After several years of sustained growth across most startup markets, 2019 will close with a low single-digit increase year over year (YoY) in private capital funding before turning flat 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. Here's a sneak peek into what will moderate VC and private equity (PE) investments in 2020:
- Investors will exert more scrutiny over high startup 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 like Uber and Tesla have struggled to meet expectations since going public, leaving investors of all stripes wary of startups that sound like they're overpromising and underdelivering.
- Startup founders will scrutinize the sources of funds for 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, startup founders will need to dig deeper into the details of where their funding is sourced.
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 next year. Adding to that downward pressure, we see far fewer new companies entering hot markets like AI. 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 (aka RegTech) grew 103% YoY, and it shows no sign of slowing down. In fact, we 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.
Read our full report for more on what to expect in VC-backed startup markets in 2020. To understand the major dynamics that will impact firms across industries next year, download Forrester's Predictions 2020 guide.
This post was written by VP, Emerging Technology Research Carlton Doty, and originally appeared here.