What’s Next for Silicon Valley? Our VC Roundtable Points the Way

By Lauren R. Rublin

Money has been pouring into Silicon Valley in recent years, and much of it has flowed into the offices of venture-capital firms, which fund and nurture tiny companies with big ideas that hope to become the next Amazon.com or Microsoft or Google. VC investors have raised an estimated $180 billion since 2013—a ginormous sum that has fueled the growth of start-ups such as Uber, Lyft, and Airbnb, whose valuations have ballooned into the billions, notwithstanding a paucity of profits. It has been one heck of a party, but don’t let all the hoodies and sneakers fool you: Funding the future is deadly serious business, and financial rewards are far from guaranteed.

Next year could be a time of reckoning for buzzy private companies that finally make their way into the public market, which takes a more hard-headed view of the high cost of growth. If interest rates rise and stocks keep falling, it could also be a more challenging year for the VC business. But no matter what the Federal Reserve or the Dow industrials do, the future is coming, and the technologies emerging in California’s Silicon Valley and elsewhere are likely to rock every aspect of our world—and possibly our galaxy, too.

That, in a nutshell, is the takeaway from Barron’s Silicon Valley roundtable, a gathering of venture capitalists held earlier this month in Menlo Park, Calif. The discussion was two-pronged, featuring a deep dive into the challenges and opportunities facing VCs and the start-ups they back, and a broad look at emerging technologies, some of which could threaten the durability of almost a third of the companies in the S&P 500.

Our roundtable members are Henry Ellenbogen, group chief investment officer for U.S. equity growth at T. Rowe Price and manager of the T. Rowe Price New Horizons fund (ticker: PRNHX), which has invested in dozens of private companies over the past 10 years; Kelly Flynn, lead portfolio manager on growth capital strategy at Winslow Capital Management; Reid Hoffman, co-founder of LinkedIn and a partner at Greylock Partners; Ali Rowghani, a partner at Y Combinator, an accelerator for very young companies, and CEO of the Y Combinator Continuity fund; and Hemant Taneja, a partner at General Catalyst. Ellenbogen is also a member of the Barron’s Roundtable.

Barron’s: This looks to be a golden age for venture-capital investing, given technological change, ample start-up talent, and abundant funding. Would you agree?

Reid Hoffman: Most VCs I speak with think it’s a challenging time. On the one hand, there are many different tech trends: the continuation of cloud computing, artificial intelligence [AI], augmented reality [AR], virtual reality [VR]. Autonomous vehicles are a version of AI. Historically, there are patterns in tech investing. VCs figure out that a particular thing is going to be big over the next decade. We start investing in it, a bunch of capital comes in, and markets develop for it. But when there is a diffusion of trends, you might not get a critical mass for market development, later-stage capital, and such. You ask yourself, what exactly should you be investing in? The tech trends are obvious, but what the diffusion of trends means for Series A investing [a start-up’s first round of financing from venture-capital firms] isn’t as obvious.

Does anyone want to challenge that?

Henry Ellenbogen: I agree with Reid. Consider the dominance of publicly traded platform companies, specifically Facebook [FB], Google [a unit of Alphabet ; GOOGL], Amazon.com [AMZN], Microsoft [MSFT] in cloud computing, and Netflix [NFLX]. Most people don’t want to fund new companies going against these companies’ core strengths. Then, as Reid points out, a lot of things could become the next platform, but it’s not clear. As a result, the most interesting companies to invest in are those providing building blocks that allow other companies to become more nimble. There is a whole host of companies enabling businesses to be more nimble, like Stripe [an online payments processor], ServiceTitan [a supplier of HVAC/electrical software], and Toast [a supplier of restaurant-management software]. So people are investing either at the periphery of dominant platform companies or in companies that enable industries to be nimble and fast-moving.

Hemant Taneja: The traditional view has been that technology cycles happen when Silicon Valley builds interesting businesses that take advantage of new technology platforms and distribution methods. The cycle that started around 2007 that was enabled by the introduction of the iPhone and App Store, Amazon Web Services, and Facebook Connect has arguably been over for a few years. Snapchat was probably the last major consumer-media property built as mobile-first. Today, there are many other exciting and potentially transformational technologies on the horizon—drones, AI, VR, Crispr in gene editing—that will fuel the next technology cycle. It’s still early days.

