The four hottest startup sectors for investment in 2016

Venture capitalist Tomasz Tunguz has pinpointed four major startup sectors that will see a “disproportionate share of investment dollars” in 2016.

Using Crunchbase data from the last five years of seed and Series A rounds across 16 different startup sectors, the VC at RedPoint finds that although sectors like advertising and social media are drastically in decline, there are many others that are set to enjoy significant funding this year.

“Which of the 16 major startup categories in information technology will reap a disproportionate share of investment dollars in 2016?” Tunguz writes.

“And which sectors are closely guarded secrets shielded by seed investors that may have their breakout year this year?”

Big data

Startups that focus on big data saw more than 7.5% of all Series A rounds in 2015, up from 2.5% in 2010, and according to Tunguz this will only increase.

“Seed investors’ interest in big data has remained constant over the last four years while Series A investors’ appetite continues to grow,” he writes.

There’s been a recent push in Australia for big data, with the NSW government making it one of its top priorities for the year, and the federal government recently launching its inaugural open data competition.

CohortIQ, a startup using machine learning and hospital data to reduce the number of unnecessary admissions, took out the top prize last week.

Education

The study also found that education startups have been rapidly gaining investors’ interest over the last five years.

“Since 2010, education startups have been on a tear in the seed marking growing from 6% to now 10% in 2015,” Tunguz says.

He points to the success of two US education companies going public – 2U and Instructure.

Numerous Australian startups are attempting to bring education into the 21^st century, including on-demand streaming service for schools Kanopy and education management app Backpack.

Two-sided marketplaces

Startups offering two-sided marketplaces and operating in the sharing economy  now command over 10% of all seed and Series A investments, “buoyed by the massive successes of Uber and Airbnb”.

“Uber is the largest taxi company in the world by market cap, but doesn’t own any taxis and Airbnb is the largest hotelier in the world by market cap, but owns no real estate,” Tunguz says.

“The astronomical growth rate and size of these businesses have seen investors pursuing new and novel categories.”

Marketplace startups and the sharing economy has become a major focus in Australia recently, with the NSW government releasing its guidelines for the space in a policy paper last week, and the federal opposition doing the same late last year.

A number of local startups are looking to capitalise on the popularity of this sector, including the fast-growing AirTasker and Buzzy Tasks – a startup to watch in 2016.

Security

With increasing fears of online security and privacy breaches, numerous startups are looking to find innovative and effective means to ensure security.

Tunguz’s study finds that Series A rounds for startups in this sector are “much higher” than seed rounds, but this could change in 2016.

“If the persistent drumbeat of breaches and data leaks is any indication, we should expect more investment in security,” he says.

Victoria has taken the lead on security technology in Australia, with the state government securing Oxford University’s first ever Global Cyber Security Capacity Centre international office, as well as the NBN’s Cyber Security Operations Centre.

Startups like TokenOne, which aims to make it easier to access private and secure information on the internet, also have significant funding to help capitalise on the growth in the sector.

You can read the full report and Tunguz’s write-up here.

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