2018 was the year big tech announced it was leaving the West Coast and moving to the middle of the country and to the other coast. Apple, Amazon, and Google all announced expansions of their campuses in other locations. Austin was the only Southern city to be rewarded one of these new campuses — with Nashville also getting a consolation prize. I hope we’ll see cities like Dallas, Houston, Atlanta, and Nashville continue to invest in their startup ecosystems in order to grow the next great generation of tech companies.
Perhaps foolishly, I’m taking a stance and publishing my predictions for startups in the Southeast. Like most forecasts, the only inevitability is that some of these, if not all, will end up wrong. However, having a point of view to use as a starting point is important when everything in the startup world is far from certain.
1. A major Silicon Valley venture firm (or two or three) will lead a $50 million+ round (or two or three) in the Southeast
By now, it’s become obvious that innovation is happening all across the country and is being highlighted by groups like Steve Case’s Rise of the Rest fund. I suspect 2019 will be the year major Silicon Valley firms lead significant rounds in Southeast-based startups.
This has happened before, as when Kabbage raised $250 million from SoftBank in August 2017, but with the rise of megafunds we’re due to see the occurrence more often.
Within the past 24 months, several startups have raised meaningful rounds from coastal VCs with deep pockets or those with close ties to them. Names include Bestow, Pull Request, New Knowledge, Map Anything, Spark Cognition, and OJO Labs. It’s not hard to imagine one of these firms picking up a large round in 2019.
2. Early-stage deals will decline as family offices pull back from direct investing in startups…
Increasingly, family offices have become the de facto seed funds of the non-coastal markets by leading deals and taking board seats. In 2019, I think it’s possible we’ll see a slowdown of that trend as family offices become more likely to take cash to the sidelines due to public market uncertainty. If the Fed continues to raise rates, it becomes entirely possible family offices will turn to private debt and distressed assets or funds impact projects where returns are only part of the equation.
For most of these family offices, venture is a very small part of the portfolio and is complementary to another business segment where they have expertise. Unlike those businesses, the startup economy is not as correlated with the macroeconomic trends. Yet this doesn’t mean that those investors won’t take a more cautious stance in 2019, especially at the margin, where growth isn’t as obvious, even with added synergy.
I’m not convinced those family offices won’t miss out on investing in a new wave of very important startups, especially in the analog spaces, where the Southeast will be a part of the conversion from an industrial economy to an information one.
3. …but series A rounds will attract more attention from coastal VCs
The emergence of megafunds has increased the size of series A rounds dramatically in the past few years. In 2017, the average series A was around $7 million, according to PitchBook. But perhaps most astonishing is that 39 percent of valuations were $25 million+ and less than 25 percent of those deals were under $10 million.
Investors, especially megafunds looking for options, are concentrating their capital into deals they view as higher quality. My guess is that when the 2018 numbers come out, we’ll see more attention being paid by coastal firms with “smaller” funds investing outside of the coasts as they are priced out of the “hot” deals in Silicon Valley by funds comfortable with deploying more capital earlier.
This is a trend I suspect will continue into 2019, as there is no shortage of capital to invest in early-stage companies. But the non-coastal companies will have to prove they are worth the investment to overcome the perceived limitations of location.
4. If a slowdown occurs, it will look more like 2015-2016 than 2008-2009
Speaking of missing out, here’s a small sample of firms that many expect to IPO in 2019 that were founded during the last recession.
- Airbnb (8/2008)
- Uber (3/2009)
- Slack (2009)
- Cloudflare (2009)
- Pinterest (2009/10)
I suspect we’ll see a slowdown in venture investing this year, but it won’t look like 2008-2009. Instead, the drop will be more similar to the one in 2015-2016, where the total number of deals fell by about 15 percent.
It’s unlikely we are headed for anything like Q1 2009, where venture funding fell by 50 percent from Q1 2008 to a total of $3.9 billion. That trend continued for the remainder of the year, and 2009 ended up as the slowest year since 1998.
Regardless, the bear market can be a good time to invest, as great companies are still founded during recessions. However, startups can most likely expect more diligence from investors — particularly family offices where fees on invested capital aren’t in play — and for valuations to come down even for the highest growth companies.
It’s possible I sound both optimistic and pessimistic at the same time — and that’s accurate. I am incredibly optimistic that the focus on innovation and technology away from Silicon Valley will continue to propel the industry to the forefront in new metros.
On the macro side, I’m less sure, as a slowdown seems all but certain at some point in the near future. While tech is, in theory, an uncorrelated asset, that’s never the case in practice, as funding always slows when the economy does the same.
Regardless, there’s no doubt that 2019 is going to be an exciting year for startups between the coasts, and I can’t wait to see the trends that emerge.
Kevin Stevens is a partner at Intelis Capital, a new early-stage VC firm based in Dallas, Texas. A version of this post first appeared on his blog.