Beyond just a tech cycle, a simultaneous secular rearrangement of the economy also began in 2007. Once content, community, and commerce started to be organized online, we had the opportunity to rethink every part of the economy. Today, entrepreneurs are thinking about how to disrupt finance, health care, and industrial companies. I’m very bullish that this secular shift will continue to lead to the creation of interesting new businesses, even before the next technology cycle kicks in.

Sources: VentureSource; PitchBook; Crunchbase

Do you see anything that could be the next iPhone?

Taneja: The iPhone gave us a feedback loop that allowed us to iterate consumer products much faster than before. I expect the next big innovation to be about creating similar feedback loops in all kinds of industrial products—broadly speaking, an Internet of Things. Once this takes off, all industrial operations will be reorganized.

Ali Rowghani: We might quibble semantically with whether this is the golden age of venture capital, but I think we would all agree that this is the golden age of investing in private markets. This trend has been driven by the best founders choosing to keep their companies private longer. The trend was started by Facebook, which stayed private for a long time, even though it had a mature business, massive revenue scale, and capable internal management. If not for a change in regulatory requirements [the 2012 Jumpstart Our Business Startups, or JOBS Act] regarding the number of shareholders a private company could have without having to file information with the Securities and Exchange Commission, Facebook might have gone public much later than it did.

Facebook’s example created the trend of thriving private companies such as Airbnb, Stripe, and Uber staying private much longer than in the past. Part of the reason they have been able to stay private is that new sources of capital emerged that were eager to invest in them. These companies have been able to raise capital at a previously unprecedented scale as private companies. As mutual funds and hedge funds started investing in private companies and venture-capital firms raised later-stage growth funds, the most compelling historical reason for founders to take their companies public—access to significant amounts of capital—disappeared. Now, when founders weigh the pros and cons of going public, the value proposition isn’t as strong as it once was. After all, going public entails more overhead, more accountability, and more volatility, and perhaps more risk of talent fleeing post-IPO [initial public offering].

But has staying private longer been good for technology companies? Some newly public companies say the experience of coming public has instilled more discipline.

Taneja: Staying private has been positive. A lot of deep technology companies being built today and raising hundreds of millions of dollars haven’t even hit their technology milestones yet. The fact that these companies can have so much capital available to hit technology milestones is good for tech overall. Those that mature—and stay disciplined—will create the next generation of innovation.

Henry Ellenbogen
Henry Ellenbogen Photograph by Noel Spirandelli

Kelly Flynn: Staying private longer is often good for tech companies, and many companies. Public markets don’t like earnings volatility. Staying private longer offers more freedom to invest in the business. Also, as Hemant has written [in Unscaled: How AI and a New Generation of Upstarts Are Creating the Economy of the Future], the entire digital-communications framework has enabled companies to scale faster, with the result that you now have more robust business models at an earlier stage. For mid- to late-stage venture-capital investors, there is a suite of more interesting, somewhat-scaled companies arriving on the scene much earlier than in the past.

Ellenbogen: I think the jury is still out on whether staying private longer will prove good for companies. Our barometer is whether we’re creating more durable and sustainable companies to drive the economy overall. One milestone we look at is how many venture-capital-backed companies actually get to $1 billion of revenue. The last time we checked the statistics, fewer than 20 of the prior 500 VC-backed companies that went public got to a billion dollars of revenue, and that includes Google and Facebook. When we look back on this period in 10 years or so, will those numbers have changed meaningfully because companies had the ability to incubate longer in private, away from the scrutiny of the public markets? I could argue it both ways.

I would like to think that companies are raising capital and building the people, process, and systems to scale and build something sustainable. We certainly hope that’s the case when we invest in privately owned companies. But the alternative is that you raise so much capital that you allow yourself to become inefficient as a business. Often when I meet with founders, it seems they have learned the wrong lesson from companies like Amazon that have shown the ability to invest aggressively and enter new markets.

How so?

Ellenbogen: The lesson they take away is that on a blended P&L [profit and loss] basis, Amazon has had low profits forever. That would be true on a blended GAAP [generally accepted accounting principles] basis for much of its history, but the lesson I take away is that after the TMT [technology, media, telecom] bubble burst in the early 2000s, [Amazon founder and CEO Jeff] Bezos focused on getting core retail to profitability. He brought in executives with operational discipline, and drove the company to [focus on] free cash flow and return on invested capital. As he invested in new areas, he held managers accountable to detailed operating metrics.

