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In venture capital, certain niches are more relevant in certain periods and attract the biggest number of entrepreneurs. This is mostly influenced by world events and the demands of states, society or businesses. In 2020-2021, many developments revolved around the pandemic and online interaction: telemedicine platforms, the heyday of ecommerce, including payment and delivery systems, remote work and training services, the explosion of crypto projects and investment platforms.
The modern environment dictates new rules. Current events are inextricably linked to the geopolitical situation and financial instability. The era of cheap money has passed — to curb inflation, financial regulators started increasing interest rates. Since March 2022, the U.S. Federal Reserve has been increasing the key rate at each meeting (for the first time since 2018). This led to continuous interest rate growth — in July 2023, the range reached the current 5.25-5.5%.
Last September, the European Central Bank increased the interest rate to a record 4.5%, which was the tenth time they increased it in 14 months, reaching the highest level since the introduction of the Euro in 1999. For startups looking to expand or just stay afloat, this leads to a decrease in available cash flow and an increase in business loan payments. At the same time, growing rates tempt investors to give preference to businesses with established profitability.
Current events directly affect the investment landscape. According to CB Insights, by the end of 2023, global venture capital financing decreased by 42% compared to 2022 and amounted to $248.4B, while the number of deals decreased by 30%.
Venture capitalists started leaning towards a more conservative position, exploring strategies that are likely to pay off in the next five years or are fundamental to the world and technology. The coming years are expected to be a time of thoughtful decisions and careful investments.
Related: Venture Capital 101: A Comprehensive Guide for Startups Seeking Investment
Top 5 most relevant industries for investment
But let’s not be pessimistic — there are areas that continue to develop extensively to this day. Here is the list of the most in-demand niches for both startups and investors:
1. Artificial Intelligence (AI)
Generative AI blew up the market and brought new investment activity: In 2023, one round shook the venture capital world — Microsoft invested $10B in OpenAI. On top of that, more than 70 rounds in the total amount of about $100M were dedicated to startups that create models, provide infrastructure or apply technology for a specific application (e.g., companies like Anthropic, Adept AI, Inflection AI, Jasper, Descript and Stability AI).
In 2024 and in the following years, the use of technology will expand dramatically. In January, OpenAI launched the GPT Store marketplace, which features trained AI assistants (chatbots) based on the GPT-3.5 or GPT-4 language models. These assistants have built-in prompts (tips or instructions), so you just need to select the right assistant for the task and briefly explain the task. At the moment, the marketplace features around 3 million versions of AI assistants for a variety of tasks: from program training to casual movie selection. Today, anyone can create an AI tool and place it on the marketplace to be accessed by all users.
Another trend in the development of AI is B2B: increased integration of technology into solutions for business, healthcare, finance and other industries.
Already at the beginning of this year, there were two major funding rounds in this direction: startup Kore.ai raised $150M (offers AI-powered virtual assistants and applications for enhancing customer and employee experiences across various industries) and Zum — $140M (the company helps schools improve efficiency and reduce the cost of managing their bus fleets using an AI-based platform).
2. Biotechnology (BioTech) and healthcare (HealthTech)
According to Silicon Valley Bank, 2023 was the third biggest year for the U.S. venture capital investments in healthcare projects over the past decade (funding decreased by just 14% compared to 2022).
Already at the beginning of 2024, there have been major funding rounds in the industry. For example, $105M was raised by biotech company Cour Pharmaceuticals (it focuses on the development of disease-modifying therapies to treat patients with autoimmune and inflammatory diseases). Also, the biopharmaceutical company Basking Biosciences, which develops therapies for the treatment of stroke, received investments of $55M.
Such demand is related to the social significance of the industry. In addition, Covid-19 highlighted problems in global medicine and accelerated developments that will help to respond to new threats quickly. In the coming years, we will see a stronger focus on biomedicine and data-driven healthcare. The integration of artificial intelligence and big data analytics into medical research and diagnostics increases both the effectiveness of disease treatment and the developments in this area.
3. Marketing (MarTech) and advertising technology (AdTech)
According to a Forrester study, the global market for marketing technologies is expected to grow by 13.3% a year in the coming years, compared with 10.9% in 2023. Its growth is largely influenced by major B2C brands: Last year, they spent 18% of their marketing budget on technology. This share is expected to grow further, with data management (AI and machine learning) as the main item for investment.
Companies also have a request for products that include several integrated tools and technologies for solving different tasks (from the Forrester report: 47% of marketers expressed the desire to reduce the number of products they use).
In a scenario where cookies will no longer be used, there is an urgent need to develop standalone solutions that will help businesses capture their own accurate user data. Again, these could be products utilizing AI or other technologies.
