Investing in startups is like bird-watching, or at least that’s the quote from legendary venture capitalist Mike Moritz.
Over the past two weeks, I have listened to 146 startups pitch in rapid-fire succession at demo days for Y Combinator and 500 Startups.
Of those startups, probably five or six will emerge as the next Airbnb, Dropbox, or Reddit. The founders of the next billion-dollar startup have probably run through their pitch deck in front of me.
The rest of the flock will disappear from the sky, selling to a bigger company, going adrift, or maybe shutting down entirely.
For venture capitalists, Moritz advises not to look at the flock, but at each individual startup. “Each one is different, and I try to find an interestingly complected bird in a flock rather than try to make an observation about an entire flock,” Moritz has said.
But you can still learn a lot from watching the entire group. Here’s what this batch of companies showed about the direction startups are flying:
- Security is the new hot ticket. Start listing the companies that have been hit with a hack in the past year (Target, Sony, Ashley Madison, etc.) and you will quickly realize why security startups are multiplying so fast. Compared with the on-demand delivery space, where every company is delivering a different product but in a similar way, the security startups are approaching the problems in incredibly wide-ranging fashions, and no one has emerged as the winning standard yet.
- Hardware startups are growing. Twenty hardware startups presented at Y Combinator’s Demo Day — as many as B2B this year. It’s not just iterations of the smartwatch, though. Startups created everything from a new shower backed by Tim Cook to a Keurig for vegetables and a sandwich-making robot. Hardware has proved a success, with Fitbit having the most successful initial public offering of the year, and startups are jumping on making anything and everything smarter (that includes your mattress cover).
- How we hire and recruit employees is about to change dramatically. Several startups are looking to upend the hiring process by making it more efficient for businesses. What does that mean for the job-seeker? You may be taking an automated test, whether you are a coder or an accountant, and interviewing with an outside company first. It’s these companies that will whittle down talent, run the background check, and do the initial phone screen before the hiring company even sees the candidate.
- Social startups are dead. Of the 146 startups that pitched, only two were social networks. One focused on alumni as a networking platform, and the other started as a dating app for lesbians before it pivoted into a social network for women. Not a single messaging alternative, photo-sharing app, or location-check-in company presented.
- Money is falling from trees, and even small businesses want a part of it. A lot of the “tech companies” were really just profitable non-tech small businesses. One condom company that presented said it had designed a nontoxic condom that women wanted. But instead of explaining the technology behind the design and how it was what women wanted, the founder pitched the margins: They cost 5 cents each to make, with 12 in a box that is sold for $15.
- Everyone is now an “X for Y.” There’s a next-generation “Bloomberg for investors” and a “Bloomberg for government data.” There’s also a “Twitch for live coding” and a “Twitch for illustration.” A comparison to an existing company is an easy way to explain a product during a three-minute pitch. If you say you are the “Uber for moving,” a user will expect to open an app and call a moving van. It will just be hard for these companies to be that one bird that becomes a billion-dollar company when a similar bird has already emerged from the flock.
- Startups are looking outside Silicon Valley — way outside. Life in San Francisco can be pretty easy. Food and cars can arrive on doorsteps with a few clicks on an Apple watch. Startups, though, are finally turning their eyes to other markets and taking Silicon Valley solutions outside the US. Many followed the “X for Y” model, including a “Venmo for Southeast Asia,” but all of the startups had different solutions for their markets. Chaldal, the “Amazon Fresh in Bangladesh,” is building micro-warehouses throughout the dense city of Dhaka to deliver groceries. Others, such as Red Carpet, are taking India’s local market system and upgrading it so customers could shop online thanks to installing a point-of-sale system.
- Startups are going niche, in both their product and their market. A particular industry may be saturated, but new startups are still finding a way to try to carve out a slice. This means making their initial market smaller but cannibalizing an untapped one (such as a food-delivery service on college campuses delivered by college students who know the area) or focusing on one product like coffee instead of delivering all kinds of food. The hard part with a smaller niche startup will be making the kinds of returns investors expect to see, but Facebook is the example of how niche can be a good thing. It started as a social site for college students and became a global network.