I worry that some of the private companies I meet with have raised so much capital, but haven’t developed any internal discipline, even at significant scale relative to the industry. What is going to force these companies to learn about business efficiency and return on invested capital? If you learn this too late in your life cycle, it’s just not in your DNA as a company. We could end up with zombie companies in the private market.

Hoffman: The public market puts pressure on companies to be accountable and strategic, but high-quality private investors would do that, too. Also, Kelly’s point is important: The public market makes it harder, in general, for companies to take bold risks. It takes an entirely different category of “oomph” with diffuse public investors versus negotiating with one or two investors.

Hemant Taneja
Hemant Taneja Photograph by Noel Spirandelli

What might stop the flow of money to Silicon Valley start-ups?

Ellenbogen: The owners of most assets, public or private, are the same: endowments, sovereign wealth funds, limited partnerships, and such. Ultimately, they will demand a return. That’s where the discipline comes from. Also, venture-capital markets tend to be tied over a relatively fast cycle to the performance of the Nasdaq. The Nasdaq index has corrected approximately 10% from its high earlier this year. If the Nasdaq were to go into a bear market, some VC-backed companies would be held to higher standards by investors. [The Nasdaq entered a bear market Friday, defined as a 20% drop from its high.]

Flynn: Some of the most widely owned and highest-valued private companies have publicly stated that they plan to go public in 2019. Thus, a couple of big potential IPOs might play a role in setting the tone for how investors think about the prospects for mid- to late-state VC investments.

Rowghani: The only thing that would change the amount of activity and opportunities available in the private market is the disappearance of high-growth opportunities. And that would happen if founders of the most attractive companies decide, en masse, that they want to go public much earlier than their predecessors did. Otherwise, we’ll see ups and downs, cycles, corrections, some VC funds drying up and being unable to raise new funds. It would take a change of the entrepreneur’s psyche for the attractiveness of late-stage private markets to dissipate for investors.

Is there a middle ground between being public and private, wherein private companies can or should be more transparent?

Hoffman: Generally, we don’t make an investment unless there’s a chance of an IPO, although with seed investments, you never know. Then, what should a company do to get IPO-ready? What would your story look like? What’s the dashboard [consolidated list of key financials and performance indicators]? How do you explain yourself to a broad set of investors? What kinds of accountability metrics would you have? How predictable would you be? You can usually tell when a company is really getting ready to go public because they hire a public-company chief financial officer 12 to 24 months beforehand.

Ellenbogen: When we invest in a private company, we ask management to create one-page monthly KPIs [key performance indicators] separate from their board decks [information packets for board meetings]. CEOs quickly find that the discipline of having to put together a monthly one-page dashboard of how the business is doing creates an internal understanding of which metrics matter. The second thing we ask is that they find a board member who has seen true scale before. If companies can do both, you end up with a portfolio of private companies that operate like public companies. We have a number of companies in our portfolio that I would put in that category.

If a company is performing well, the pressure to go public is less than it used to be because you can deal with the liquidity needs of early-stage investors and employees in the private market. But if you want people to get liquidity in a fair fashion, the public markets are the easiest way to do that, because there is no debate about the timing. Liquidity is available to all stakeholders at a clear price. That is the final forcing function that drives many companies to go public.

Kelly Flynn
Kelly Flynn Photograph by Noel Spirandelli

Companies such as Uber, Lyft, and Airbnb, each valued at billions of dollars, are likely to go public in 2019. Do these companies have what it takes to keep growing their valuations?

Ellenbogen: It’s hard to comment on companies you’re invested in. [Laughter] Let’s look at IPOs generally. This has been a good year in terms of the number of IPOs. As long as the financial markets are accommodative, we could welcome a lot of new companies to public ownership next year.

We estimate that investors are concerned about the disruption and terminal value [long-term durability of a business’ economics] of about 30% of the companies in the S&P 500. If you’re a public-market investor, you want to invest in companies that you think are on the right side of change. Your opportunity set has almost by definition been shrunk because of your concerns about the 30%. So not only might some bellwether companies come public, but could the public markets become a source of capital for other private companies pursuing leading-edge technologies?

For instance, Reid is an investor in Aurora, which most people think is one of the leaders in developing technology for self-driving cars. It is relatively early in its life cycle, but you could imagine that if Uber is well received by the market and people start thinking about the future of driving, the market might say, “This is like a biotech investment; it doesn’t have a product today, but the value of the end-market is in the trillions.” One could make a reasonable case that the public market would be receptive to something like this in 2019 or 2020, assuming a good market environment.

