[Editor’s Note: Mark Siegel, managing director at Menlo Ventures, was the keynote speaker at IBF’s Venture Capital Investing Conference today in San Francisco. The post below summarizes his talk, in which he argued that the convergence of mobility, cloud infrastructure, social and big data—what he calls the Right Now Economy—sets the stage for $500 billion in venture returns over the next decade.]
Every technology cycle is driven by a huge disruptive new trend in innovation, such as the PC, the Internet/telecom boom, or the rise of social networking. We’re in the midst of the latest cycle, and it’s particularly compelling because it marks the convergence of four important trends: mobile, social, cloud infrastructure and Big Data.
These technological mega-trends have converged to create the real-time marketplaces of the Right Now Economy, which are already disrupting trillions of dollars in aggregate market value and have produced an incredibly fertile area for entrepreneurs to grow ideas into well-funded companies with the potential to take on established stalwarts.
In this Right Now Economy, what had to be planned can now be spontaneous. What was previously owned, can now be rented on demand. What was stored in inventory can be delivered or manufactured just in time. Matching supply more closely with demand leads to efficient pricing, better utilization of assets, and less waste. Traditional supply chains are being disrupted, and this is presenting growth companies with golden opportunities to displace large and once-unassailable market leaders, in almost every industry sector.
Big Investment Returns
This kind of disruption offers a very attractive proposition to venture firms, who have, as an asset class, experienced lackluster returns over the past 10 years. In fact, I’ll argue that the companies funded in the next few years will produce $500 billion in venture returns, and top-quartile internal rates of return of over 25 percent over the next decade.
Converging Mega-trends: Mobile, Social, Cloud, Big Data
Each technology mega-trend underlying the Right Now Economy is producing great opportunities for entrepreneurs and venture capital investment. First, there’s mobile. Consider that the smartphone was unimaginable in 2000, didn’t really exist until 2007, but is being mass marketed in the developing world in 2013. Cell phones and tablets have overtaken PCs and laptops to become the predominant personal computing devices. Five billion people around the world will become “Right Now” e-commerce, gaming, media, and education consumers in the next five years.
Platforms for reaching these consumers have evolved, too. Two-thirds of businesses now use Facebook for marketing, and 47 percent of Americans active on social networks say that Facebook has the greatest impact on their purchasing behavior.
And now we are connecting everything. It’s estimated that 50 billion devices will be Internet-connected by 2020. Today, the standard way to think of a television is as an Internet device, powered by companies like Menlo-backed Roku. Yet even refrigerators are connecting: LG has announced a refrigerator that will download recipes and give you a shopping list.
This connectivity, along with the rise of mobility and social networking, produces reams of data everyday. In the realm of big data, there are many novel approaches being developed to quickly analyze and glean business insights from this data. We’re seeing innovative database technologies and algorithms to categorize, search and sort not just structured tabular data, but unstructured data like Web pages and images as well. Who would have imagined that a company called Splunk, which started out just analyzing log files, could be worth over $4 billion?
To help power this analysis, we’ve got the cloud, which represents the most fundamental change in computing since the PC and client-server architectures. The number of virtual servers in the cloud surpassed physical servers in 2010 and will continue to skew even more dramatically, thanks in part to companies like network virtualization startup Pluribus, in which Menlo is an investor. With underlying hardware in computing and networking becoming commoditized and even irrelevant, the new value is being created in software and systems for this new, multi-application, mixed-workload, virtualized environment.
The Right-Sized Venture Industry
Besides the investment opportunities that lie ahead, the VC industry has returned to a healthier state. After a decade of lackluster performance, the industry has been winnowed to 200 or so active firms and $20 billion of annual inflows. To entrepreneurs, this means the remaining firms possess the know-how needed to build successful companies, and that goes well beyond investment dollars.
Value is Now Generated Pre-IPO
In fact, I would argue that most of the value that gets built into young companies does so well before they reach the IPO stage. For companies going public before 2000, almost 75 percent of their eventual market value was realized in the public market, post-IPO. Since then, as it became harder to get small companies to market, the venture capital industry has played the role that the public market used to play for micro-cap IPOs. As a result, nearly all of the market value of public technology companies is accruing while they are still private. Compare the recent offering of Facebook to that of Microsoft.
This fact will draw an increasing number of investment dollars to VC firms who back smart entrepreneurs. And with the additional promise of very substantial returns thanks to the Right Now Economy, right now is a very good time to build companies that cater to the demands of this disruptive convergence.