4. Financial technology (fintech)
Over the past decade, fintech has been brought to the forefront of progress. To this day, this is facilitated by the growth of the banking sector, rapid digitalization, changes in user preferences and growing support from investors and regulators.
According to the McKinsey report, in July 2023, the market capitalization of publicly trading fintech companies amounted to $550B, which is twice as much as in 2019. The USA was the region with the largest number of fintech startups, with over 11,500 companies registered in the country. Stripe (payment processing) and Chime (online banking) are recognized as the largest global players. In total, there are more than 272 fintech unicorns in the world, which is seven times more than six years ago. This data indicates that the industry is in high demand and it periodically gives rise to successful fintech players.
5. ESG startups
An extensive industry that includes areas corresponding to the 17 UN Sustainable Development Goals: ClimateTech, UrbanTech, renewable energy, eco transport, social projects and more. More and more investors are expressing interest in the field. According to Statista, 50% of professional investors worldwide plan to increase funding for socially relevant projects in 2024.
In 2023, there were two major rounds of financing for ESG startups (comparable to financing for AI): $1.1 billion invested in Generate Capital (renewable energy sources) and $1 billion invested in Redwood Materials (production of materials for electric car batteries).
In addition, more and more consumers are becoming concerned about the environmental and social impact of the products they use, and they are willing to spend more on conscious brands. As a result, corporations are developing their own solutions in this area and purchasing startup developments (from recyclable packaging to logistical solutions that reduce carbon emissions, etc).
Here is a thought-provoking study by Stanford University. It showed that approximately two-thirds of Generation Z and millennial investors are concerned about environmental and social issues. While the majority of investors aged 58 and older expressed little or no concern about those issues. Moreover, young people are willing to tolerate lower returns in order to achieve ESG goals. We can conclude that young investors and startups create the driving force in this industry.
In addition to the above-mentioned industries, there is a demand for projects that increase resistance to threats (for example, cybersecurity). Areas such as SpaceTech, autonomous transport, and agricultural and food technologies are also developing.
Related: 4 Crucial Indicators To Know Before Seeking Venture Capital Funding
What should a startup’s founder have in order to attract funding?
Effective idea and business model: Investors assess the unique potential of the startup, its competitiveness and scalability. The assessment is based on a pitch, which includes, among other things: a roadmap — a plan of strategic development (goals, objectives, deadlines, key milestones), and a go-to-market strategy — a strategy for attracting customers.
It is also important to evaluate the economics of the project. It should include a forecast of income, expenses, profit, cash flow and other indicators for a certain period. Based on these indicators, the founder estimates approximately how much investment the project will need for a period of six or 12 months.
Proof of concept (traction) and MVP: These days, venture capitalists want to see evidence that the product has already partially entered the market and can provide metrics by which investors can determine its progress. Therefore, it is easier for a startup to receive bigger funding at the seed round than at the idea stage (pre-seed). In other words, the founder should start searching for investors after developing an MVP — a prototype of the product.
Of course, you can still approach investors with an idea, but in this case, it would be more appropriate to enter an accelerator or incubator. This option is also viable if you have already launched a successful project from scratch, showing that you have a proof of concept and can be trusted.
Choosing and tracking the right metrics: There are no universal metrics — the selection depends on the industry and the stage of business development. You should start with bigger metrics such as average purchase amount or session duration and follow to a conversion funnel.
You need to understand that your actions directly affect the tracked metrics, including the most important marker. In product businesses, this is the North Star Metric (NSM) — an important indicator that is used to assess the overall success of a company and the achievement of its strategic goals. NSM is often related to how users interact with a product and how well it fulfills their needs. This can include the number of active users, customer satisfaction, total sales or another major indicator.
Professional team: The team behind a project is essential. Investors expect to see a strong team with capable leaders who can execute a business plan and drive growth. It is important to highlight the strengths of the entire team, as it will help increase the level of trust.
Understanding the exit strategy for investors: From the very start, investors are normally interested in the process of exiting the project in the future: either through an IPO, a merger, an acquisition or other strategies.
I should note that each business angel or VC fund may attach different levels of importance to the listed features depending on their approach to investments.
Other important notes for startups and investors
If you are an investor, I recommend looking at projects in the field that you have expertise in. If you want to discover new areas, you can access professional platforms that will help you learn about unfamiliar niches and invest more effectively.
If you are a startup founder, it is especially important to be able to assess risks before launching a product and to have an immediate business strategy. Also, use your time efficiently while waiting for an angel: Develop your product and attract early adopters or customers for testing.
In order to make venture agreements profitable for all parties, be as open as possible — show real forecasts, make transparent goals, and do not be afraid to point out areas that need to be improved. If you manage to reach a partnership, provide honest reports in the process of work. This will ensure long-term relationships with investors and partners and will push your business towards short and long-term development.