The ebb and flow of VC dough

VC investment in martech and adtech will drop by 75 percent in 2019, meaning the flow of capital and equity will recalibrate and signal innovation across several key industries.
Written by Forrester Research, Contributor

Marc Andreessen once said, "Raising venture capital is the easiest thing a startup founder is ever going to do." That's a bit of hyperbole from Mark, but there's a lot of truth to it if one's timing is right. Technology startup markets can go through periods of irrational exuberance in which money seems to grow on trees. Those same markets can also quickly transition into periods of frightful volatility -- much like today's stock market. This creates uncertainty and risk for large corporations, VC funds, and private equity firms that want to invest in emerging technology markets as a source of innovation and new revenue.

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Many of Forrester's large clients are active participants in emerging technology markets. Fortune 1000 companies across industries including finance, retail, healthcare, technology, transportation, and others all face a common challenge: Innovate, or die a slow death at the hands of someone else who does. Innovation can come from within and from external sources. History is littered by ill-fated companies plagued with a "not invented here" mentality, while other companies seek sources of innovation and inspiration wherever they can find it.

This year, Forrester partnered with Venture Scanner to track and monitor emerging technology markets as diverse as transportation tech, fintech, health tech, additive manufacturing, and many others. We're identifying patterns in these markets to help our clients see around the corner based on funding trends and other market activity. The resulting insights point to tomorrow's business growth opportunities and hot spots for innovation. Based on what we see, we've published five predictions for 2019 that might cut against the grain of conventional wisdom.

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Here are a few examples:

  • Venture capital investment in martech and adtech will drop by 75 percent. Of all the technology markets we track, this is the slowest-growing by far (CAGR of 19 percent since 2012). Now if I was writing this just a couple years ago, we'd be talking about explosive growth with thousands of small vendors vying for VC funds. But rest assured, I'm not going to show you a graphic with thousands of logos on it. The truth is, there have been sharp declines in this category for the past two years -- with the rare exception of an occasional APAC mega-deal like ByteDance, which just raised $3 billion in China. As big companies continue to shift digital ad spend and adapt practices to GDPR, new startups in this market will find early-stage funding extremely difficult to secure in 2019. That's not to say that later-stage private equity deals can't be lucrative. Vista Equity Partners sold Marketo -- a B2B martech firm it owned for just two years -- to Adobe for a surprising return.
  • Additive manufacturing will save General Electric. Yeah, I know -- as I write this, GE is trading at under $10 per share. The industrial giant has had a tough run the last couple years. But we think there's a way out of the quagmire, and it's called additive manufacturing (AM). We define AM as "an industrial process that creates physical products that are digitally designed with software and fabricated by 3D-printing machines." This is still a fledgling market approaching $2.5 billion in total VC investment, but in a recent report, we projected that additive manufacturing will upend the manufacturing industry. Large providers such as HP are moving in now to compete with pioneering startups like Carbon and Desktop Metal. Meanwhile, big industrial companies, such as Boeing, are reinventing how they produce complex machinery. Despite GE's woes, we saw early signs of the company's future in additive manufacturing in 2018.
  • Retail tech investments will top $25 billion for the year. With all the talk about the "retail apocalypse," one might think that venture capital would shy away from the industry. But we see VC investors doubling down on retail tech investments. After a pause between 2014 and 2016, annual funding in this category is back on a growth trajectory. We expect that to accelerate in 2019, pushing the category total past $100 billion and with a 35 percent year-over-year growth rate. What's driving it? Many retailers continue to digitize and optimize their brick-and-mortar stores with new tech, while specialty brands such as Allbirds and online pure plays like Etsy reshape the retail landscape overall.

-- By Carlton Doty, vice president, group director

To understand the seismic shifts that firms will face in 2019, download Forrester's predictions 2019 guide.

This post originally appeared here.

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