What VCs Want in 2016

What do venture capitalists want? For entrepreneurs in search of funding, this is the perennial question.

Last year the world saw a record high of venture capital investments, with total deals topping $100 billion, according to a report by auditing giant KPMG and data clearinghouse CB Insights. Dominating the investment marketplace were internet companies, which obviously won’t go out of style anytime soon; same goes for tech, mobile, telecom, healthcare, financial, education and consumer startups.

So what will be hot this year? We asked some leading VCs to put their money where their mouths are, filling us in on the sectors that excite them most -- and those likely to score major financing in the months ahead.

Virtual Reality

When most people think of virtual reality, they think of 3-D gaming or Oculus, the maker of headsets that Facebook acquired for $2 billion. But that’s just the tip of the virtual iceberg, says Ted Leonsis, a founder and partner at Revolution Growth, part of the Washington, D.C.-based investment firm co-founded by Steve Case, Donn Davis and Tige Savage.

Leonsis expects the VR market to explode with training products for education, sports and the military this year and beyond. Last year he announced a partnership between VR startup STRIVR and three pro sports teams he owns: the Washington Capitals, Wizards and Mystics. The idea is for these NHL, NBA and WNBA teams to incorporate 3-D training into their game preparation.

Training programs that feature audio and video lessons have about a 50 percent retention rate, Leonsis explains. “But when you add interactivity, the retention skyrockets to almost the 75 percent range,” he says. “And now virtual reality takes retention levels to well over 90 percent.”

Brian Wilcove, partner at Artiman Ventures, an early-stage venture fund in Silicon Valley that invests in companies aiming to disrupt multibillion-dollar markets, seconds this prediction. His firm invested in zSpace, which makes an all-in-one VR solution for the education market -- complete with glasses and stylus -- that tens of thousands of U.S. students already use. Think high schoolers dissecting 3-D holographic frogs in biology class, or med students watching a virtual open-heart surgery.

“The big challenge is that the level of computer power that one of these things needs is pretty high,” Wilcove says, adding that as the market evolves, he can imagine a communications app for far-flung business meetings “where you’re all virtually sitting around the table in different locations with one of these headsets on, James Bond-style.”

Cybersecurity

Take corporate and consumer concerns about data integrity, add ongoing developments in mobile and cloud technology, and you get a scorching market.

“The sophistication of the bad guys has increased,” says Theresia Gouw, co-founder of Aspect Ventures, a San Francisco firm that invests in digital marketplaces, security, health IT and analytics. “That, coupled with massive change in technology infrastructure, is creating huge opportunity. It’s like a perfect storm.”

Consider Exabeam, a big-data security company that has raised $35 million in financing, including contributions from Aspect Ventures. The company employs user- behavior analytics to detect cyber attacks that rely on stolen credentials. “You’ve got to think about users,” says Gouw, who has been investing in security companies for 15 years. “Most of the big hacks that you’ve read about, everything from the Sony hack to the Target hack, are bad guys getting users’ credentials.”

Sean Flynn, managing director of Shasta Ventures -- a Silicon Valley firm that makes Series A investments in enterprise software, consumer internet companies and connected hardware devices -- gets excited about mobile security, especially with so many employees using their own devices at work. In early 2015, Shasta contributed to an $8 million investment round in Skycure, a solution that protects bring-your-own and employer-issued mobile devices in the workplace from internal and external security threats. “We think that most enterprises are quite exposed,” Flynn says. “And we feel like that’s a really big opportunity.”

On-Demand Platforms

Startups that focus on quality assurance and smooth transactions are the name of the game, says Flynn, whose Shasta Ventures invested in Turo, a national peer-to-peer car-rental platform. Turo screens renters, provides various levels of insurance and offers 24/7 roadside assistance.

“It’s tapping into underutilized assets and building a product around that marketplace so it’s not just a free-for-all,” Flynn says.

Maha Ibrahim, general partner at global VC firm Canaan Partners, which focuses on technology and healthcare, expects on-demand startups to add more premium, white-glove services in the coming months. As an example, she points to onefinestay, an Airbnb for upscale homes that vets listings and offers concierge services. Another example from Canaan’s portfolio: The RealReal, a luxury-brand consignment platform that vets all goods listed on the site, provides high-end photos of them and ships them to buyers.

