New Funds Target Out-Of-Favor Startup Sectors

8 months ago 46

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Startups in sectors that saw steep funding declines may be getting fresh attention from investors, courtesy of new industry-focused funds that closed this year.

In areas from consumer products to apps to gaming, U.S. venture firms have raised fresh capital to invest in industries where funding levels remain drastically below peak. This, along with a modest uptick in first-quarter venture investment, indicates some sectors may have hit a cyclical low last year and should be heading higher.

To get a sense where newly allocated capital is going, we aggregated U.S. fundraising data for all new startup investment vehicles announced this year. We then looked at some of the sectors where investors plan to focus.

To a large degree, they will continue to fund hot themes of recent quarters, and AI in particular. However, we also saw a number of funds targeting areas that might be considered more out of favor. Let’s take a closer look.

The app economy

Most of us are more addicted to our apps than ever. Yet even so, venture investment in app startups has been tapering off for years.

Per Crunchbase data, funding for U.S. companies tied to the app economy peaked as a percentage of total investment back in 2016. In 2023, it hit its lowest point in a decade.

Against that backdrop, it’s interesting to see that Andreessen Horowitz has earmarked $1 billion out of the firm’s latest $7.2 billion fundraise to go toward an apps-focused fund. One expects AI will factor heavily into this strategy, given the firm’s stated enthusiasm for AI-driven companionship, wellness and creativity tools.

Gaming

After several slow quarters, funding to gaming startups has picked up this year, driven by a resurgence in early-stage dealmaking. New funds are also looking to tap into the momentum.

Earlier this month, Bitkraft Ventures, an early-stage gaming-focused investor, closed on $275 million for its third fund. And last week, Andreessen Horowitz announced it raised $600 million for a gaming-focused fund, as part of its massive total fundraise.

Consumer

Consumer-focused startups haven’t been an investor favorite of late. VCs have essentially abandoned the direct-to-consumer startup model, and they’re not backing a lot of consumer products startups either.

Maven Ventures, however, offered a bit of encouragement for the space. The Silicon Valley-based firm closed on $60 million this month for a fourth fund continuing its strategy to “invest in seed stage software startups tapping into new consumer behavior and trends.”

Andreessen Horowitz, meanwhile, is enthused about the intersection of AI and consumer-facing investment. A recent post notes that: “Consumer software companies are amongst the most valuable in the world (FAANG is all consumer) and were built during a major platform shift or product cycle. We expect this time to be no different.”

Web3

Startups related to Web3 — defined as those in the crypto and blockchain sectors — saw a slight increase in funding in Q1 of this year, per Crunchbase data. It was the first quarter-over-quarter rise for the space, once among the buzziest in the venture landscape, since the fourth quarter of 2021.

San Francisco-based Hack VC, a Web3-focused venture investor, landed $150 million for a new fund in February. It’s been investing busily, participating in more than a dozen known rounds this year, per Crunchbase data.

Deals are also getting done at high valuations. In March, for instance, three global crypto-related companies crossed the $1 billion valuation threshold to clinch unicorn status: Berachain, an Ethereum-compatible blockchain for financial applications, Io.net, a blockchain service to sell excess GPUs, and Polyhedra Network, a Web3 infrastructure company.

Cybersecurity

Cybersecurity is among the sectors that saw U.S. funding perk up in Q1, after hitting a multiyear low two quarters earlier. Rounds in the hundreds of millions are happening again, per Crunchbase data, as is talk around potential exits for some of the more heavily funded players in the space.

Just in time for the rebound, San Francisco-based Ballistic Ventures announced in March that it has raised $360 million for an oversubscribed second fund that will invest exclusively in cybersecurity.

What was out is in again (with a twist of AI)

Rising interest and investment in sectors that hit cyclical lows last year doesn’t mean venture investors are turning away from their recent favorite investment theme: AI. Rather, there’s a vast array of applications for artificial intelligence in almost any industry.

Still, it’s reassuring to see startup sectors bouncing back, and to see funds with stores of capital dedicated to these spaces.