There’s a cyclical nature to fundraising. Certain sectors rise quickly and become competitive while others decline. So how do you know what is hot and what is not?
If you work in the industry and are constantly gauging the state of the market like me you ask yourself a couple of key questions. First, which sectors are in vogue now in Seed investing and Series A investing? Second, is there a delay between the sectors attracting seed capital and Series A capital? In other words, do seed investors see trends before VCs do?
The chart above shows the trends in the seed investment market. This data is Crunchbase data filtered for the largest 20 or so sectors from 2010-2013. Each graph shows the fraction of relevant seeds in a particular segment over time. The hottest sectors, those with a sudden increase in seed investment share, include some obvious ones: Hardware + Software, Health and Wellness, and Messaging. The hardware startup movement has been catapulted by the success of crowdfunding platforms like Kickstarter, and the quantified self help and wellness movement has amassed some tremendous momentum as well. More interestingly, though, there are a few surprises: Automotive, ECommerce, and Fashion.
The sectors in decline include Advertising, a challenging sector because of the market dominance of Google and Facebook, and Big Data, whose investment share had spiked two years ago creating a swell of competition, and Android.
Let’s contrast the seed investment patterns with Series A patterns using the same analysis for the top 20 or sectors in the Series A market.
The patterns are similar but not identical. Some winners like Hardware + Software, Health and Wellness, and ECommerce are consistent. But Automotive and Fashion didn’t garner large enough Series A share to surface in this analysis.
Series A investors seem to be more bullish on Android companies than seed investors do; perhaps it’s an artifact of latency. The Android startups which raised seeds in 2011 and 2012 raised Series As in 2013. Series A investors are pursuing Analytics with more gusto than seed investors. Which raises the question, how quickly do Series A investors respond to the trends in the seed market?
The chart below overlays the Series A trends across the Seed categories in the top chart of this post.
Looking at the data on an annual basis, and though there are exceptions, Series A investors quickly respond to trends in the seed market. In fact, the investment patterns have a very strong synchronicity. Series A investors follow the patterns set by seed investors, or at the very least, both tend to invest in the same markets at the same time.
Going into a bit more detail if you compare the investment correlation patterns by quarter it shows that when a sector becomes hot in the seed market, it’s hot for another nine months in the Series A market, and then it begins to cool. Interesting huh?
Whether you are in a hot sector or not it shouldn’t really affect you ability to raise funding for your business. As long as the fundamentals are right, the management team is strong and you can demonstrate an ability to meet projected performance you are in a very strong position to get the funding you need.
Just remember though that getting funded takes a lot longer than you think!
Adapted from The Hottest Startup Sectors.
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