Flynn: It isn’t hard to get good information on private companies. Many companies are providing the KPI dashboards that Henry referenced one or two years before they plan to go public, and preparing financials in a way that would be palatable to public-market investors. All investors are focused on the path to profitability. It’s not the Wild West out there.

Taneja: There is a lot of uncertainty about what the public markets will look like in 2020. It has been such a bull market for so long. That is creating a psychological dynamic for 2019. Companies that could go public are asking, “Should we IPO now or wait until the next cycle?” There is a lot of interest in being safe. I expect 2019 to be a fairly aggressive year for IPOs.

Hoffman: In addition to getting liquidity, companies frequently use IPOs in another way: to have a debutante moment. When you come public, there is a whole bunch of press oriented toward you. But if you have a suck-all-the-oxygen-out-of-the-room political fight [in 2020], that could pose challenges for the debutante feature of going public.

Ali Rowghani
Ali Rowghani Photograph by Noel Spirandelli

The stock market has been a nasty place lately. Henry, as someone who invests in both public and private companies, do you think a wave of high-profile IPOs next year could lend new vigor to the public market?

Ellenbogen: Public market cycles are driven by the economy. Is there any reason why high-profile IPOs would change the economic status of the U.S.? I don’t think so. But successful IPOs could drive excitement in certain sectors of the market. Successful IPOs of Uber and Lyft, which represent on-demand driving, eventually would increase the public discourse on the value of Waymo, Alphabet’s self-driving technology, and other things related to autonomous vehicles.

Which emerging technologies interest you most as venture-capital investors? And which should public investors study most closely?

Rowghani: It is almost certain that transportation will become a service. That will profoundly change the way we live. Car ownership will become optional for many people. Think about the impact on real estate, energy, cities, gas stations, and such as the dominant paradigms for urban transportation change. The big question is when this will all happen, and I don’t have a great answer. But whether it’s Tesla [TSLA] or General Motors ’ [GM] Cruise unit or Waymo and others, there is a huge amount of work going on in this area. Among start-ups, Aurora is a name to watch, as is Embark, a developer of self-driving trucks. There are dozens of start-ups working in this area.

Hoffman: I have made three AV [autonomous vehicle] investments, in three zones, as I don’t invest in companies that compete directly with each other. What is the best possible shot at the brains for a self-driving passenger vehicle? That’s Aurora. Co-founder Chris Urmson built the technology at what is now Waymo. Other Waymo developers founded Nuro, which has developed an electric driverless delivery van. This creates new opportunities in logistics. Maybe it changes the dynamic around local delivery for Amazon and Walmart [WMT]. My third investment is Nauto, whose AI-based platform uses a two-way camera to check on and provide safety feedback to drivers. People assume there will be a switch flipped and everything will be AV. In fact, the roads will be mixed [combining drivers and driverless technology] for a long time.

A self-driving Uber killed a pedestrian in Arizona this year. How do you think about issues like liability, which would seem to stand in the way of commercializing autonomous vehicles?

Hoffman: As U.S. investors, we hope to make as much progress here as possible. We work with U.S. municipalities, but we also have relationships with Singapore, Dubai, and other places. The U.S. should want a 90% reduction in road fatalities [stemming from the adoption of AV], but if we can’t solve problems here around regulation, insurance, liability, and such, we’ll go build the technology elsewhere. That’s a plan B, but it is frustrating. I have personally made phone calls to U.S. governors to explain and discuss the benefits of AV.

Are you getting a lot of resistance?

Hoffman: They say, “Let’s study it more. It’s the president’s first year” or whatever. It’s the time-frame question that’s the central issue. It’s the ostrich move—head in the sand—ignoring the oncoming future.

Taneja: There is a precedent for developing technology overseas. A lot of drug-discovery work is done in Europe first and then comes here, because the Food and Drug Administration is slow to approve things. The process of identifying new drugs and taking them through clinical trials is being fundamentally transformed with the application of AI. This will change the cost structure for developing drugs and will lead to the creation of entirely new pharma companies.

I think a lot about how artificial intelligence can similarly transform other industries: How will it unlock transportation? How will AR and VR applications develop? How will drones transform different sectors? How will genetic-engineering technologies like Crispr/Cas9 play out? Commercializing each of these technologies will have a profound impact.

