We were traveling in India until the second week of January so I’m late getting out these predictions. Of course, the benefit of being late is I got to read everyone else’s. Here is my attempt at predicting what's to come in the next year focused around some themes that we follow closely at SBNY. This list is by no means exhaustive, but I will revisit in December to see what I got right. I believe all these things will happen eventually, but timing the market is a tricky business.
In 2015, AI matured from a buzzword to a real thing with the emergence of a few interesting companies seeking to replace jobs currently performed by humans with machines. Mechanizing labor is nothing new, but what's different this time around is the attempt at mechanizing the mind e.g. tasks that require judgement. In 2015, this included both “on demand” products that look automated but have humans pulling the strings behind the scenes and actual machine powered NLP-based services. In 2016, I think we’ll see a separation between products that can truly claim AI and those that borrow the label for its cache. I think we’re still more than a year away from startups deploying true machine intelligence at scale (fully mechanizing judgement beyond defined tightly scope), but like most technological advancements, progress will be incremental. NY-based Clarifai are succeeding in helping to lift the veil of tag-based search methodologies, which are long overdue for rearchitecture. This fits into the AI column in so far as tag-based image categorization is still performed by humans and they’re replacing this function with machines. Services like x.ai (we are investors) are replacing the more judgement-laden human behavior of managing a calendar - negotiating, scheduling and editing. Technologies such as these will begin to integrate more seamlessly with popular apps and services and I think we’ll start to see some M&A activity in the segment, both of which will bring more attention to it.
Lots of money has flowed into the category and 2016 will be the year a few businesses emerge as leaders. We'll see some separation between companies masquerading as RE Tech (e.g. functional software applied in the RE vertical for specific purpose) and companies that unlock the vast opaque datasets will be recognized for the unique value they create (we’re investors in Reonomy who fall into the latter camp). Technological advancement in commercial real estate will continue to outpace residential as this is where the most opportunity for disruption lies. On the residential side of the house, the broker will continue to gradually lose power with direct sale platforms gaining momentum, but this evolution will take a decade or more before it’s acutely felt by the market.
FANG + Apple
Global mindshare of Facebook and Google will continued to grow. Amazon will surge fastest and dominate all things commerce causing a few national retailers (and retail-focused REITS) to rethink their strategies or worse. Facebook will continue its acquisition binge buying another company that surprises people. Netflix and HBO will start going head to head more directly and we may see some consolidation as the 84-channel cable bundle starts to break down. Programming quality will remain at all-time highs benefitting the consumer. My guess is Apple will underperform Facebook, Amazon, Netflix and Google, but they have a chance to made a real dent in the TV market with the AppleTV marketplace and this could become the iTunes of TV if they execute. This is Apple's biggest near term opportunity.
Interest in “on demand” everything will finally subside. Marketplace leakage and upside-down unit economics will cause many of these businesses to go away. The few who deliver a product or service where the marginal utility of real time delivery is high enough to make a difference (Uber) or the simple act of unlocking discovery in an opaque market delivers enough value (Zeel) will endure.
Overfunded late stage / Public markets
In 2016, private valuations will come back to reality and be more closely correlated to public multiples, which themselves will contract after a 30-month bull market run. Incidentally, when I learned the venture pricing business as an analyst at Robertson Stephens in the late 1990s, we applied a haircut to public multiples via a "liquidity discount”. In 2016, rational behavior will return. In both public and late stage private markets, 2016 will be a year of some reckoning with valuation corrections and adjustments, in some cases extreme.
New York City will continue to accelerate as the nation’s fastest growing market for software development (and 2nd overall after the Bay Area). As the WSJ reported last week, venture funding in New York has grown more than 4x since 2009 far outpacing the national average and representing more than 10% of the US market. This trend will continue and we’ll gradually see more high profile exit events as more of the mature private tech companies either go public or otherwise make noise that attracts attention.
I will come back to revisit end of December. Happy and healthy 2016 to all.