The year in startups: 3 trends in 2019 offer a glimpse into a wild 2020

I’ve written plenty of prediction stories in past years, some of which seem prescient in hindsight. Other predictions, unfortunately, make me cringe. 

That’s the nature of the predictions beast, I suppose, but this year I’ve decided to try to reduce uncertainty – always a Sisyphean task when soothsaying – by taking a more methodical approach to my prediction process. First, I took a long, hard look back at the trends I observed over the last two years as I covered tech startups for Network World and IDG Insider Pro.

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I then reached out to every startup I’ve featured in my IDG startup roundups since the beginning of 2018, asking their C-level executives about the trends they deemed most impactful in 2019, as well as asking for their 2020 predictions. Finally, to get a better read on the funding climate, I surveyed the VC and angel investors who subscribe to my Startup50 newsletter to get their input about funding trends.

Early in the new year, I will offer my 2020 startup predictions based on this research, but first, let’s take a look back at three important tech and investment trends that shaped 2019.

Trend 1: Baby bulls joined the stampede

Technology startups had another big year in 2019, raising massive funding rounds, achieving exits through acquisition, and even earning a solid foothold in such up-and-coming markets as internet of things (IoT) and SD-WAN.

[ Related articles: 10 hot IoT security startups to watch and SD-WAN sector report: Growing with no end in sight ]

Not everything was rosy in 2019, however. Tech IPOs dried up almost entirely in Q4 (gated link), while a couple of deep potholes threatened to slow down the economy, including a costly trade war and an alarming yield curve inversion.

Still, the overall investment environment for tech startups remained positive.

“A notable funding trend in 2019 was increasingly larger seed rounds, which drove up the initial valuation of these startups artificially,” said angel investor Amichai Shulman.

Aaron Blumenthal, venture partner and director of Global Portfolio Services at 500 Startups, observed this trend as well. “Of the thousands of applications we saw during calendar year 2019, I think the most interesting trend for 500 Startups was how heavily so many applicants (and indeed investments) are skewing toward what we would think of as earlier stage (roughly 66 percent of applicants, up from about 45 percent just three years ago),” Blumenthal said.

Data from Crunchbase backs up these observations. In 2019 big rounds got bigger. Crunchbase’s Q3 2019 data showed that venture capital deal volume hit an all-time high in the first three-quarters of 2019, driven by a flurry of seed-stage international startup investments. Crunchbase projects that when all of the data is in, investors will have poured $75.6 billion into 9,100 venture capital deals in Q3 2019.

My own reporting over the past two years featured a healthy number of seed- and Series-A-stage startups that had the right combination of funding, team, market potential, and/or product-market fit to hold their own against better-established startups and incumbents.

2018-19 IDG Hot Early Stage* Startups

Startup            Total Funding    Latest Round    Year founded    Roundup

Canvass Analytics    $6.5M               seed                  2016             AI-Powered IoT

Cloud Daddy           Self-funded      N/A                       2017            Business Continuity

EdgeMicro               $6M                  seed                    2017            Micro Data Centers

Edgeworx                Undisclosed     seed                    2017            IoT Security

Hammerspace        Self-funded      N/A                      2018            Virtualization       

HyperQube              $575K              seed                    2017           Virtualization       

JetStream Soft         $11.5                  A                       2016            Business Continuity

MemVerge               $24.5                  A                        2017            HCI

Q-CTRL                   $15M                  A                        2017            Quantum Computing

ReFrim Labs            $4.5             seed/grant                2017            IoT Security

RStor                        $45M                  A                        2016            HCI

Strangeworks           $4M                  seed                    2017            Quantum Computing

Turnium Tech          Undisclosed      N/A                      2017             SD-WAN

Vrayo Systems        Undisclosed      N/A                      2017             SD-WAN

Xage                        $16M                  A                        2016             IoT

Xanadu                    $41M (CA)          A                        2017            Quantum Computing

Zapata Comp           $31.4                 A                        2017             Quantum Computing

ZEDEDA                 $19M                   A                        2016             IoT

*For this story, we consider “early stage” startups to be those founded in 2016 or later and having raised only seed or Series A round funding.

Trend 2: 'Seed-stage' doesn’t mean 'green'

Seasoned early stage startups performed particularly well in 2019, as our chart above shows. If “seasoned early stage startups” sounds like an oxymoron, it’s probably because you’re picturing first-time entrepreneurs who are barely old enough to shave. The seed-stage startups propping up the VC market in 2019 were not newbies.

Angel investor Shulman says there are two big factors driving the uptick in big early rounds. “One of the reasons for this is excess money in the market,” he said. “The other is the return of second-time cyber-entrepreneurs with new companies. Startups with seasoned founders are considered extremely lucrative by VCs and draw larger investments for less equity.”

On Shulman’s first point – excess money – Crunchbase data supports this observation. Crunchbase found that investors poured excess money into supergiant funding rounds ($100M+). The 2019 data showed a slight downtick in supergiant rounds from 2018, but these rounds were no longer limited to late-stage startups, with a select number of Series A and B startups reeling in massive rounds.

Among our IDG hot startups, only Rubrik landed a super-giant round in 2019, reeling in a massive $261 million Series E, but a number of startups raised $25 million+ rounds at every stage from A through E.