Hoffman: Crispr/Cas9 is a ways out, but bioprinting [3-D printing of biomedical parts] and synthetic biotechnology [genetically modifying biological systems to produce new compounds]—that’s here.

Taneja: Drug development isn’t going to be about blockbuster drugs anymore. It is about understanding which compounds could work on small populations, based on their DNA makeup, and bringing them to market. The whole biotech industry is going to move from blockbuster-oriented drug discovery to the creation of low-volume drugs for smaller populations. Many companies here are using machine learning to identify such compounds and figuring out which types of DNA they can target. Verge Genomics is one example.

It is very disruptive to the biotech industry because those companies traditionally aren’t software-first. There are a bunch of companies coming together now at the intersection of machine learning and AI and pure biotechnology that are targeting different disease areas. Longevity is another area in which these technologies are being applied.

Hoffman: People think cloud computing is already big, so they move on. But combining multiple sources of data with VR and AI techniques has stunning implications. Would you rather have your average radiologist or a trained AI program read your films? This transformation is just beginning.

Taneja: Think about all the application-software companies that have brought efficiency to how we work. If you embed intelligence in this data, that will lead to rethinking workflows. To Reid’s point, the radiologist’s role is going to be different than it was in the previous era because computers will be able to safely evaluate 99% of radiology films. This will allow the radiologist to focus on patients who need the attention. In general, application software sold to businesses will fundamentally change. This is the huge technology refresh that is happening now.

What else is slated for disruption?

Taneja: You name it. Financial services.

Rowghani: Supply-chain management.

Hoffman: Farming.

How is technology changing farming?

Hoffman: Think about all the places where data happens. There is data on the weather and the state of the soil. Analyzing it shapes decisions on what to plant, and where, and when. Synthetic biology can be used to improve soil nutrients. Autonomous vehicles could change farm life.

Taneja: Farming is the last manufacturing process susceptible to weather. Why do we even do it outside? Why can’t we create indoor farms and use data to optimize the delivery of light, water, and nutrients? How does this become a more robust, repeatable process? Indoor farming start-ups like Bowery are scaling fast.

Hoffman: Moore’s Law is coming to space. We are going to see a revolution in space. We could see manufacturing in space, and maybe on Mars. At the moment, this sounds like science fiction. It’s not usually talked about much, unlike AI and biotech. I have invested in a satellite propulsion company, Apollo Fusion.

Here on Earth, there have been many successful start-ups in financial services. What lies ahead for the industry?

Taneja: There is a lot going on in financial services, particularly in the payments area, where large companies have been built over the past decade. Think about the role of large banks. They have served society poorly; look at their NPS [net promoter scores, a measure of customer experience]. So there has been a proliferation of neobanks going after specific customer segments—someone with low disposable income who doesn’t know how to save, but needs help figuring it out. Some interesting companies have popped up here and especially in Europe, given a favorable regulatory environment. Revolut Bank and Monzo Bank are both digital banks scaling fast in the United Kingdom. Digit, Chime, and Acorns are growing fast in the U.S.

In the future, we aren’t going to need 6,000 banks in the traditional sense, because a lot of that functionality should be in the cloud. You could see a lot of these interesting neobanks spawn on top of the two or three banking platforms, akin to cloud-computing platforms, that understand their end users and can service them deeply across focused segments.

Ellenbogen: Non-U.S. companies have been an inspiration in this sector. You can’t really talk about the changing face of banking without looking at what Ant Financial and Tenpay have done in China. [Ant Financial, an affiliate of Alibaba Group Holding (BABA), and Tenpay, a subsidiary of Tencent Holdings (700.Hong Kong), are huge fintech start-ups.] Developing markets didn’t have a banking infrastructure. These sorts of companies will come to developed markets, but in a different fashion. Here we are seeing the integration of payments processing and data-management software that is allowing small businesses to provide better value to customers. These businesses don’t have the IT resources of a large company, but if you can bundle software that runs the front end of the business with their payment infrastructure, providing a valuable suite of financial services, that really unlocks economic growth. Toast, ServiceTitan, and Evolve [a property rental platform] are examples of this.

Taneja: Because many start-ups are creating interesting software products for small businesses, we are gaining a richer understanding of these businesses and their customers than traditional banks have had. That enhances the ability to underwrite risk in a fundamentally different way. In 2008, when the big banks were failing, the government sent a lot of money to the states to help small businesses. But the banks didn’t know how to service them, and the money just sat there. If companies like Fundbox and BlueVine had existed then, the data could have been used just as Henry describes: to give smaller businesses access to capital in new ways.

