Advertising and e-commerce are out, AI and insurance tech are in. These are the industries that have the eye of elite venture investors.

“Smart money” VCs have an enviable investment history, with a pattern of successful exited companies and high returns. And these firms’ portfolios can provide important indicators of where tech and innovation is going.

We define smart money venture capital firms (VCs) as those firms with the best combination of portfolio valuations and investment outcomes. Our methodology led us to identify 24 venture capital firms that stand above the rest in terms of financial success.

So where is smart money going? We crunched the data to identify where smart money VCs are investing in early-stage companies in recent years and how that investment focus has shifted.

Using CB Insights’ natural language processing, we identified the most common words used in company descriptions among those companies that received early-stage investment from a smart money VC between 2010-2016. We then looked at which words have trended up and down among this cohort over the years. In addition, we identified the categories and industries that are seeing the most smart money early-stage investment. Through this lens, we can see where top investors see the most potential.

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Among our top findings:

  • Health, insurance, and AI are in — Smart money investors are making more early-stage deals to companies that mention health and insurance in their company descriptions. “Insurance” has seen its usage increase over 2000%. In addition, AI has seen its usage grow 1000%.
  • Advertising and social are out — “Advertising” has seen its appearance decline by almost 100% over the time period. There are also dips in usage of “Twitter,” “Facebook,” and “Instagram.”
  • Other top winning categories — Business intelligence, marketplace, and social companies received the most early-stage smart money investments between 2010-2016. But health & wellness has seen a big uptick in deals, alongside food & delivery, collaboration & project management, and cybersecurity startups.
  • Other top losers: E-commerce and renewable energy have declined notably.

Overall we see that smart money VCs have notably slowed down their early-stage activity over the last two years, ahead of the overall slump in VC activity.

From 2010 to 2014, the volume of smart money investments steadily rose. But in 2014, that number declined for the first time since we began collecting data.

smartmoneyovertime

In this brief we’ll take a deep dive into smart money VC activity, identifying the most active smart money VCs and where they’re located, where smart money VCs are investing at the category, industry, and sector level, and how early-stage investments focuses have shifted.

Who are the smart money VCs?

The below chart identifies them and ranks them by the number of deals they have completed since 2010:

Smart Money VC

Andreessen Horowitz, located in Menlo Park, California, nabs the top spot for completing the most deals since 2010. There’s a clear hub in California: 17 out of 24 firms are located in Menlo Park, San Francisco, or Palo Alto. Together, they account for about 75% of smart money deals.

The next largest hotspot for smart money is in the greater Boston area, which houses four VC firms that account for nearly 15% of smart money deals. Only one smart money firm is located in New York.

Where smart money VC firms invest

To understand not only overall smart money trends, but where these VCs are placing their bets we looked at the most common keywords in descriptions of startup companies that had early backing from smart money VCs.

smartmoney.descrip

The most common word, used in more than 9 out of 10 company descriptions is “platform.” In addition, 87% of companies funded by smart money VCs since 2010 have mentioned “data” in their company description. Not surprisingly, smart money VCs are focusing on tech, with keywords like “platform,” “users,” “mobile,” “online,” “app,” “software,” and “network” showing up in their company descriptions.

But more importantly, have trends in the keywords used by companies with smart money investors changed as well? We looked at the biggest increases and decreases in company description keywords since 2010 to find out.

smartmoney.termincrease_1

The keyword “insurance” has grown nearly 2500% in its appearance in descriptions of companies receiving smart money VC investment since 2010, a trend that is in keeping with the rise in overall deals to the insurance tech sector. Similarly, “healthcare,” “doctors,” and “healthy” have each seen their use in descriptions rise, mirroring the steady increase in digital health investment over the same time period.

The keyword “artificial intelligence” has also risen by over 1000%. AI companies hit a record for both deals and dollars in 2016.

smartmoney.termdecrease_1

 

Meanwhile, “advertising” has seen its appearance decline by almost 100% over the time period. Dips in usage of “Twitter,” “Facebook,” and “Instagram” mirror the decline in early-stage deals made to companies in the social category discussed below. Declines in the use of “Amazon” are in keeping with a similar decline in the e-commerce industry, and the declining usage of “energy” underscores the decrease in investment in the energy and utilities industry.

Where smart money invests: By category

2017.03.02 Categories Smart Money VCs Invest In v2

Business intelligence, marketplace, and social companies received the most smart money investments between 2010-2016.

Have business intelligence companies, such as Palantir and Ayasdi, always taken the biggest share of smart money deals among subindustries? We looked at how investments have changed over the time period.

2017.03.02 Change in Smart Money Deals Categories v2

Social may account for the third-most smart money investments since 2010, but social deals have declined since a surge of investments including deals to PinterestSnapchat, and NextDoor.

On the other hand, health and wellness are on the rise, with more than 100 smart money-backed deals since 2010 to companies like Honor, a website that connects home caregivers with aging patients, and Docent Health, a healthcare technology platform.

Categories including food and grocery (Blue Apron), collaboration and project management (Slack), and cybersecurity (CyenceVirtru) are also on the rise. In contrast, gaming (Oculus) and video (VesselTasteMade) continue to see a decline in deals.

Where smart money VC firms invest: By industry

2017.03.02 Industries Smart Money VCs Invest In v2

At the industry level, we find that smart money VCs have made the greatest number of deals by far to the internet software and services industry, which includes companies like StripeQuoraRefinery29, and Illumio. The industry with the second-most smart money participation in deals is mobile-centric software and services, which features companies like Nubank.

But these VCs are not just investing in apps and software. Other notable industries on the list include biotechnology and consumer electronics.

How have these investment patterns changed over time? We looked at the change in number of deals in each industry since 2010.

2017.03.02 Change in Smart Money Deals Industry v2

Internet and mobile software & services, the two industries with the most smart money deals and dollars, have had mixed trends since 2010. Internet software deals peaked in 2012 and have been slowly declining; mobile software peaked in 2013 and has similarly declined. E-commerce, the industry with the third-most deals, has shown an especially pronounced decline since 2012.

Biotechnology, healthcare software, consumer electronics, and scientific, engineering software are all trending upward, while drug development has shown mixed activity.

Where smart money VC firms invest: By sector

Sectors Smart Money VCs Invest In v2

At the broad sector level, smart money VC firms have made the most early-stage deals to internet companies, at over 2,000. This sector includes companies like Pinterest, GitHub, Airbnb, Slack, Wayfair, and Jet.com.

The second-largest early-stage investment sector for smart money VCs is companies are in the mobile sector, which includes smartphone-centric companies like Snapchat, WhatsApp, Uber, HotelTonight, and Flipboard.

Have these patterns stayed consistent since 2010? We compared each sector’s number of early-stage deals by year to find out. They are categorized into increasing, decreasing, or mixed-trend groups based on change from 2010 to 2016.

2017.03.02 Change in Smart Money Deals Sectors v2

Deals in the non-internet software sector, including to companies such as Magic Leap and MongoDB, have increased between 2010-2016, along with investment in industrial companies and business products and services (which includes mostly consulting and outsourcing companies).

Computer hardware and services, electronics, and energy & utilities deals, primarily renewable energy, have decreased dramatically. Consumer products & services, mobile & telecommunications, internet, and healthcare deals have each seen mixed trends.

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  • jpd

    Very good study. Thank you.