By David J. Blumberg, founder & managing partner, Blumberg Capital
A commonly held belief is that as an economy develops, its service sector keeps growing. This is certainly true in the United States, where 107.8 million people (or 71%) work in private service-providing industries – such as healthcare, professional services or hospitality – rather than in the industrial or manufacturing sectors.
In conjunction with this rise of the service economy is the growth of automation, which uses software to replicate functions humans don’t want to do, don’t do well or don’t do efficiently. This helps businesses grow and remain competitive by contributing to greater output at a lower cost.
But how did we get to this point?
Technology progression: From hardware to AI
Major developments in hardware and software throughout the 1950s-1970s propelled the field of computing and technology forward. However, at that time hardware was customized and the software was monolithic, domain-specific and built in-house – which created barriers to innovation.
Over the course of the last several decades, programming languages have evolved, streamlining the process of software by making it more modular, object-oriented and able to encompass micro-applications within larger frameworks. With this, businesses shifted from using legacy proprietary software built on customized hardware to standardized applications running on commodity hardware. This has been transformative, allowing for increased scalability and flexibility at lower cost.
Then came the development and widespread adoption of cloud computing in the late 1990s and early 2000s, which has enabled even greater flexibility to scale and interoperability.
Now we’re in the process of moving toward another level of efficiency and productivity with AI and automation. AI allows software to control machines, requiring less human interaction than ever before. AI will continue to evolve as mass amounts of data flow to train models, allowing them to scale in their own intelligence and abilities.
Impact on the VC landscape
As the pace of change has accelerated and product cycles have shortened, the venture capital landscape has shifted. Because companies today are generally using the SaaS business model, they have reduced the selling friction, allowing them to iterate quickly and grow at a much faster rate. Further, global platforms and services such as Amazon Web Services, Google Cloud Platform, GitHub and open source make it easier and cheaper than ever to scale.
VCs are more invested in software and early-stage technologies today than ever before. Recent data from Crunchbase found that the market for Series A and Series B rounds has almost doubled between 2008 – 2018, causing increased competition and capital investment to reach an all-time high.
Finally, SaaS-based business models and cloud platforms have lowered the capex required to start a company and decreased time to market, which encouraged angels and early stage VCs to invest earlier.
What does the future hold? Continuous innovation
With shorter product lifecycles, the need to continuously innovate has never been more important.
According to a report by Innosight, corporations in the S&P 500 Index in 1965 stayed in the index for an average of 33 years. By 1990, the average tenure had narrowed to 20 years and is now forecast to shift to 14 years by 2026. Increasingly, companies are falling off because they are out-innovated by more cutting-edge technologies and businesses. In order to survive in this new world, companies must continuously innovate and grow alongside technology’s evolution, while still balancing costs and investments.
The lesson is that the world is not static. There will always be new dynamics, expanding markets and expanding technologies with more competition and a more educated workforce that needs to be recruited and retained. The onus is on entrepreneurs and investors to forecast what’s coming next, take educated risks and continuously innovate.