As we move into the new year, it's important examine what we learned about startups last year. Here are the major takeaways for startups from 2014.
Last year was one of impressive success for the global startup community. Venture capital investments poured in, the M&A market flourished, and the number of companies that hit a valuation of a billion dollars or higher rose exponentially from the years before.
The prosperity of the startup scene has even led some to whisper the chilling term that sobers the most optimistic entrepreneurs and investors: Bubble. While that is nothing to take lightly, we should also take a look at what factors played into the growth experienced in 2014.
Expectations have changed when it comes to building a startup. Here are the lessons learned by startups in 2014 and how you can apply them for the year ahead.
It's getting crowded
The common career progression used to dictate that one would attend college, maybe even graduate school, and go to work for company for a few years before even dreaming of starting his or her own company. Entrepreneurship is changing that, and it was very evident in 2014.
According to Jordan Levy, general partner at SoftBank Capital, there has been a titanic shift in the number of people who are forgoing the standard route for life as a founder. That shift means there are even more startups clamoring for funding.
"I can't even begin to tell you the volume of people starting companies," Levy said. "These companies are, in many cases, extraordinarily qualified people with very exciting ideas. There's no way they can all get funded."
The amount of money being invested by venture capitalists grew in 2014 as well. In fact, the MoneyTree report compiled by PricewaterhouseCoopers and the National Venture Capital Association for Q1 showed that amount rivaling dot-com numbers for the first time since the bubble burst.
While there may not be enough initial funding for everyone, that money made for many important follow-on investments for some bigger companies. Combine that with a healthy M&A market and acquisitions and valuations jumped.
Alex Rosen, managing director with IDG Ventures, said that there is no doubt that we are in a high valuation environment, but that usually bodes well for entrepreneurs. And, if you can't access some of the VC money being invested, try looking elsewhere.
"There are lots of sources of capital, from traditional ones, to AngelList, micro VC firms, boutique firms like ours, and late-stage financing from hedge funds, mutual funds, and sovereign wealth funds from around the world," Rosen said.
For founders to make it through the changing funding landscape, Rosen noted that it is important to focus on what he called "real" financials. Valuation has a place, but Rosen said it can become a vanity metric for some.
More money and more sources for financing have also clouded the funding process.
"There is no clarity as to what a round is about anymore," Levy said. "That's one thing that people should just forget. I need to raise X amount of money and just forget about all the rest. There's clarity about B and C rounds, but on the early stuff it's so muddy that it's very difficult to figure out what is what."
The rise of the marketplace
Enterprise startups made a triumphant return to center stage in 2014, but much of startup growth last year was shaped by the rise of the on-demand marketplace. For example, Uber is a marketplace for transportation and Airbnb is a marketplace for lodging.
The concept is simple, make the customer experience for everyday services better by using existing technologies and the ubiquity of mobile devices. The idea took off and soon Andreas Stavropoulos, a partner at Draper Fisher Jurvetson, was inundated with pitches on the next "Uber for X" or "AirBnB for X." Unfortunately, he said, disrupting these traditional markets is harder than it looks.
"Overcoming the logistical, operational and sometimes regulatory complexities typically associated with these businesses has very little to do with the tech prowess of the founding teams and much more to do with getting the details of the business model right," Stavropoulos said.
To mitigate the risk involved with these marketplace startups, Stavropoulos said that his team looks for huge markets that have inefficiency built-in, combined with a team that is careful to get the execution details right.
The sharing economy played a huge role in popularizing both Uber and Airbnb, but these on-demand marketplaces (and many other startups) can also attribute their exponential growth to the rise of the API economy.
According to Rich Wong, a partner at Accel, this is sometimes referred to as APX, or API times everything.
"There are a lot of pre-built components that allow startup companies to move dramatically faster getting to their end-product," Wong said.
For example, Wong said, Uber uses Google Maps for mapping and it uses Braintree to process its payments. Additionally, companies like Uber of Lyft could use the service Checkr to perform background checks. All of these things that you used to have to build, you can now buy or rent through the API economy, allowing for faster innovation.
"The level of competitive intensity, and the speed that the startup needs to react is dramatically greater than ever before," Wong said.
Some of the smarter companies are leveraging the API economy to move faster, and it is forcing other companies to keep pace.
SaaS keeps growing
Ever since the inception of the SaaS model, we've seen an ever increasing number of startups subscribe to this model, and 2014 was no exception.
"There's clearly a huge movement into the SaaS marketplace," Levy said. "People are shifting companies to become SaaS companies, that might have started out something else."
The growth of SaaS was spurred by strong demand in the market for SaaS products, according to Rosen. That demand stems from the technology stack increasingly becoming better adapted to use the advantages of web services and cloud infrastructure, he said.
In addition to new SaaS companies starting, existing providers are releasing new products and continue to gain traction. Initially, building out a SaaS product often requires fewer resources than other types of startups, but Rosen said the difficulty comes in scaling and supporting the product.
"Products do not sell themselves, customers need to be supported, features need to evolve, etc. Managing sprawling infrastructure, or avoiding paying large amounts to Amazon, requires yet another skill set," Rosen said. "Key takeaway: What's easy to start isn't necessarily easy to grow rapidly into a huge business."