“It’s a way of capturing more money from that premium user,” says Ibrahim, who expects the trend to proliferate throughout the travel, fashion and food-delivery sectors.

Consumer Healthcare

Technology companies that make medical treatment more efficient for patients are another good bet. Shasta Ventures has invested in Doctor on Demand, which lets users see board-certified physicians, psychologists and lactation consultants by video call.

Also hot right now: wellness platforms that doctors, insurers and employers can offer their patients and employees to help them stay healthy or recover from a medical setback.

Aspect Ventures’ Gouw credits mobility, the consumerization of healthcare and the Affordable Care Act with the growth of the sector. Case in point: Vida, a platform her firm invested in that pairs individuals with a coach who counsels them on fitness, nutrition and general well-being while monitoring their vital signs.

Sharon Vosmek, CEO of Astia, a San Francisco-based nonprofit dedicated to identifying and promoting women as high-growth entrepreneurs, sees innovations in traditionally underfunded areas like women’s health and reproductive health as a growing market. Astia Angels, a global network of angel investors, backs select Astia companies across the sectors of tech, life science, med device, consumer products and health and wellness.

“We plan to double down on those companies that actually understand that the female healthcare market is a large and expanding market,” Vosmek says. A few examples from the Astia Angels portfolio: nVision Medical, a medical-device startup tackling female infertility; Sandstone Diagnostics, which has developed a male fertility tracker; and Naya Health, which makes a smart breast pump for nursing mothers.

Services for the Underserved

It has become smart business to develop education, employment and lending workarounds. “People are looking to alternative pathways to get to school and to get that four-year degree, but they’re also looking for alternative ways to get the type of education they need in order to get the kind of jobs they want,” says William Crowder of Comcast Ventures’ Catalyst Fund, the telecom giant’s $20 million New York-based venture fund for early-stage tech startups led by minority entrepreneurs. As an example, Crowder points to Catalyst Fund portfolio company Quad Learning, which works with community colleges to offer affordable education for students earning a bachelor’s degree.

Dan Levitan, co-founder and general partner of Maveron, a consumer-only VC firm based in Seattle and San Francisco, shares these sentiments. “We think that the whole jobs market and ‘How do you get liberal arts people jobs?’ is a very big idea,” he says.

Besides investing in educational startups Koru and General Assembly, Maveron has championed Earnest, an online lender that offers low-interest personal loans and student-loan refinancing to fiscally responsible borrowers. “The lowest rate that Earnest has on a student loan is like 2 percent for highly qualified buyers,” Levitan says.

Robotics and Drones

Robotic toys and vacuum cleaners may be all the rage, but Shasta Ventures is more enthused about robots for enterprise. “You can build really functional products that make companies much more efficient,” Flynn says. Fetch Robotics, one of Shasta’s portfolio companies, has a suite of robots for warehouses that enables businesses to pack and ship products in a more streamlined way.

Then there are drones. Although they’ve been touted as a solution for delivering items from e-commerce companies, regulatory concerns persist. Other applications are likely to gain ground first. “I think we’ll see a first wave of drone companies targeting image applications, whether that’s taking pictures of houses or surveying land,” says Artiman’s Wilcove. His fund has looked at a couple dozen drone startup deals in the past year. Other possible uses: monitoring bridges, cell towers and dangerous locations. And don’t be surprised if selfie-taking drones appear on the market before year’s end, he adds.

Internet of Things

Gartner famously predicted that, come 2020, the world will see 25 billion connected objects in the consumer and business sectors: cars, appliances, fitness devices, household products.

“All objects will become intelligent,” says Ravi Belani, who teaches entrepreneurship at Stanford University and is managing partner at the Alchemist Accelerator, a Silicon Valley accelerator for enterprise startups. “Every device has the capability now because the price point of chips and sensors and security is becoming so low. And that’s hugely exciting.”

Among the IoT developments that have VCs buzzing are medical sensors. Take the biochips created by healthcare innovator Proteus Digital Health. “You ingest a sensor that ties to a therapy, and then it tracks the compliance of the drug in the body,” Artiman’s Wilcove explains.

Or the patient gets a sensor -- say, for tracking their glucose injected subcutaneously -- that stays in place for several years and syncs with the patient’s smartphone. “That,” Wilcove adds, “is wild stuff.”