Venture capitalists (VCs) are responsible for making early and risky bets on companies before they are widely adopted.
How are you supposed to make responsible bets on “the next thing” without being on top of “the current thing”?
In this article, we’ll break down why VCs have to constantly be monitoring the news, Twitter, and other sources to find the trends that matter.
Trends are especially important for pre-seed and seed investors. These investors skate where the puck is, and they use trends to figure out where they should be spending their time.
At this stage, there is not enough data on companies to underwrite them like you would a growth equity or later-stage investment; you’re primarily underwriting the quality of the team, the size of the market, and the trends and tailwinds.
Trends will not tell these investors which companies will break out, but it will lead them to a group of companies that have a shot.
Momentum investing is a strategy that involves investing in companies that have been recently trending and popular. While this may seem like a good approach, it has its drawbacks.
A lot of venture investors got burned momentum investing in the last bull run from 2019-2021, and now they are underwater on positions.
The thought at the time was that there will always be another buyer at a higher price as long as these companies continue to trend in the right direction. That all sounded good until it didn’t.
Markets dried up, and so did those buyers. Many of these startups were reliant on new funding that wasn’t there, and existing shareholders got burned.
This was a good reminder for investors: trends are a piece of the diligence equation, but it definitely isn’t the only piece of that equation.
VCs pride themselves on being informed. New trends allow them to explore, learn, read, and build their own thoughts on these trends.
Every time a new trend pops up, it becomes a thought exercise of how this will impact the future and how it will impact the portfolio. Investors can share their thoughts online (through Twitter or a blog), in a newsletter ((beehiiv or Substack), and they can communicate them in a board room.
Every one in a while, a market shift occurs, and billions of dollars are unlocked from the effects of this shift.
In the 1970s, this shift happened in semiconductors.
In the 80s, it was PCs.
In the 90s, it was the internet.
In the 2000s, it was mobile.
In the 2010s, it was social media.
In the 2020s, it is … 🤷♂️
It is still unclear what the next market shift of this decade is. Generative AI, blockchain infrastructure, and others are making a case, but it’s too early to tell.
That’s why VCs keep monitoring trends to find the next big shift.
In conclusion, staying up-to-date on the latest trends is crucial for venture capitalists in order to capitalize on early investment opportunities, identify market shifts, and develop informed thoughts on different markets.
While trends are an important piece of the diligence equation, they are not the only piece. VCs must also consider other factors such as the quality of the team, the size of the market, and tailwinds. By monitoring news, social media, and other sources, VCs can stay informed and make responsible bets on “the next thing”.