4 tech startup predictions for 2020

Capital markets are in transition, unicorns are falling and geopolitical instability abounds. That adds up to an 'interesting' climate for tech startups.

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We’re just days into 2020 and already the new year and new decade are shaping up to be turbulent ones. Capital markets in transition, unicorns falling on their faces. . . er, horns, and geopolitical instability will all create unintended consequences that even the most talented startup soothsayers cannot predict ahead of time.

Yet, as Aiden Gillen’s character Littlefinger famously observed in Game of Thrones: “Chaos is a ladder.” Unforeseen opportunities will invariably bubble up from the market turbulence, offering bold startups the chance to carve out new niches, disrupt sclerotic markets, and even create brand new ones.

After gathering input from more than 100 startups I’ve featured over the past year and  and after surveying hundreds of VCs, here are my top 4 startup predictions for what is shaping up to be a wild 2020.

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

Prediction 1: Hibernating bears start to stir

Startups enjoyed another favorable year for raising venture capital in 2019, but 10 years into this steady bull market, a range of economic indicators from slowing global GDP to yield-curve inversions to several high-profile flameouts by “can’t lose” unicorns have started to bring the bears out of hibernation.

Whether or not the economy stalls or continues to chug along in 2020, capital markets will continue to transition to new investment models, which presents an opportunity for bearish investors. That capital markets are in transition is no surprise since the entire global economy is itself in transition. Part of this is due to the changing nature of those investing into startups, as private equity firms, crowdfunding, and other novel investment vehicles compete with venture capitalists to lead funding rounds for promising young startups.

[ Related: How to build a startup evaluation toolkit ]

“Bigger funds and many first-time funds, as well as disruptive funds like SoftBank, have caused significant issues with balance in the private markets,” says Sonal Puri, CEO of ecommerce cloud platform provider Webscale. Puri gained a first-hand view of what VCs prioritized in 2019, as her startup sought funding and secured a $14 million Series B round.

In the meantime, as automation, robotics and AI take over both unskilled and highly specialized jobs, capital is yet again being redistributed from the labor class up to the capital class. When capital floats to the top, it needs to go somewhere, but institutional investors don’t have the same risk tolerance as traditional VCs, who have traditionally been willing to swallow a long string of strikeouts, so long as they hit homeruns every now and again.

Yet, as unicorns like Uber and WeWork saw their market caps/valuations erode in 2019, even cowboy venture capitalists have become more cautious about long-shot risks.

[ Related: Tracking economic disruption in the digital age ]

“The mega-funds need mega-returns to satisfy their investors and follow the promise of the ‘unicorn,’” Puri notes. “Staying private longer than the current trend of 12-14 years is unlikely to be an option. At the same time, private equity players are consolidating and coming into the investment space as well, leading to more M&A activity. 2020 will be interesting and will focus on the fundamentals of business.”

In fact, a recent survey by the accounting and tax advisory firm BDO International found that 72 percent of private equity funds expect an economic downturn within two years. According to BDO’s U.S. Private Capital Outlook survey, venture capital funds are hedging against a potential recession by targeting distressed assets, seeking to pick up underperforming ones in proven markets on the cheap.

Prediction 2: Unicorns evolve into workhorses

The rocky year that WeWork, Airbnb and Uber had is giving some investors flashbacks to the dotcom era, when a flood of flakey startups like Pets.com eventually pulled the entire economy down with them.

Investors may not have learned their lesson in the dotcom bubble, but they do seem to be waking up to the possibility of a repeat and are taking steps to avoid it.

In my 2019 in review story, I noted that investors had begun moving away from green founding teams with change-the-world, grandiose ideas to startups run by seasoned teams who know the path to a successful exit because they’ve done it before.

In 2020, I expect the back-to-basics trend to go even further. While unicorns continued to attract supergiant funding rounds of $100 million+ in 2019, those massive rounds were fewer and farther between, while the number of unicorns dipped as well.