On Shulman’s second point – seasoned founders are in great demand – I found that IDG hot startups, which tend to be startups with experienced leadership teams, performed well at all levels, from early stage on through to exits. In fact, several of our recent hot startups were acquired in 2019 by such monopoly-scale incumbents as Google, VMware and Amazon.

2019 Acquisitions of IDG Hot Startups

Startup              Acquired by      Price                 Roundup

Alluvium             Augury                Undisclosed      AI-Powered IoT

Avi Network        VMware              Undisclosed      Virtualization

Elastifile             Google               ~$200M            Hybrid cloud

E8 Storage         Amazon              ~$50M              HCI

Hedvig                Commvault         $225M              Business Continuity

QxBranch          Rigetti                 Undisclosed      Quantum Computing

Vexata                StorCentric         Undisclosed      Virtualization

A word of caution: there’s selection bias at play in my data. One of the factors I weigh heavily when I evaluate startups is the track record of the founding team, so it’s no surprise that the early stage startups I’ve featured are run by seasoned pros.

Investors too, however, have become biased towards founding teams that have proven they know how to guide a startup to a successful exit. This has always been the case to a certain degree, of course, and the dorm-room startup was more myth than status quo, but investors seem to be reacting to market-correction warning signs by placing fewer and fewer high-risk, high-reward long-shot bets.

In my own startup coverage, many other of our “seasoned” hot startups landed big funding in 2019, attracting $25 million+ funding rounds.

IDG Hot Startups that Landed Big Funding** in 2019

Startup                 Funding    Round      Funding to Date    Roundup

AlertMedia            $25M         C               $42M                      IoT

Armis Security      $65M         C               $112M                    IoT

Cato Networks      $55M         C               $125M                   SD-WAN

CloudGenix          $65M         C               $99M                      SD-WAN

CyberX                 $18M         C               $47M                      IoT Security

IonQ                      $55M         B               $75                         Quantum Computing

MemVerge            $24.5M      A               $24.5M***                HCI

Particle                  $40M         C               $75.8M                   IoT Security

Platform9              $25M         D               $61.5M                   Datacenter Virtualization

Rubrik                   $261M       E                $553M                    Storage

Weka.IO               $31.7M      D               $66.7M                   Hybrid Cloud

Zenlayer                $30M         B               $40M                      SD-WAN

** For this story, we consider “big funding” to be $25M+

***Close enough, we’re rounding up

Trend 3: AI led the startup pack

Several enterprise technology sectors that boomed in 2018 continued to expand at a breakneck pace in 2019, especially artificial intelligence (AI), IoT, and SD-WAN. My recent Insider Pro hot market sector reports for IoT and SD-WAN offer an in-depth look at why smart money continues to flow to these sectors, so let’s take a closer look at how AI is transforming enterprise tech.

AI was the overwhelming No. 1 technology sector that startup executives and Startup50 subscribers mentioned as being hot in 2019, and they predict this sector will continue to scorch into 2020 and beyond.

“While the uptick in seed-stage investments was a new trend in 2019, the trend in investing in all things AI continued at the same rapid pace that we have been seeing since 2013,” said Vidya Raman, principal at Sorenson Ventures

AI has an unfair advantage because it is integrated into so many other technologies. IoT, SD-WAN, storage, cybersecurity, business continuity, and plenty of other enterprise networking technologies now include AI/machine learning (ML) capabilities within their feature sets. In my own consulting work with startups, I’m seeing AI drive such disparate sectors as FinTech, pharmaceuticals, cybersecurity and DevOps.

“Large [funding] rounds for maturing AI/ML/Analytics continued to be an even bigger trend in 2019 with infrastructure players such as Databricks, DataRobot, and Hashicorp [gaining market traction],” Raman observed. However, Raman also believes that the AI sector could cool off in 2020, as large enterprises turn to maturing AI/ML platform tools that they can use to “build their own AI/ML-enabled applications instead of purchasing them from startups that have created a point solution.”

Executives at startups are even more bullish about AI than investors. “Hands down, AI was the most important trend across all enterprise computing in 2019, said Yaniv Romem, CTO and co-founder of Exclero, an NVMe startup I featured as a hot data-center virtualization startups to watch. “The use of AI and ML-based systems exploded in 2019 as technology evolutions made it far easier to capture, store, and process data into insights. AI will continue to transform every digital process and technology well beyond 2020.”

In 2019 AI showed signs of delivering a competitive advantage to early adopters. In 2020, I fully expect AI to pay big dividends to early adopters, with the gap between early adopters and laggards expanding quickly.

A recent IDC survey supports these observations. IDC’s survey of global organizations that are already using AI found that half of them see AI as a priority and two thirds are emphasizing an “AI First” culture.

“Organizations that embrace AI will drive better customer engagements and have accelerated rates of innovation, higher competitiveness, higher margins, and productive employees. Organizations worldwide must evaluate their vision and transform their people, processes, technology and data readiness to unleash the power of AI and thrive in the digital era,” said Ritu Jyoti, program vice president, Artificial Intelligence Strategies.

IDC also predicts that by 2024, AI will be integral to every part of the enterprise, resulting in 25 percent of overall AI spending being targeted at AI solutions that drive innovation at scale.

Not everything AI touches turns to gold, however, and in my 2020 predictions story, I’ll take a close look at a complementary technology to AI that could trigger a different sort of disruption, the risky type of disruption that smart enterprises will seek to avoid.

Watch for Insider Pro's 2020 startup predictions in January.