Fundbox offers lines of credit to small businesses and freelancers. Users link their accounting platforms with Fundbox, which uses data analytics to determine how likely it is that receivables will be repaid. On that basis, it advances money to a business. Working capital is a huge issue for small businesses.

Why have Visa [V] and Mastercard [MA] been so resilient to disruption?

Ellenbogen: The network effect is powerful. Google Pay tried to disrupt them, and it didn’t work. Apple Pay then used them as the rails for its system, riding the network effect as opposed to disrupting it. Shares of Visa and Mastercard shot up after that happened. At some point, however, this will change. Outside the U.S., you have a road map for what a different system would look like.

Taneja: Exactly. In China, payment systems aren’t using credit-card-company rails. Over time, will what Visa and Mastercard provide be enough? I bet they are thinking hard about how to innovate.

Flynn: This brings up an interesting point about competitive moats, which are extremely important as companies seek to move from early-stage to fully developed businesses with strong long-term growth prospects. There are a lot of interesting AI and fintech start-ups, but it can be a challenge to gauge the competitive moat when you have dominant incumbents like Google, and well-capitalized beneficiaries of the network effect.

How do you deal with that problem?

Flynn: Amazon and other behemoths have helped lay out a digital communication and commerce framework. But there are industries, or niches in various industries, that haven’t leveraged that framework well yet, whether in fashion or real estate or pet care. We have made investments, including Compass [a real-estate technology company] and Chewy.com [an online retailer of pet food, acquired in 2017 by PetSmart], in a few of those categories. Also, while Facebook, Google, and others have solved a lot of problems, they also have created new challenges and opportunities for business, especially small businesses and local companies. Shopify [SHOP] helped address that issue by providing an e-commerce platform for small businesses to access customers.

Hoffman: It is very difficult to take a strong incumbent from behind. So you look for different platforms or angles or features. We have made two investments in recent years in the gaming space: Discord and Roblox. Discord is a chat app or social network for gamers, something Facebook and Snapchat aren’t really doing.

Rowghani: We’ve always had big tech companies, but what’s different today is the nimbleness of Google, Amazon, Facebook, and Apple [AAPL]. At Y Combinator, we have funded more than 2,000 companies. The joke internally is that Amazon competes with all of them. Not only have these big companies built strong, monopoly-oriented businesses at their core, but their ability to execute and expand beyond the core business is pretty impressive. Investing in the wake of powerful platform-oriented incumbents is one of the interesting contours of our industry.

Beyond their competitive power, they soak up and retain a lot of talent. These companies have changed the whole nature of start-ups, partly because they have increased labor costs so much, particularly in the Bay Area. In some ways, it has never been easier to get a start-up off the ground, thanks to tools like Amazon Web Services and such, and in some ways it has never been harder to accumulate and retain the talent you need to be able to build a great company.

Ellenbogen: The dominant companies have raised customer expectations with offers like Amazon Prime and Uber. They are forcing traditional businesses to move at a fast pace and become more customer-friendly. For example, we have invested in Clear, a biometric secure-identity company that encrypts fingerprints and irises. It is being used at airports and sports stadiums. When you go to an airport or sports stadium or high-profile building, you don’t want to have a trade-off between security or speed, but we live in a world where security is ever more important.

Among the endangered 30% of the S&P 500 to which Henry referred, which industries that we haven’t yet discussed are most vulnerable?

Ellenbogen: We would start with traditional media.

We’re sorry to hear that.

Ellenbogen: Retail and enterprise technology are others. Microsoft has again become the most valuable company in the S&P because it has created one of the dominant cloud platforms. Transportation is also at risk, and the hospitality industry is facing significant change. When you double-click on transportation, you’re talking not only about original equipment manufacturers but the distribution of goods, ensuring their transport, and all the ways these things relate to real estate. Autos and transportation are 13% of U.S. GDP. That is a huge swath of disruption. The public markets haven’t focused on some of these areas and others, such as agriculture or health care or space. Change generally favors early-stage companies over incumbents. Put another way, that 30% is most likely going up, not down.