“Unicorns are hard to grow and even harder to feed, especially if their diet is heavily dependent on investment capital and lacks an eye towards building a solid, sustainable, revenue-generating business,” says Aaron Blumenthal, Venture Partner and Director of Global Portfolio Services at 500 Startups. “The discussion will no longer revolve around hollow traction figures and get-rich-quick valuations at all costs. I believe there will be a renewed appetite on the part of VC’s for high-growth businesses, but only for ones with reasonably clear paths to profitability.”

While it’s still easy to spot a unicorn in the wild these days – 23andMe, Airbnb, Space-X, Uber, WeWork – unicorns that have mythical business models with no plausible near-term path to profitability will fall out of favor in 2020.

“I think the most significant trend developed after Uber’s IPO and WeWork’s broken IPO – that is, a renewed focus on positive unit economics and overall profitability or path to profitability,” argues Jeff Kearl managing director, Pelion Venture Partners. “Growth is still a priority but is balanced against money making. There is more scrutiny on expenses than I have seen in several years.”

Adding even more urgency to the back-to-basic trend is the fact that uncertainty stomped into the economy in a big way in 2019 and the first days of 2020, as a tense geopolitical climate adds risk to everything from outsourcing to supply chains to dairy farming (more on this trend in a minute).

Prediction 3: Billionaire entrepreneurs continue to defy gravity

While VCs will continue to scrutinize business fundamentals in 2020, the equation changes when a billionaire serial entrepreneur or a multinational corporation starts toying with spaceports, flamethrowers, or artificial humans. Billionaires and mega-multinationals won’t be nearly as bound by gravity as other investors in 2020.

Successful serial entrepreneurs will continue to float above the constraints of earth-bound startups, free to pursue long-shot ventures cooler heads would avoid because. . . why not? When you have won at everything else, why not this?

That’s what leads the likes of Elon Musk to stubbornly pursue private commuter tunnels and Richard Branson to construct his not quite empty but nowhere near profitable spaceport in Middle of Nowhere, New Mexico.

The allure of the serial entrepreneur is so strong that Virgin Galactic reeled in a $20 million investment from Boeing for the very risky concept of space tourism for billionaires, and Elon Musk’s Boring Company convinced the Las Vegas Convention and Visitors Authority (LVCVA), which runs the city’s convention center, to commit $50 million for a system of private tunnels.

Perhaps, these billionaires will continue to defy gravity, relying on the sheer force of will to turn what look like vanity-project boondoggles into market-shaping success stories. With a potential recession on the horizon, 2020 will be a make-or-break year for these projects.

Prediction 4: A new era of Great Power competition creates uncertainty, confusion and risk throughout the global economy

In the 2020s, business of all shapes and sizes, from mom-and-pop shops up to multinational corporations, will be forced to deal with everything from intellectual property theft by adversarial foreign governments to cyberattacks launched by murky state-sponsored organizations to the unintended consequences of trade wars.

In the earliest days of 2020, a U.S. drone strike killed General Quasem Soleimani, the commander of Iran’s Islamic Revolutionary Guards Corps, Quds Force (IRGC-QF). While Soleimani had an official role in the current Iranian government, the U.S. and its allies consider him a terrorist mastermind, not a legitimate general.

Whatever your politics and no matter your view on the killing of Soleimani, what is not in question is that the risk of state-sponsored cyberattacks ratcheted up in the immediate aftermath of Soleimani’s death. Iran has vowed to seek revenge, and security experts warn that U.S. businesses could be prime targets

Tensions with Iran are just the latest conflict in this new age of Great Power competition, as both China and Russia seek to extend their spheres of influence, while the U.S. and Western Allies are pushing back to maintain the post-Cold War status quo.

U.S.-based businesses risk being pulled into this competition. In recent years, startups have been used as investment vehicles for Russian oligarchs to gain access to U.S. election infrastructure; other business have been targeted as a back-door way to exert influence on Western democracies; and security experts warn that China’s Huawei could function as a de facto Trojan horse that could turn critical communications infrastructure into a tool for espionage.

The problem is so severe that, according to CNBC, 1 in 5 North American-based companies say that China has stolen their intellectual property in the last year. 

As the old Chinese curse goes, “May you live in interesting times.” If the above four trends continue on their current trajectories, “interesting” will be an understatement for 2020.