The Hottest Industries to Invest In
Exclusive Ranking of Best Industries for Investors
The Top 3 Industries and Sectors to Invest in by 2020
Many angel investors have favorite sectors, and some sectors lend themselves to angel investing. Software or Internet services require less capital than manufacturing startups, for example, which means large venture capitalists aren't always required for seed and series rounds. Single founders or co–founders are also more likely to approach angel investors, and many of those individuals are currently working in tech–based fields. Given those observations–and the current global market—it's not surprising that two of our three hottest sectors are tech based: cybersecurity and big data. The third sector that's poised for prime growth through 2020 is biotechnology.
#1 Cybersecurity Startups
Cybersecurity refers to the software, hardware, and services that protect networks, computers, and data. Protection may be any destruction, access, or change that is unauthorized by the user or is unintentional. The bulk of what we refer to as cybersecurity concentrates on protecting against cyber threats–hackers, malware, and criminals that would vandalize or appropriate data or networks for illicit use. Other cybersecurity products might protect against outages or disaster scenarios.
What makes cybersecurity attractive to investors?
Cybersecurity startups are attractive to investors for a variety of reasons, not the least of which is a general high potential for IPO and acquisition events for any small company in the industry. A startup with a good idea draws attention from bigger companies, and experts believe the cybersecurity market will continue to be dominated by big players such as Dell. That doesn't alter the value of smaller companies–Aaref Hilaly, a partner at investment firm Sequoia Capital, says that larger organizations rely on startups for major innovation across the technical space.
Another reason cybersecurity startups make good investments is that the best companies tend to scale up quickly. Tech firms in general are experts at building on existing technology; they rarely start from scratch, letting then bring viable products to market in short time spans. Because those products tend to meet an urgent psychological and actual need for users, an apt marketing campaign or integration is often all it takes for good products to find sales success.
Investors in cybersecurity can also be assured of a continued and growing need for these types of products. Startups that show an understanding of the market are likely to be able to navigate future needs to tweak or develop products for continued viability. Cybersecurity startups tend to be launched by individuals with high–level technology degrees, backgrounds with large tech companies or security agencies, and, often, some background in startup management. As these companies hit IPO and acquisition stages early on, it leaves founders available to launch new products–and provides angel investors with experienced people to invest in.
What are some companies poised to thrive in this sector?
Dozens of startups are positioned for strong growth in cybersecurity over the next few years, and new companies hit investment rounds every month. One company poised to thrive is CipherCloud, which we covered in our section on the hottest software startups. Another startup poised for success in the cloud security arena is SkyHigh Networks.
Founder Rajiv Gupta says that part of SkyHigh Networks' success is that it collaborates with larger security companies rather than competing with them. In launching SkyHigh Networks, Gupta and his cofounders looked for the hole in cloud security they could plug. Rather than developing another solution simply to protect cloud networks or data, Gupta and his team addressed the psychological needs of companies directly. Specifically, SkyHigh Networks offers technology that lets companies analyze cloud–based security risks, monitor and manage employee cloud behaviors, and encrypt data stored on the cloud. The company secured $66.5 million in investments over three rounds since 2012.
Other companies to watch in this sector include Shape Security, Palo Alto Networks, Recorded Future, LaunchKey, and 405 Labs.
What catalysts make the cybersecurity industry accelerate?
Cybersecurity has already taken off, and rapidly evolving technology keeps the floor swept for new startups and success. Growing sophistication among hackers and cyber criminals mean legit operations have to work even harder to keep up, and there's always a new threat or security need to be addressed. Since companies can't cut networks and Internet from their processes, cybersecurity products will continue to be a major need.
Every five years or so, the industry sees a major architectural shift in how businesses and people use computers and technology. Recent shifts have been to cloud and mobile, and experts are expecting future shifts to include genetics, biotech integrations with computers, and increasing virtual environments. Each shift drives a new wave of startup and investing opportunities.
The globalization of economies and businesses also drives cybersecurity. Users are more connected than ever before, but laws, cultures, and infrastructures are not. Businesses that can't rely on global governments to protect virtual assets are willing to pay for services and products that will.
What are the risks for startups and investors in this sector?