Flynn: Consumer packaged-goods companies are also under threat. We have talked mostly about technology today, but changing consumer tastes are disruptive. Consumers are more selective when it comes to health and wellness. They are more interested in authenticity of brand and sustainability. Most important, consumers are less loyal than in the past. They are more interested in niche brands, and trying new things. That is a difficult environment for a large manufacturer of packaged goods to operate in. Then layer on technology that has enabled nascent brands to get the word out and scale up to viability fairly quickly. These trends are driving some of the large consumer-staples companies to acquire businesses that didn’t exist several years ago.

Ellenbogen: We recently invested in Allbirds and Warby Parker at similar valuations. [Allbirds sells environmentally friendly footwear; Warby Parker sells prescription eyewear.] One might deduce that we felt they were at similar scale, relative to their opportunity set. Yet Allbirds has less than half the technology head count of Warby, because it was able to leverage many of the modern enabling technologies, like Shopify, that didn’t exist when Warby was founded.

Importantly, they are both examples of direct-to-consumer companies. Both were built as omnichannel retailers focused on an excellent customer experience with authentic brands that leverage social media, such as Instagram, and that provide strong value by cutting out the middleman. This trend is important for two reasons: It makes investing in new DTC companies risky because of the ease of entry, and it makes investing in traditional retail brands and consumer packaged goods more challenging because of the change in the competitive moat. Hemant talks a lot about this in his book.

Taneja: The health-care sector has been all about doing mergers to acquire scale. We haven’t yet seen many interesting health-care IT start-ups come public, but they are being built and scaling fast. Software standards are emerging in that area—in particular, FHIR [Fast Healthcare Interoperability Resources] standards that Apple, Amazon, and other big tech companies have rallied behind. With standardization of cloud-based innovation in that space, you’ll start to see much more innovation. Health care is 20% of GDP. The largest software-like company in health care is probably only $25 billion. This is a massive opportunity in the next 10 years.

Big tech companies increasingly are coming under regulatory threats. What does this mean for the venture-capital business?

Taneja: A lot of our founders are building companies in traditionally regulated markets. It is important for them to understand that regulations were there for a reason, as they create products. We are encouraging them to build what I call algorithmic canaries into products, which literally measure whether a business’ success in the short term is aligned with the long-term interests of society. If you’re a company making private student loans and you cherry-pick students with the biggest potential, are you making it harder for the next layer of students to get financing? Your data analysis should include asking questions like this. This is a new discipline, but it is essential that founders consider it.

Hoffman: In my book, Blitzscaling [Blitzscaling: The Lightning-Fast Path to Building Massively Valuable Companies], I deal with three kinds of risk: deep risk to individuals, lots of risk to a large number of people, and systemic risk. Even fast-moving companies that are taking a lot of risks to be first to scale try to figure out those areas of risk. Inasmuch as regulation helps navigate those risks while being very careful to minimize restrictions on innovation and speed, it is a societal positive.

Final question: What is one big thing we should watch for next year from the venture-capital business or the innovation economy?

Flynn: The cost of being a jerk has never been higher when it comes to valuation and business implications in the wake of the #metoo movement and other prominent issues. Integrity, or doing what’s right, not just what is possible, is probably going to be a more important investment theme down the line.

Hoffman: I already mentioned space as an interesting area. Somewhat entertainingly, we didn’t talk about cryptocurrency, and I don’t know what to make of that. The notion that you can create an HTTP of value as a platform stack [a platform operating system with a framework for applications and data] that could lead to new assets, smart contracts, and new capabilities in all software is interesting. I am bullish on cryptocurrency. Right now, it is all asset speculation, but pay attention to it.

Rowghani: I would focus on AI. In particular, keep an eye on how the products we all know and love, and new products that we adopt, are improved by AI. In almost every industry, there will be an AI version of that thing in the next few years, and it will be better than the version you’re used to.

Ellenbogen: We started today by talking about the golden age of technology and venture capital. Technology—and the innovative spirit—is a big driver of our economy, and it isn’t independent from where you stand on Brand U.S.A. and our stance on global immigration. The U.S. is in long-term competition for global intellectual capital to drive innovation. Three panelists here were born outside the U.S. Ensuring that this is a place where diverse talent can come and build companies that continue to drive our economy is superimportant.

Taneja: One area where founders need to engage more is with government agencies. Our government is highly inefficient. There isn’t enough work being done to bring the same kind of software-based agility and efficiency we’re talking about to government organizations and processes. I hope that’s an area where we’ll see more innovation.

Thank you, everyone, for participating today. 

Write to Lauren R. Rublin at lauren.rublin@dowjones.com