What’s Hot (and Not) in Early Stage Tech [Chart]
Using big data to discover what aspiring entrepreneurs are thinking
The Chart of the Week is a weekly Visual Capitalist feature on Fridays. There are many ways to get a pulse on the startup scene to see what is trending. For example, one could look at the sub-sectors getting the most money from venture capitalists. The more deals and money hitting a sub-sector, the more it could be on its way up the ladder. However, perhaps there is another angle that can tell us something, even if it’s simply confirming an already-held suspicion about trends in early stage tech. What are the entrepreneurs in the trenches doing? What are they focusing on, and how is that a change from previous time periods?
Big Data from Y Combinator
Y Combinator, arguably the most prominent startup accelerator on the planet, has indulged us on this hunch. Using the thousands of applications they get each year from aspiring entrepreneurs, they’ve had the foresight to methodically break them down by keyword to potentially show us trends within the pitches by startup founders. For a wonderful post that breaks this all down, go to the company’s The Macro blog, which discusses many of these trends over the course of years in great detail. That said, we decided to piggyback onto this interesting data set with a slightly different approach.
Method to the Madness
While the results of the keyword analysis of Y Combinator applications included many meaningful keywords, it also was cluttered with less meaningful pieces of noise. As an example, between 2015 and 2016 applications, there was a 204% increase in the use of the word “firms”. This doesn’t seem to tell us anything significant about the startup world, especially since it only went from 0.3% to 0.8% in actual usage within the scope of all applications. To combat noise, we took the more subjective approach by identifying keywords that were more concretely associated with sub-sectors or trends. The mention of the term “IoT” in an application, for example, is more telling and suggests that an entrepreneur is pitching a startup idea related to the Internet of Things to the accelerator. More mentions of “IoT” in pitches means that ideas on the “IoT” are top of mind for aspiring entrepreneurs.
What’s Hot in Early Stage Tech?
Using the above subjective methodology, here are the increases and decreases over the last year that stood out the most to us: The word “Slack” was used 850% more often in 2016 applications, clearly related to the popular workplace collaboration tool of the same name. Slack’s explosive growth has rippled through to the startup world, likely inspiring an army of potential competitors and collaborators in the wake of their success. Other emerging trends that picked up steam in recent applications: virtual reality (“VR”), artificial intelligence (“AI”), internet of things (“IoT”), and “drones”. The 119% increase in the usage of the word “bills” also points to the recent attention on the fintech space. The mention of “SaaS” (Software as a Service) also increased 52%, as it has become a preferred business model by venture capitalists.
What’s Not
The largest decrease of all terms used was that of “Bitcoin”, which dropped 62% from one year to the next. The cryptocurrency has been a popular developer target for years, but the rush to take it mainstream may now be losing steam. The world’s top performing currency in 2015 has been called dead many times before, so it is certainly no stranger to adversity. The word “nonprofit” was also used 29% less, which may point to the recent pressure for startups to offer a more foreseeable potential return on investment for investors. The ecosystem isn’t as frothy as it once was, and nonprofit ideas may have taken a temporary tumble as a result. “Crowdfunding” has also dropped more off the radar, receiving 25% less mentions. on But fast forward to the end of last week, and SVB was shuttered by regulators after a panic-induced bank run. So, how exactly did this happen? We dig in below.
Road to a Bank Run
SVB and its customers generally thrived during the low interest rate era, but as rates rose, SVB found itself more exposed to risk than a typical bank. Even so, at the end of 2022, the bank’s balance sheet showed no cause for alarm.
As well, the bank was viewed positively in a number of places. Most Wall Street analyst ratings were overwhelmingly positive on the bank’s stock, and Forbes had just added the bank to its Financial All-Stars list. Outward signs of trouble emerged on Wednesday, March 8th, when SVB surprised investors with news that the bank needed to raise more than $2 billion to shore up its balance sheet. The reaction from prominent venture capitalists was not positive, with Coatue Management, Union Square Ventures, and Peter Thiel’s Founders Fund moving to limit exposure to the 40-year-old bank. The influence of these firms is believed to have added fuel to the fire, and a bank run ensued. Also influencing decision making was the fact that SVB had the highest percentage of uninsured domestic deposits of all big banks. These totaled nearly $152 billion, or about 97% of all deposits. By the end of the day, customers had tried to withdraw $42 billion in deposits.
What Triggered the SVB Collapse?
While the collapse of SVB took place over the course of 44 hours, its roots trace back to the early pandemic years. In 2021, U.S. venture capital-backed companies raised a record $330 billion—double the amount seen in 2020. At the time, interest rates were at rock-bottom levels to help buoy the economy. Matt Levine sums up the situation well: “When interest rates are low everywhere, a dollar in 20 years is about as good as a dollar today, so a startup whose business model is “we will lose money for a decade building artificial intelligence, and then rake in lots of money in the far future” sounds pretty good. When interest rates are higher, a dollar today is better than a dollar tomorrow, so investors want cash flows. When interest rates were low for a long time, and suddenly become high, all the money that was rushing to your customers is suddenly cut off.” Source: Pitchbook Why is this important? During this time, SVB received billions of dollars from these venture-backed clients. In one year alone, their deposits increased 100%. They took these funds and invested them in longer-term bonds. As a result, this created a dangerous trap as the company expected rates would remain low. During this time, SVB invested in bonds at the top of the market. As interest rates rose higher and bond prices declined, SVB started taking major losses on their long-term bond holdings.
Losses Fueling a Liquidity Crunch
When SVB reported its fourth quarter results in early 2023, Moody’s Investor Service, a credit rating agency took notice. In early March, it said that SVB was at high risk for a downgrade due to its significant unrealized losses. In response, SVB looked to sell $2 billion of its investments at a loss to help boost liquidity for its struggling balance sheet. Soon, more hedge funds and venture investors realized SVB could be on thin ice. Depositors withdrew funds in droves, spurring a liquidity squeeze and prompting California regulators and the FDIC to step in and shut down the bank.
What Happens Now?
While much of SVB’s activity was focused on the tech sector, the bank’s shocking collapse has rattled a financial sector that is already on edge.
The four biggest U.S. banks lost a combined $52 billion the day before the SVB collapse. On Friday, other banking stocks saw double-digit drops, including Signature Bank (-23%), First Republic (-15%), and Silvergate Capital (-11%).
Source: Morningstar Direct. *Represents March 9 data, trading halted on March 10.
When the dust settles, it’s hard to predict the ripple effects that will emerge from this dramatic event. For investors, the Secretary of the Treasury Janet Yellen announced confidence in the banking system remaining resilient, noting that regulators have the proper tools in response to the issue.
But others have seen trouble brewing as far back as 2020 (or earlier) when commercial banking assets were skyrocketing and banks were buying bonds when rates were low.
