We started Equal on the belief that we were entering a new technology super-cycle, one that would rapidly transform the way we work and live. Over the last 6 years, we’ve seen massive technology developments, enabling the thesis that we’ve held sacred since Day One – that these technologies would become so mainstream that they would enable rapid digital transformation of the old world economy. While value will undoubtedly be created by the foundation technology innovations themselves, the opportunity in thoughtfully deploying instances of these technologies throughout industries is far larger.
As a student of industries, I spend my time with customers, executives and non-VC investors daily. As I examine the operations of legacy companies, the disruption point seems more adjacent than I’ve ever seen. This creates fear AND opportunity. Many of these industries are littered with aging labor workforces where the lack of labor is actually a massive inhibitor of growth. This isn’t for the sexy jobs, but more often in highly repetitive, paper pushing menial tasks that many of these workers hate. AI presents an incredible opportunity to automate many of these tasks to fill the gap of the existing labor force, improving both the quality and cost of the overall product. It’s a win for the companies, their employees and their customers, creating a unique moment in time for digital transformation.
This has played out in past cycles where the ultimate beneficiaries of technology aren’t the innovators, but rather those who thoughtfully deploy it once it’s hit maturity. These companies utilize technology to drive economic leverage within their business (Carlota Perez refers to this as “production value”). As we navigate the “frenzy” stage of this cycle (demonstrated by characteristic bubble behavior in the AI market), we’re seeing startups utilize AI to find “synergies” within their markets that make their businesses demonstrably better than legacy incumbents. We believe this presents an incredible opportunity for founders to develop businesses beyond software.
Widening the aperture for startups is a tremendous win for founders and investors alike. Our sectors (energy, insurance, supply chain and retail) cover over ten trillion of annual GDP, but have surprisingly birthed relatively few software winners. In industries like insurance, there is a single software company worth over $10b (Guidewire - $GWRE), but countless brokers, carriers, and intermediaries worth more than that with dozens worth 10x that value. In energy, we’ve seen precisely zero software companies worth more than $1b, but have countless US based utilities, project developers and other intermediaries worth tens of billions of dollars. These conditions hold true for Supply Chain and Retail where we have companies like Shopify and Toast standing out as software winners far above the rest, but even these companies pale in comparison to the scale of marketplaces, retailers, brands and logistics providers supporting the industry. When we expand beyond software, we not only increase the potential quantity of massively lucrative outcomes, but also the quantum (i.e. they can be MUCH bigger). Below is a table of the largest software and non-software companies in each of our industry categories. As you can see, the scale of outcomes now addressable to us investors is far larger now that we are no longer relegated solely to software.
But the new world isn’t without its challenges. There is so much about the old world of tech investing that needs to be unlearned. The old world is dominated by legacy tech networks that lack the relationships and industry insights to serve the new world’s customers. Legacy best practices for SaaS aren’t the same in a world where services are being sold – for better or worse, the operating models are going to be incredibly different, requiring a nuanced understanding of the customers needs and how they buy. This equally impacts the nuance that investors will require to successfully invest and support these companies. With new margin structures, investors will have to properly understand the difference between value creation and revenue growth (hint: revenue multiples never mattered much, but mean even less now), comping a business to its category and its comparative unit economic performance. This looks very different from the traditional “growth at all costs” methods of venture and likely needs to borrow from other methods of investing to better align with how these companies would be valued in the public markets.
This has always been core to our thesis at Equal (actual slide from Fund 1 deck below created 6+ years ago). We've architected our firm to deliver on this moment with the skillsets, networks and approaches that we believe are suited for the New World. Over the last 12 months, we’ve invested in everything from a more ‘traditional' vertical software computing platform to an insurance carrier, a reverse logistic provider and an energy services company. We’ve also welcomed countless industry executives and private equity professionals into the Equal family, embracing the incumbents as valued partners. We’re not trying to look like the venture firms of the past, but rather to build the prototype for the future ahead.
The New World is going to create opportunities for technology investors and founders like never before, but it’s not going to look like what we’re used to. It requires new approaches, new skill sets, new backgrounds and new perspectives. Yes, we need to learn from the past, but if we assume the tried and true methods are the only ways to win, then we’ll fail to tap into the true potential of what this cycle has to offer.
Insightful! What is your opinion on microSaaS which solve a very niche problem?