The Technology Deployment Phase
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Since the founding of Equal, we have focused on the application of technology within our industries to transform their respective value chains (or as we say “To bridge the digital divide”). As we put this into practice over the last 5 years, in many cases it has meant that we’re not investing in traditional software, but rather the deployment of that software within the industry. This is a theme we started to recognize almost 8 years ago as we saw the challenges many SaaS companies ran into in legacy markets.
As we fast forward to today, not a single one of our last 3 companies are selling software — the investments are a climate insurance company (stealth), a reverse logistics company (Revive) and a grid services company (stealth). These companies leverage technology to create competitive advantages within their market in what we believe will deliver a more superior value creation story than selling software to their industries otherwise would.
This makes sense to us given the landscape of SaaS is so much smaller than the broader economy. As we look to the sectors we invest, there are very few multi-billion dollar (let alone decacorn) software investments, yet there are dozens of companies worth in excess of $100b. After all, Nestle is a ~$270b company and I’d be hard pressed to imagine a CPG SaaS company ever achieving that type of scale. However, the concern of this approach (as it has been since we started Equal) was whether our companies could attract the downstream capital needed to grow, given VC’s leanings toward what is traditionally considered “venture backable” (i.e. SaaS).
Over the last year, however, we’ve seen a tremendous turn in the tide. Slow Ventures posted its manifesto on Growth Buyouts, famed enterprise software firm Emergence Capital shared its thesis on AI-enabled services and the venture industry is seeing a resurgence in tech-enabled services and other non-SaaS based business models (especially those enabled with AI). We couldn’t be more excited to see this.
When we started the firm, we centered our core thesis on a movement along the technology innovation cycle from what Carlotta Perez would call a “Technology Installation/Development” phase (focused on the development of core enabling technology) to a “Technology Deployment” (focused on the application of those technologies across the economy to achieve advancements in production value). As technology/AI have become mainstream, this is happening in front of our eyes – in a span of a decade we’ve seen the market evolve from it being nearly impossible to start a company without a technical founder to 1 person non-technical founding teams achieving massive traction leveraging no/low-code. Given the cultural, organizational and technology architecture in place at legacy institutions, very few will be able to leverage modern advancements in technology the way that some of these startups can.
Detractors against this movement would note that we’ve seen this show before with some disastrous results. We saw a real estate company create one of the biggest venture losses of all-time, along with a plethora of value destruction cases in many of the industries we focus on (freight brokers, insurance MGAs, retail marketplaces / brands, energy finance companies, etc.). We feel these cases highlight the need to fully understand the nuances of what value creation looks like for each of these types of businesses within the context of their industry. We saw this play out in the first leg of the cycle where startups across these verticals were funded like SaaS companies (despite having business models and margin profiles very different than SaaS) and ultimately failed to deliver shareholder value beyond the capital invested. However, we ultimately see this as a mismatch of capabilities with founders/investors alike approaching these markets with a naïve mindset to their complexity and needs. As the game changes, so do the capabilities needed to succeed and we’re seeing this creating some dramatic shifts for investors and entrepreneurs alike.
As postulated by Carlota, this new world enables a wider surface area for founders and one where the core skillset may very well be industry knowledge and connections, not just technology acumen. Founders and investors alike need to be able to tap into the knowledge and networks of their industry segment if they’re hoping to unlock opportunity. As Kanyi Maqubela puts it “The Services as Software era is about industry.”
This is equally impactful on investors who have leaned on their ability to underwrite the quality of a product and relied on the simplicity of revenue multiples to inform their guidance to founders on how to grow their companies, to a new landscape where those skills/experiences are incomplete. Investors in our sectors need to understand the competitive landscapes, they need to understand how each industry's customers operate differently than the traditional IT buyers and they need to understand how non-SaaS based businesses actually create value for their shareholders (not just achieve a certain level of growth). Knowing how a DCF works actually has relevance again!
Ultimately, our mission is to find, fund and help founders capable of transforming their industries. Sometimes this will be through SaaS and other times it will be competing with incumbents directly. The freedom to pursue investments outside of traditional SaaS presents an incredible opportunity along with the equally incredible burden of (as one of our LPs lovingly put it) “knowing your shit”. Learning these industries is rewarding, but time consuming given their nuance. It’s not for the faint of heart and even some of the most brilliant investment minds have been burned by approaching these markets without a fully informed appreciation for their difficulties. That said, those who do invest the time to unravel those complexities of these markets may have the opportunity to unveil some of the largest investment outcomes ever achieved.
Buckle up as we leap forward into the age of “Technology Deployment”.