It is that time of the year when VCs are asked about what sectors are they betting on in 2017? It’s become a game of “hot or not” for the last few years. Sectors seem to change as frequent as the years if not seasons. Food tech was hot a couple of years ago, no one seems to mention it anymore. AI and chat bots are probably still hot.
Investing cycle in venture is typically 10 years. The first 2-3 years is when the investments are made, over the next 5-6 years they are nurtured and then it’s time for exit and returning the money to the limited partners. To make stellar returns the portfolio companies and the sector they address need to be attractive even at the time of exit. The VC not only has the job to catch the wave during the investment, but also must be foresighted to see if a sector will continue to be hot over the next 8 years. That is the difference between a fad and a trend. A short-term capital can ride a fad and make money, but patient capital like venture needs to catch a trend. The difference between fad and trend – Vietnamese food in India may be a fad, but healthy eating is a trend.
Founders have an even tougher choice to make. The path to fad is easy – it is the talk of the town and can attract talent and capital. The path to follow a trend is relatively tougher and needs a greater understanding between the partners building the company – founders and investors. The investors must understand the upside of a trend and continue supporting the team. The founders must believe in frugality to sustain the company for the years until the start of significant cash flows from the business.
For investors, the choice can mean better returns. A fad usually has irrational investor interest and valuation. A trend could be more attractive investment, but would require greater analysis and connecting the dots.
So, shouldn’t the question for the investors be – what is your prediction for major trends in 2025?