TLDR:
- Venture-capital backed startups tend to focus on software industries, leaving other sectors underfunded.
- Fifty Years, a venture capital firm, has created an “Opportunity Ratio” to measure the level of investment in different industries.
- Investors tend to focus on software industries because of their growth potential, but there may be opportunities in less competitive industries.
- One example of an underfunded industry is the paper industry, which has seen many closures but could potentially benefit from related technologies like biochar or mass timber.
Venture-capital backed startups often concentrate their efforts and investment in software industries. As a result, other sectors are left with fewer new companies and ideas. These industries must rely on existing firms for growth, which tend to be less open to disruptive innovation. Alternatively, they can bootstrap their operations or finance them with debt, resulting in slower growth. This pattern of investment has been cataloged by venture capital firm Fifty Years.
Fifty Years has created an “Opportunity Ratio” to determine which industries receive the most investment in relation to their market size. The ratio is calculated by dividing the current market size by current startup funding. This provides a clear picture of the industries that are underfunded and have the potential for growth.
While some may argue that industries with the largest Opportunity Ratios are not attractive investments due to issues such as shrinking demand or regulatory challenges, the focus on software industries by investors is not random. Investors recognize the growth potential in these sectors. However, there is merit in looking for opportunities in less competitive industries, where a new game can be found.
One such underfunded industry is the paper industry. Growing up in Maine, the author observed the closure of multiple paper mills in a state abundant in trees. This led to a curiosity about how these facilities could lose money in such a resource-rich environment. The author suggests that related technologies like biochar or mass timber could be a way to leverage the abundance of cheap lumber in the state. These technologies offer the potential to reverse the trend of declining profitability in the paper industry.
The data provided by Fifty Years sheds light on the investment patterns of venture-capital backed startups and the potential for growth in underfunded industries. While software industries remain attractive to investors due to their growth potential, there may be opportunities for innovation and investment in less competitive sectors like the paper industry.
