A New Way to Analyze What's Next in Startups

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Unlike the internet wonders and mobile darlings of the past two decades, today's fastest-growing start-up sectors are firmly rooted in the real world, according to the Global Start-Up Genome's 2018 Global Startup Ecosystem report, issued last week. The authors' conclusions are somewhat surprising, because they categorize "declining" industry sectors as those whose growth in exits and later funding rounds remain high, but early stage funding rounds are declining.

This analysis shows that sectors considered "hot" in popular media, like Digital Media, Adtech, and Gaming, are actually in decline according to this definition, although there are pockets, like esports, still very much on the rise. The Start-Up Genome folks may be early in their predictions of industry "decline" by 5-7 years, as industries like Adtech likely have years of robust revenue growth ahead of them (think the ad fraud storm, Facebook, new tech like AI to make ads more targeted, and new interfaces like augmented reality), even if startup formation has slowed. However, if you're a VC trying to skate where the puck is going, you're investing in robotics, blockchain, and artificial intelligence ("AI") - all technologies which augment and accelerate real world activities like manufacturing and supply chain management.

 
 Source: Global Startup Ecosystem Report, 2018

Source: Global Startup Ecosystem Report, 2018

 

The report then goes on to discuss a number of factors that create a successful startup ecosystem, including the importance of global connectedness. Companies that have more than 50% foreign customers experience 2.1X the revenue growth of more locally-focused firms. Toronto's Wattpad is a fine example of this. Early on, Wattpad decided to make its writing platform available to users in multiple languages, giving it a global community of readers and writers - some of whom even volunteered to translate the platform into their language in the earliest days.

 
 Source: Global Startup Ecosystem Report, 2018

Source: Global Startup Ecosystem Report, 2018

 

Another factor in a successful start-up ecosystem is a diverse immigrant population, something of possible interest for governments when considering whether to build walls or bridges. Immigrant founders start a disproportionate share of tech companies and have more degrees in Science, Technology, Engineering, and Math ("STEM").

...current (US) immigration policies force many to return home or settle elsewhere. We should staple a green card to every new graduate degree in maths, science, engineering and management.
— Source: Harvard Business School professors Michael Porter and Jan Rivkin, in The Economist, 2012

We may have moved in the wrong direction on that one since 2012, Michael and Jan.

The report then provides a reality check for entrepreneurs before diving into subsector specifics. No matter what sector your tech startup's in, a few figures remain relatively constant: the seed round's about $500,000, the Series A is about $5 million, and the median exit's in the $30-40 million range. This is a refreshing bit of data sanity, given the number of small company founders we meet who claim they won't look at anything below $100 million - before they've actually made a sale. (This is where my lack of a poker face is a real biz dev liability.)

Moving on to subsectors, AI is flat out smokin.' It has been growing at 24.8% year on year ("YOY") since 2008 in terms of number of startups created. And with open source tools like Hadoop and inexpensive cloud services, costs of deploying AI have dropped dramatically, with most of the heavy lifting early on done by governments and universities - and giants like Google, which spent between $20-$30 billion on AI in 2016.

Recent PWC research shows that global GDP could be up to 14% larger in 2030 as a result of AI - the equivalent of an additional $15.7 trillion, making it the biggest commercial opportunity in today’s economy.
— Global Startup Ecosystem Report, 2018

AI is a broad term encompassing a field from machine learning (learning from data) to deep learning (from supervised learning to reinforcement learning to unsupervised learning), to artificial intelligence. Inmar Givoni, Autonomy Engineering Manager at Uber, gives us some definitions here, and explains that we don't even really know yet how to go about achieving true artificial intelligence (i.e., a machine thinks like a human): 

Startup Genome's global map shows some serious Canadian content in the growth sectors. Canada's rising stars in AI include Ottawa's Mindbridge AI, which detects anomalies in financial reports for accountants. Solon Angel, founder of Mindbridge, chose his industry and target market well. Accounting is rules-based, lending itself to a data-driven approach, and accountants will trust a system which is proven accurate over time, with less concern for the "softer" elements of trust. Further east, Halifax's Affinio uses machine learning and advanced algorithms (pattern recognition, at heart) to identify commonalities in audience interests and paint a picture of target personas. This helps marketers refine their key messages and targeting techniques, down to keywords and hashtags. SAM, founded in Edmonton in 2013, uses AI to monitor social media to detect emergencies around the globe. It claims to power more newsrooms than any other curation platform. Toronto is home to the Vector Institute for Artificial Intelligence and Geoffrey Hinton, who leads Google's AI research. It's also where, in January 2018, giant TD Bank acquired Layer6 for $77 million, seeking to use AI for enhanced personalization and "next product" recommendations. TD Bank has been on a bit of an AI roll, agreeing in October 2017 to add Kasisto's conversational AI (i.e., smart chatbots) to its mobile app. Given the speed with which the AI space is moving, we think this "buy/partner vs. build" approach makes a lot of sense for bigger companies. The best ideas are likely to come from outside the corporate citadel in this space.

Further west, Vancouver is home to a major gaming innovation center, another of the sectors discussed in the report. Homegrown successes include Eastside Games, creator of mobile games like Pot Farm (excellent timing), and A Thinking Ape, as well as AR/VR leaders Finger Food Studios and Archiact Entertainment. Montreal is home to 35% of the gaming studios in the country, thanks in part to a provincial tax credit amounting to 37.5% of eligible employee salaries. Halifax boasts branches of global game publishers such as Ubisoft and start-ups such as Play the Field, which has created a demo for an app that creates a treasure hunt experience at a casino, increasing engagement and moving customers through the casino.

And for the first time ever, Valve's international esports tourney, the Dota 2 Championships, will be held in Canada (at Vancouver's Rogers Arena) late this summer. Dota (Defence of the Ancients) is part of the multiplayer online battle arena game genre, with prize pools approaching $25 million. Players are mostly male and in their early to mid-twenties. They form teams of 5 with names like Slayer, Bloody Nine, and DeMoN, presumably because Baby, Posh, and Ginger were already taken. I guess if you get paid $25 million, you can call yourself whatever you'd like. While a small part of $120 billion gaming industry today, esports is growing rapidly and is projected to grow to over $2 billion in revenues by 2020, from $500 million in 2016. It will be a medal event at the 2022 Asian Games in China.

The report's chock full of analyses on other start-ups in blockchain, life sciences, robotics, edtech, and cybersecurity. It's worth a read if you are seeking to invest, found a start-up, or just update the career advice given to Dustin Hoffman in the 1967 movie, The Graduate. "One word. Just one word, young lady. AI. There's a great future in AI."

 
 Source: Medium, @Aerosint

Source: Medium, @Aerosint