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2016 – A Surreal Year for Tech

Posted by Early Growth

January 18, 2017    |     5-minute read (992 words)

Merriam Webster has officially chosen their word of the year for 2016: surreal. This word was chosen because of the significant increase in which users looked up the word, most notably after the US election in November, as well as following the terror attacks in Brussels and Nice, and the coup attempt in Turkey. But there were times when this word perfectly defined the heartbeat of the tech and investment world this past year as well. As 2016 wrapped up, I had a number of conversations with Bay Area investors, ranging from angels s to larger institutional investors. I've included their thoughts here.

In terms of funding, 2016 did see a slow down, as was predicted. Overall, Series A & B funding fell by at least 25% in the last quarter of 2016 when compared to the same period just two years prior. According to Bloomberg's Startups Barometer the startup market as a whole is down 15% from its high in 2015. Some of the initial worries that 2016 might not be a lucrative year for early stage companies has definitely played out, but perhaps not to the extent as was predicted. Brian Holmes, partner at First Ascent Associates, observed the extra time it took for a typical seed round to close, from a typical one-month diligence process to an extended 3 months or more, noting that rounds were still completed “but investors were cautious and slower to deploy capital.” This sentiment was echoed by other investors in the Bay Area.

2016 also held some other surprises for the tech scene.  Most notably, the rise of the so-called 'frontier' technologies, namely AR/VR, machine learning and autonomous vehicles has been an exciting progression as these areas quickly gain traction and speed. One Bay Area angel investor expressed sincere shock at how quickly we are nearing the dawn of the self-driving car. All Tesla models currently in production have the capacity to become self-driving once the software is ready to go.

Wait, so I just accept the terms and conditions, hit update, and in the morning my car can drive itself? Surreal, indeed.

Stephen Forte of Fresco Capital was surprised at the "rise in AR/VR in the mainstream consumer market" mentioning that the virtual reality space rapidly progressed through the typical 'hype cycle' that usually delays other technologies. As I wrote earlier this year, virtual reality investments are at their highest margin ever, and slowly but surely reaching the consumer market with the releases of Samsung and Google headsets along with the Oculus Rift and HTC Vive.

What can we expect for 2017? It’s going to get more surreal. Looking ahead, investors are expecting to see even more growth in frontier tech. Could this be the year for A.I. and machine learning? Or maybe we’ll see robotics and hardware reign in 2017? TechCrunch lists some of the main areas where seed investors are 'scaling up' including machine learning, augmented and virtual reality, and automotive.

It would be remiss not to mention the potential effects of the new administration on tech. President Elect Trump potentially has some favorable tax plans up his sleeve including cutting corporate tax rates a whopping 20% from 35% down to 15%, including pass-through income for LLCs, partnerships and S-corps. This means huge gains for founders where income is concerned. Some of his other proposed plans would benefit small business owners in the US, including a childcare tax credit and "tax holiday" for money returning from overseas. And despite a very obvious disconnect between the President Elect and Silicon Valley during the presidential campaign, some of the most important leaders in tech including Facebook COO Sheryl Sandberg, PayPal founder Peter Thiel and Apple CEO Tim Cook, sat down with Trump in December 2016 to hash out some of the issues currently facing Silicon Valley, including taxes, regulatory barriers specifically in regards to China and the admittance of highly-skilled immigrants into the US.

One unknown of the new administration is if the Affordable Care Act (ACA) will be repealed and if so, how far. Whether this plays favorably or unfavorably for health tech remains to be seen. Stephen Forte is bullish on digital health expecting a boom in investment and adoption of technologies focused on health care for the consumer. It makes sense to see a slowdown in financing and consumer sales cycles as both consumers and investors may take a "wait and see" approach before making any bets or purchases. But as Stephen Kraus of Bessemer Venture Partners states "great healthcare companies can be built in reaction to the regulatory changes of the era."

In terms of how it may affect startup founders and employees in general, we may see the repeal of the ACA change the health benefit requirements for employers of companies with 50+ employees. Worse for employees, those working for small companies under 50 employees may not have as many options available to them for health coverage without being able to rely on the ACA. However, any form of repeal may open up new marketplaces for companies trying to fill the gap left by the ACA.

Ending on a positive, forward-looking note for 2017, investors have raised the most money since the early 2000s and still have yet to invest it all. In other words, there is still a lot of capital ready to be deployed into the bank accounts of eager new companies destined to lead us along the next tidal wave of innovation. Changing regulations means that there will be opportunities for ambitious entrepreneurs to respond to customer needs in ways we may not be able to anticipate. The rise of frontier technologies is swinging the doors wide open as the potential true market size for machine learning, robotics, and AR/VR are yet to be fully realized. 2016 has indeed been a surreal year, however, don’t be surprised to see 2017 surpass its predecessor in more ways than one.

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