As is customary this time of season, I will take a moment to reflect on the year that just ended, revisit my prior predictions, and dare to make some audacious new forecasts for the upcoming year in VC and tech.
First, a look back
Looking back, 2018 proved to be a fulcrum year in terms of both uncertainty and volatility, driven largely by macroeconomic and geopolitical events.
For the business of venture capital, however, uncertainty and volatility can lead to opportunity. We witnessed this with our modest fund in Japan which had the fortune of realizing two breakout exits, and consequently returned itself many times over in three short years to its investors.
2018 also experienced a groundswell of awareness from consumers everywhere about the effects of technology on our lives. Potentially detrimental consequences of excessive screen time raised alarm bells among parents. High profile data scandals such as Facebook/Cambridge Analytica as well as numerous data hacks on a massive scale have opened our eyes to privacy considerations.
The year of the regulator ?
Which leads me to scoring my prior predictions. My broad and audacious prediction one year ago was that 2018 would emerge as the Year of the Regulator.
In many ways, this became reality. The European Union passed the most sweeping data protection legislation in the world. In the U.S., executives from the top technology firms were hauled in front of congress on numerous occasions. Meanwhile, Japan erected yet more structure governing cryptocurrency and token offerings, specifically requiring a fairly cumbersome crypto exchange license to operate in the world’s largest crypto market.
Just when a regulator’s job arguably became more important than ever, though, the underlying institutional foundations showed fragility. Vulnerabilities were exploited both from within (gradual dismantling by politicians and special interests) as well as from the outside (cue France’s yellow-vest movement).
Over the holidays I read Michael Lewis’ new book, The Fifth Risk. With his inimitable knack for narrative, Lewis gives us insight into the unsung heroes behind healthy regulations inside the U.S. government. What struck me most is the dangerous divergence among regulators between those who are driven by the mission versus those who are driven by the money.
Looking ahead to 2019
This context of fundamental divergence leads me to my outlook on 2019, which in one word I would characterize as chaotic, at least in Western markets.
The good news however, as I’ve written before, is that for startups it’s more about the micro than the macro. Venture capital is more a bottoms-up business than top-down. It’s about brilliant entrepreneurs building small, niche-based solutions which can ultimately disrupt large markets.
That being said, turmoil at the macro level will likely have some spillover effects on startups. Venture deals will likely take longer, and I expect that in 2019 we will see less froth in startup valuations. I would not be surprised to see more down rounds in the coming year either. Furthermore, startups that have taken on excessive venture debt, or have layered convertible notes upon notes, may encounter a day of reckoning this year.
On a more optimistic note, I predict that investors will rediscover Japan. In times of great uncertainty capital flees to safe havens like the Japanese yen. A wise business contact of mine in Tokyo recently pointed out how even during the devastation of Japan’s 2011 earthquake/tsunami, flows of capital into the country reached record highs.
But I’m referring to more than fundamental currency flows. Long-running corporate stagnation in Japan has awoken the private sector to the need for radical innovation. Corporate Japan has $2.3 trillion to spend on addressing this stagnation, and a significant portion is directed toward technology innovation for the enterprise.
Shrouded from the endless discussion of a crypto winter, several corporations in Japan are among the most advanced in the world with experimentation around blockchain innovation, for instance.
To cite another example, Japan’s major banking groups are endeavoring to boost the country’s degree of cashless adoption (only approximately 20% of all payments in Japan are cashless, compared with, say, Sweden at 60%). It’s no coincidence that leading foreign fintech companies like eToro, Revolut, and TransferWise are currently prioritizing the Japanese market.
From a VC perspective, whereas 2018 represented more a year of harvesting and value realization, I predict that 2019 will begin the swing back toward fresh investing, sowing seeds for future champions on the distant horizon. I’m looking forward to it.