The Lack of Venture Capital in Non-Software Industries
Venture-capital backed startups almost all cluster in the same handful of industries, mostly various types of software. This leaves a variety of large and economically important sectors with almost no venture-capital backed startups. That means those industries see fewer new companies and new ideas; they must rely on either growth from existing firms, which are unlikely to embrace disruptive innovation, or on startups that bootstrap and/or finance with debt, which tend to grow slowly.
Mapping Investment in Various US Industries
Venture capital firm Fifty Years has done a nice job cataloging exactly which industries see the most, and least, investment relative to their size. Here is their picture of the US economy by industry market size:
US economy by industry market size
Now their picture of which industries get the investment (though unfortunately, they aren’t very clear about their data source for it):
Industries receiving investment
The “Opportunity Ratio” and Underfunded Industries
They use this to create an “Opportunity Ratio”- current market size divided by current startup funding:
They call the industries with the largest Opportunity Ratios the “Top Underfunded Opportunities”:
Challenging the Top Underfunded Opportunities
I don’t necessarily agree; some industries face shrinking demand, prohibitive regulation, or other fundamental issues making them bad candidates for investment. Conversely, investors haven’t just focused on software randomly or through imitation; they see that it is where the growth is.
Still, herding by investors is real, and I always like the strategy of finding a new game instead of trying to win at the most competitive games, so I do think there is something to the idea of investing in an unsexy industry like paper. Growing up in Maine and watching one paper mill after another close, I always wondered how they managed to lose money in a state that is 90% trees, and whether anyone could find a way to reverse the trend. Perhaps related technology like mass timber or biochar will be the way to take advantage of cheap lumber.
Exploring Investment Potential in Untraditional Sectors
With the majority of venture capital concentrated in software industries, there is a great opportunity for investors to explore untapped potential in non-software sectors. While industries like paper may not seem exciting, focusing on these sectors may yield significant returns. The lack of venture-capital backed startups in these industries means fewer new companies and ideas, making them ripe for disruption and innovation.
Investors should consider looking beyond the crowded software market and seek out industries with high growth potential. For instance, industries like paper may benefit from advancements in related technologies such as mass timber or biochar. These technologies can leverage the abundant availability of cheap lumber in states like Maine, revitalizing struggling industries and creating new opportunities for investment.
By diversifying their portfolios and investing in underfunded sectors, investors can tap into a whole new realm of possibilities. While software continues to dominate the venture capital landscape, there is great potential for growth and innovation in non-software industries. The key is to identify the industries with the highest Opportunity Ratios and explore how disruptive ideas and technologies can transform these sectors for the better.
In conclusion, the lack of venture capital in non-software industries presents a unique opportunity for investors. By venturing into underfunded sectors, investors can participate in the growth and innovation of industries that have been overlooked. With the right strategies and a willingness to invest in untraditional sectors, investors can tap into previously untapped potential and drive economic growth in these industries.
Analyst comment
Positive news. Analyst perspective: The lack of venture capital in non-software industries presents a unique opportunity for investors to explore untapped potential and drive growth and innovation in these industries. By diversifying their portfolios and investing in underfunded sectors, investors can tap into a whole new realm of possibilities and create significant returns.