As strong as the industry is, cybersecurity investments are not without risks. The sheer number of founders running in the industry's direction makes saturation and competition a risk, though a number of the illustrations used throughout our book demonstrate that excellent ideas and execution can triumph in the face of robust competition. Another risk for cybersecurity startups is the possibility of quick obsolescence as technology evolves so rapidly. For angel investors, evaluating the people behind the product can help determine whether founders will be able to adapt to the market when necessary.
#2 Biotech and Research Startups
“Biotech”, or biotechnology, includes the field of all startups that are biology–based technology companies. Some types of companies in the field include pharmaceutical companies, R&D firms with a biological focus, and equipment and tech firms servicing research labs and scientists. The combined purpose of most of these companies is to develop knowledge, technology, and products that fight diseases or provide solutions for other global issues such as hunger or resource scarcity.
What makes biotech and research attractive to investors?
There are plenty of opportunities for investors in the biotech industry. As with cybersecurity, biotech startups offer a good chance at IPO action. In 2013, the industry saw more IPOs overall than it had for the past 13 years. While the industry is more volatile overall than other options, no one will argue that biotech will continue to be relevant through 2020, and many biotech firms offer long–term investment opportunities that can balance out the portfolios of angel investors with a lot of hot–burning software investments.
What are some companies poised to thrive in this sector?
A number of hot startups in biotech are covered in chapter 6, including Counsyl, Science Exchange, Transcriptic, Benchling, and Cambrian Genomics. Companies to watch that are crossing pharmaceutical and biotech spaces include Portola Pharmaceuticals, Tear Glucose Research, Dual Therapeutics, and Prosena Holdings.
One interesting startup poised for ongoing success in biotech is 23andMe. Founded in 2006, the startup is one that has managed to thrive sans IPO for almost a decade. Since 2009, the startup has garnered over $111 million in funding, including a 2014 National Institute of Health grant.
23andMe differentiates itself from other biotech startups in a number of ways, one being that its launch and current flagship product would probably not be considered a necessity for many people. The company offers a mail order DNA kit that lets any consumer swab the inside of their mouth and return the saliva sample for analysis. The consumer can then access a detailed report about their DNA, including ancestry breakdowns. Users can opt in to databases to find long–lost relatives across the world and build family trees using DNA connections.
The product is compelling on many levels for consumers, who are living in a technologically connected world. As family structures evolve, many individuals are wondering where they come from–and 23andMe gives them that knowledge at an affordable rate and through a process that is convenient. However, 23andMe has faced serious regulatory hurdles with the FDA, who stated that by providing reports that detail a consumer’s vulnerability to certain diseases, 23andMe is considered a medical device and must comply with FDA regulations. *
What makes 23andMe a likely long–term investment opportunity and player in biotech isn't just the consumer–friendly product, though. The company has execution plans that go beyond basic family–tree research. First, it leverages all the DNA it gathers to fuel genetic studies. Consumers can opt into research programs, and each sample offers additional information in more than 230 studies. Second, 23andMe has plans to enter health–related markets. It already provides DNA–based health reports to consumers in Canada and is awaiting FDA approval in the United States to do the same.
What catalysts make the biotech sector likely to take off?
Health concerns, resource needs, reemerging and new diseases, and growing regulation in biological and healthcare fields are all fueling biotech growth and are likely to do so through 2020. New technologies are also driving research and development in fields such as disease treatment, vaccines, and genetics. Thanks to technologies such as nanospectroscopy, researchers can view the world of viruses, proteins, and genes like never before, and those technologies are only improving. A desire to fix global issues–as well as a certain level of consumer fear about such issues–will make biotech a big business for decades.
What are the risks for startups and investors within biotech?
Biotech hit hard in 2013, but the industry demonstrated an overall poor performance in 2014, so it's not without risks for investors. In fact, the volatility of the industry is a primary risk. Investors adverse to moderate or greater risk may not find biotech is right for them.
Another risk common to biotech startups is a lengthy time to value. Many biotech startups are founded on a research discovery or idea–unlike 23andMe, they don't yet offer a specific product or monetization option. Angel investors working with idea or research–based startups should always tread lightly in early stages.
