GVA Research On Bloomberg: Tech Spending and Investing in 2015

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The interview starts at 13:30 and runs to 28:30.

Last week, I was interviewed on Bloomberg Radio’s “Bloomberg Advantage”. Special thanks @Kathleen_Hays and @VonnieQuin for having GVA Research on their show!

2015 Venture Capital Outlook: Following 2014 which saw the greatest amount of funding raised for start-ups since 1999, questions understandably arise as to whether the sector is currently in “bubble” mode (see:http://online.barrons.com/articles/tech-stocks-sizing-up-the-new-bubble-1417844424), especially as consumer-facing start-ups such as Uber have raised significant late-stage funding at elevated valuation levels (i.e. $2.4bn total raised in 2014, with last round valuation $41bn). Separately, as alternative funding sources have begun to ramp-up (e.g. crowdfunding, angelfunding), one must ask whether early-stage valuations are similarly becoming unrealistic. One near-term milestone investors should watch is the IPO for cloud-based storage & collaboration platform Box Inc. (raising $150mm at $1.6bn valuation through Morgan Stanley/JPMorgan/Credit Suisse-led syndicate for trade Fri 1/23/15). While experiencing strong growth, Box is currently unprofitable, something that may be of concern to IPO investors. Meanwhile, note the 2014 IPO total came in at $85.2 billion, the highest in the past 10 years. On Wall Street, nothing succeeds like excess, so investors should watch for the underwriting quality for upcoming IPOs to see if standards are deteriorating. In the bigger picture, note that capital formation cycles typically do not collapse until monetary policy tightens and interest rates rise. With oil prices cut in half over the past 6 months and economic growth sluggish at best in the EU and slowing in the PRC, inflation is not an issue, especially as the US Dollar has strengthened against its trading basket. The next financial crisis most likely comes from a non-US issuer default on US-denominated debt (see:http://www.bloomberg.com/news/2015-01-18/kaisa-on-brink-of-dollar-default-spooks-world-s-money-managers.html). However, relative to venture capital 2015 prospects, expect low interest rates and GDP growth will keep sector allocations at elevated levels as investors seek higher returns.

Start-ups of interest in NYC and elsewhere: Financial Technology (FinTech) start-ups are drawing interest, but still too early stage. With Sony Studios going down in flames due to hacking, security is seeing strong demand that should be thought secular, not cyclical. In this area, CipherCloud (www.ciphercloud.com) is of particular interest. Image processing also good as “light field imaging” leader Lytro (www.lytro.com) is seeing 2015 commercial launch in consumer market, but the software developed from the company’s IP portfolio is more critical as it can be deployed in a wide range of consumer-facing applications (e.g. e-commerce, video). Meanwhile, with companies such as Lytro moving up rapidly and incumbents such as Apple (ticker: AAPL) developed image-related IP, it is clear that companies such as GoPro (ticker: GPRO) may experience only a short half-life unless a “stickier” product ecosystem is developed to promote customer retention. In Advertising Technology (AdTech), NYC-based MASS Exchange (www.massexchange.com) is launching IP-based financial market structures for advertising markets, an integrated framework covering a range of media channels, not a piecemeal RTB internet ad focused solution that characterizes the current AdTech landscape.

Smartphones, Smarthomes, Internet of Things (IoT): Smartphone market in 2015 will reflect the ongoing upgrade cycle to larger screen form factors following Apple’s September 2014 iPhone6 product launch. Competitors who were early to the form factor (e.g. Samsung) will experience market share losses as consumers and businesses worldwide are drawn to the superior integrated user experience that Apple still offers. Separately, the anticipated Apple Watch will likely capture attention during 1H15 and if well received may be the year-end holiday gift for 2015. Meanwhile, smartphone up&comer Xiaomi continues the time-honored PRC company tradition of trademark & copyright infringement in branding its products as “Mi-phones” and “Mi-pads”, a direct nod to Apple’s iPhone and iPad. Much attention given to how rapidly Xiaomi has scaled and its possible prospects (see:http://www.bloomberg.com/news/2014-12-29/xiaomi-raises-1-1-billion-at-45-billion-valuation.html). However, until Xiaomi demonstrates success in penetrating major markets away from the PRC, the company should be seen as mainly a beneficiary of Beijing’s increasingly nationalistic industrial policy. Last, Microsoft (ticker: MSFT) still remains a relative unknown in the smartphone market despite the $7.2bn acquisition of the mobile handset operations of Nokia (ticker: NOK). Look to Redmond, WA for interesting developments in 2015.