving out of some early winners, a sensible and practical exploration of the uses of the technology leads to a more gradual “Slope of Enlightenment” which then slowly flattens out into the “Plateau of Productivity” as the true implications of the technology are fully realised and widespread adoption is reached.
This is not to say that the Hype Cycle is perfect; it has been criticised as an analytical framework, yet it can still be a helpful way to think about new technology and the way in which it trends and spreads through the economy.
So if start-up investing is a question of backing new technologies at an early stage and sponsoring their growth to make returns in the many multiples, then it is only natural that venture investors will be influenced by these same trends. When choosing to make investments it is therefore critically important to try and understand where about in its lifecycle a particular technology or industry falls. This will influence both the price you pay (i.e. how much capital is alive to and excited by the existence of the technology), the likelihood of commercial success (is the commercial model in anyway proven?), as well as your timeline to exit (the company may have been founded a while ago, but is this still early days for the technology, or are we already seeing widespread adoption?).
It’s no secret that investment in start-ups is heavily influenced by trends so let’s take a look at four current ones, and consider a few of the factors that may help you analyse their current state of development.
We’re lucky in Europe to have London, which if not the, then is certainly one of the world’s main financial centres. Coupled with the remarkable flourishing of tech expertise in the UK’s capital over the last 10 years this has lead to an explosion in financial technology (fintech) start-ups, accompanied by the emergence of investors that specialise in this sector alone.
In fact, recent figures from the industry group Innovate Finance show that in 2017 the UK saw its best year on record for fintech investment, with over $1.8bn of capital invested over 224 deals – which represents a 153% increase on 2016.
But dig a bit deeper into fintech and you can see that it’s not a monolith. The are many different sub-sectors and business models – from the later-stage challenger banks and money transfer services such as, Revolut, and WeSwap (some valued in the hundreds of £ millions) to earlier stage specialist B2B fintech firms.
Considering the breadth, depth and pedigree of financial and technological expertise in London, expect to see this sector continue as the poster child of the European start-up scene.
Arguably a sub-sector of fintech but worthy of consideration in its own right.
London hosts the oldest insurance market in the world – Lloyds – and is rightly considered the global centre of insurance. What might seem to the outside observer like a sleepy industry has in fact always been open to innovation, and we’re starting to see the effects of what happens when this is combined with the digital revolution.
A wave of insurance start-ups has been hitting the market over the last few years – from businesses such as Wrisk, which are intent on a fundamental consolidation and re-pricing of consumer insurance, to others with solutions to more specific problems, like Cuvva.
Insurtech has been a hot trend recently, and as we continue to see a number of really exciting businesses and founders talk to us about funding, it’s clear that growth in this industry is set to continue.
Although not normally seen at the bleeding edge of technological innovation, many feel like the law’s time has now come.
The legal industry is looking on as a number of start-ups set out to fundamentally disrupt, supplement and enhance the provision of legal services around the world, and investors have been taking note. For instance in late 2017 Seedrs announced a partnership with the Law Society, and we have seen a steady stream of legaltech businesses raising more widely – for example Orbital Witness, which successfully raised with us at the beginning of this year.
In contrast to the earlier two sectors legaltech is still seen as a relative newcomer, and may also have a significant crossover with the next “hot” sector – crypto assets.
Bitcoin. Bitcoin Cash. Ethereum. Litecoin. Dash. The chances are you are already familiar with the big names in the “crypto” world, and it’s safe to say that crypto has already hit the “Peak of Inflated Expectations”, and may have come down the other side.
However, I’ve used the title crypto assetsrather than crypto currenciesfor a reason. Although a lot of the public focus on this new technology has been around its currency-like potential, many believe that the true power of blockchain technology comes from the ability to facilitate transactions and processes without the involvement of a trusted intermediary – like a lawyer with an escrow account.
Despite the hype in truth this technology is still in its infancy, and its ability to challenge and disrupt existing business models across a wide range of industries and technologies remains to be proven – but where there is uncertainty there is also opportunity for forward-looking investors.