#3 Big Data Startups
The data industry covers a wide range of startups, from those that provide data analysis software to cloud storage providers. Any company developing products and services that make it easier to move, store, secure, analyze, or access data would fall into this category.
What makes big data startups attractive to investors?
There are more than 3500 data mining startups; in each listing, average startup valuation was over $4 million. With hundreds of successful data startups, investors can pick from diverse solutions that are meeting needs across every single industry on the market. So much data exists that companies can't keep up with analytical needs. According to Forrester Research, businesses estimate using only around 12 percent of data that's available to them–tools that let companies capture more of the data pie without expending extra resources are sure to find favor among business consumers, which is a strong point for investors.
What are some companies poised to thrive in this sector?
In our section on the hottest software startups, we covered Mixpanel, a data startup that everyone seems to agree is poised for big things. Other data startups poised to thrive in upcoming years include MuSigma, Domo, Cloudera, Kaggle, Precog, and CrowdFlower.
Data is an interesting sector for investors because you don't have to stay within the business and software scope. A number of startups are bringing mobile–to–consumer applications into the data space, and with so many consumers seeking to organize and order their lives, these companies are seeing success. One interesting startup, which has garnered $8 million in funding since 2010, is Yummly. The startup piggybacks preference–based delivery ideas offered by products such as Netflix and Pandora, but applies those ideas to food.
Yummly uses data–both intrinsic and personal–about food and food preferences to deliver recipes and food recommendations via its website and app. The startup has even teamed up with another of our favorite companies–Instacart. Users can generate grocery lists based on Yummly data and recipes, and then order those items through Instacart's one–hour grocery delivery service.
While it's not in the business sector, Yummly does illustrate a characteristic angel investors should look for when investing in data companies. Data alone doesn't do much, so startups need a plan for integrating their product with other companies, software, or industries.
What catalysts make the big data sector likely to take off?
According to Rob Bearden of Hortonworks, data volumes at the enterprise level are trending to grow 50 times year–over–year through 2020.* With 85 percent of that data coming from sources such as mobile, machine–generation, and social networks, analytic challenges are expected to plague companies over the next few decades. Those challenges fuel the market for unique products that offer data solutions. With IT professionals in all industries struggling to keep up with hardware and software demands, data needs often get shunted to the side–also a reason organizations are more than willing to turn to new solutions.
* * *
* FDA. In Vitro Diagnostics and Radioactive Health. 23andMe, Inc. 11/22/13.Inspections, Compliance, Enforcement and Criminal Investigations. Alberto Gutierrez, 22 Nov. 2013. Web. 29 Apr. 2015.
* "A SIEM Is Not Enough: Moving to a Complete Cyber Security Solution." Big Data Cyber Analytics. N.p., 20 Apr. 2015. Web. 29 Apr. 2015. http://www.ikanow.com/a-siem-is-not-enough-moving-to-a-complete-cyber-security-solution.
Transcript on the Hottest Industries and Companies to Watch for Investing:
I like three primary categories for 2016, 2017 and 2018 and beyond. I love cybersecurity. Angel Kings is a major investor in cybersecurity startups. We love early stage cybersecurity companies. I'll give you an example of these cybersecurity companies: we've mentioned LookOut Mobile, we've looked at Authy, Sift Science. We also have looked at numerous companies including, True Link Financial. That was another hot startup that you should watch.
Another industry we like is biotechnology. We love biotech. Biotech is the premier industry. It's growing rapidly of course with the advances in genomics, the advances in immunotherapy. An example of an Angel Kings portfolio company is one called TuteGenomics. A big company doing a lot of interesting things in genomics and detecting early stage diseases or rare diseases. Giving scientists a better idea of what things are affecting our population.
The third big category we like at Angel Kings is big data. Big data is a cross between companies like Kaggle who actually uses data scientists to analyze and purse through massive amounts of information. It also includes companies like Palantir Technologies. Palantir is one of the favorite hottest startups in the country now and they're doing ... They're pursing through massive amounts of data for analytics purposes, for government and enterprise companies.
The three hottest ones that we like are cyber security, big data, and biotech.
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