The Hottest Startup Sectors In 2016
Which of the 16 major start of categories in information technology will reap disproportionate share of investment dollars in 2016? And which sectors are closely guarded secrets shielded by seed investors, that may have their breakout year this year?
Using Crunchbase data, I analyzed share of dollars commanded by each of these 16 categories over the last five years to understand the trends in both the seed and series A fundraising markets. The chart above contrasts the pace of investment across the two markets by sector measured by % of total dollars invested anually. Seed investment is marked blue, and series A investment is marked red.
Advertising has seen its share of both series A and seed dollars fall from 15% to 5% in just five years, and indication of how out-of-favor this category of business has become amongst investors, because of the dominant network effects of Facebook and Google.
Analytics remains an important category for both markets. Startups building analytics products command roughly 10% of both seed and series A dollars.
Big Data, a term popularized in 2012 that has reached its apogee in 2015according to Google trends increased from 2.5% of the market in 2010 to more than 7.5% of the series A market in 2015. Seed investors’ interest in Big Data has remained constant over the last four years while series A investors’ appetite continues to grow.
Cloud computing, which encompasses the infrastructure products used by developers to build services, has remained flat at 4% over the past five years despite some recent declines in 2013 and 2014.
Amongst investors, Digital Media is witnessing a renaissance growing from 2% share to 4% share in three years. Series A investors, though, have not shown has keen of an interest, or at least not yet. This may be a breakout category in 2016 for Series A investments. The challenge for digital media companies in the past has been the valuations at exit. Media companies trade at lower multiples than traditional software companies, but the impressive growth of new entrants like Upworthy may entice investors to reconsider.
A perennially important category, e-commerce is constant in the series A market at 15%, but declining in the seed market, falling from 15% below 10% in 2015. E-commerce companies require more capital in order to grow, in part because the margin structure is lower than software companies, and these businesses require a fair amount of working capital. The decline in seed interest may indicate seed investors expect an increase in cost of capital in the next few years, and consequently the follow-on dollars to finance e-commerce startups may not be available at the attractive terms they once were.
Since 2010, education startups have been on a tear in the seed market growing from 6% to now 10% in 2015. During the period, we two salient education companys have gone public: 2U, a SaaS online college company worth $1.3B and Instructure, a learning management system business worth $550M. Disclosure: Redpoint are investors in 2U.
Seed investors continue to invest roughly 4% of their dollars, but series A investors have not followed over the past five years.
FinTech, which includes startups in the Bitcoin ecosystem, have seen good and bad years, with a whipsaw decline in 2014, in which the early winners of the movement benefited from a massive increase in follow-on rounds, but new companies were starved for capital, followed by a banner year in 2015.
Games continues to suffer a steady decline from 7% of dollars to fewer than 2% of dollars. Exits in this category have been harder to come by than expected, with the exception of King.com. Meanwhile, high-flyers such as Angry Birds’ parent company Rovio haven’t been acquired or gone public, while facing increasing competition in the ecosystem and pressure to diversify their offerings…..