What is Frontier Technology?
Some call it frontier technology or “frontier tech” and others use terms such as disruptive, emerging or bleeding-edge technologies. Frontier tech is neither a sector nor a vertical, but rather a broad collection of the newest disruptive technologies sharing the common characteristic of being very early in their market-adoption cycle. Frontier tech companies often don’t fall into common venture capital investment categories such as consumer apps or enterprise software, and they may show up as an evolution or enhancement of industries like retail, banking or manufacturing. These companies may also be the first step in the creation of new industries.
We see a wide range of these emerging technologies in which investors are deploying capital these days – autonomous vehicles, space, blockchain, genomics, robotics, artificial intelligence, machine learning, deep learning, internet of things, augmented reality, virtual reality, 3D printing, drones and the list goes on.
Investing in Frontier Technology
Frontier tech resides on the higher-risk edge of venture capital investing. When venture capitalists contemplate allocating capital to these technologies, some special considerations are required. Unlike the more common venture capital focus areas, in frontier tech, there could be a very long research and development period with no customers or revenue in sight. At the time of the investment, the business cases can be unclear. For example, it may not be known who the target customers will be, how much they might pay and/or what the potential total addressable market may be. Importantly for the venture capital industry, there may not be obvious acquirers, increasing the liquidity risk.
Nevertheless, the role of venture capital is to identify trends and invest early. Timing the market is impossible and investors may run the risk of investing too early into certain technologies. Despite the risk, many venture funds started making investments in frontier tech areas several years ago with the belief that these investments would eventually pay off. Firms have had varied success levels thus far investing in this space.
At this point, we have already seen a range of VC strategies related to frontier tech, from established venture firms allocating some of their capital to frontier tech to emerging managers with heavy emphasis on frontier tech or even dedicated funds focused solely on one category within frontier tech. An interesting strategy that provides exposure to frontier tech but has somewhat clearer potential customer base and exit opportunities is investing in solutions that support and enhance frontier tech companies.
Example Categories of Frontier Technology
Where have we seen venture capital firms invest? Here is a non-comprehensive list:
- Autonomous Vehicles – The autonomous car market has been growing rapidly over the last few years. According to data from CB Insights, global investors have been deploying money into autonomous driving-related companies at a high rate. In just the first three quarters of 2018, there was $4.2 billion committed towards autonomous driving-related companies, which was an increase from 2017. The sector has already seen some major exits including the acquisition of Cruise Automation by General Motors for nearly $1.0 billion and the acquisition of Otto, a self-driving truck start-up by Uber. While auto manufacturers have emerged as obvious potential acquirers, there is still a lot of competition start-ups are facing from such manufacturers, as well as from other well-funded companies, like Alphabet’s Waymo and Zoox, which raised $500 million in Series B funding in July to build self-driving cars from scratch. Overall, the promise of autonomous driving has led many investors to deploy large amounts of funding to ensure they are part of the future.
- Space – The space industry has come a long way and continues to change. Space 2.0 private enterprises have entered into what used to be a government-sponsored field, which has increased the pace of innovation and allowed for the creation of cheaper rockets and satellites. Private investing in the space industry has also remained active – according to the Q3 Space Investment Quarterly Report by Space Angels, over $2.0 billion was invested in the first three quarters of 2018. We have also seen a significant increase in dollars deployed to satellite-related companies. The well-funded VC-backed space startups include SpaceX, which designs, manufactures and launches rockets and spacecraft and Swarm, a satellite company providing accessible, low-cost global connectivity.
Genomics – The genomics industry has the potential to change the medical industry by improving and personalizing health. Gene sequencing costs have been declining rapidly and have recently dropped to only $1,000 for sequencing the full human genome, which opened a whole new range of commercial opportunities. But there is more than just sequencing. 23andme, MyHeritage, Color Genomics and others offer a variety of direct-to-consumer services, while Verge applies computational genomics to accelerate the drug discovery process. According to a research report by RockHealth, 2018 has already surpassed 2017 as the largest venture funding year yet for digital-health companies.
- Blockchain/Cryptocurrency: Many frontier tech areas have to do with the physical world, but blockchain is mostly about the code. While it may not clearly fit some of the criteria of frontier tech, it has a potential to impact almost every aspect of our digital, and even real-life, experiences. Since this technology allows accurate tracing through its permanent ledger; blockchain technology has the potential to eliminate corruption in politics and can potentially make it impossible for people to indulge in black-market labor and money laundering. Since it doesn’t require investments in hardware and maybe because it is such a horizontal category, we see many VCs allowing a portion of their capital to be held in crypto tokens. According to data provided by PitchBook, in 2018, blockchain and crypto companies have raised nearly $3.9 billion through venture capital funding. This is almost a 280% increase from 2017’s totals. While many VCs prefer to buy equity in blockchain companies rather than cryptocurrencies, due to volatility and regulation risks, there are still more questions than answers these days when it comes to the viability of blockchain businesses. Coinbase is the flagship of cryptocurrency companies – providing a way for investors and individuals to purchase and store cryptocurrencies. Harbor is another interesting blockchain example – which aims to tokenize private investments (e.g., commercial real estate) to unlock liquidity and value.
Now, more than ever in our history, technology is everywhere. The traditional industry players who will adopt the correct frontier tech early will likely remain ahead of the curve. Frontier tech companies have already shown ability to raise funds, generate unicorns and deliver returns to investors. With the rapid progress of the Fourth Industrial Revolution, some frontier technologies may become mainstream and new ones are being envisioned and created by most innovative engineers and venture investors. While frontier tech covers different industries and stages of advancements it all together is unavoidable in the future.
We look forward to experience the evolvement of Frontier Tech in 2019!
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