Activant's Greene Street Observer No.6

Making sound decisions in turbulent times, the next chapter of Activant Research, and summer fun

How do we make sound decisions despite a cloudy future?

We have been thinking a lot about the concept of “opacity” in decision-making and how to manage it. What do I mean by opacity? If you were lucky enough to study economics, remember when your professor said “all things being equal” (or “ATBE”). All of a sudden, building equations and predicting the future became simple when all things are equal except the one variable we were trying to solve for.

In a simplified environment, our basic economic principles work great, but in the real world, they rarely apply. An ATBE mentality drives poor decision-making and sets up students to feel like they should be able to calculate anything. This can carry over into modeling returns for investments.

Compounding the difficulty of modeling is not only the number of variables but the rate of change. When the rate of change in the environment is high, it reduces not only the feeling of understanding, but a fair assessment of variables with which one could make a decision. The unknowns increase almost exponentially. This logically reduces any sort of visibility we may think we have on how the future could play out – in other words, creates opacity.

For individuals and organizations alike, three important change vectors to consider are: human aspects (personal, team dynamics, or family life), political stability, and economic conditions. When the macro and geo-political environment is in flux, as is the case today, things feel more volatile. It is the physical equivalent of pulling a blanket over our decision-making.

Great managers keep their heads down and focus on what is in front of them. What we see from the best managers is they build in buffer in two forms: culture and margins of error around prognostications. Culture provides the guidepost when things are difficult, and increasing allowance for margin of error is a forcing mechanism for efficiency. Both strategies help with the opacity problem.

When looking at the rate of change, we can isolate a single variable (y) with (x) usually being time. That works for economics professors, but in the real world it can feel like we have so much thrown at us today – and that feeling is closer mathematically to that of acceleration or declaration. This can be expressed by f = ma where [a] is a multivariate equation of the change we feel around us. Otherwise known as the second derivative of a function, “the rate of change of the rate of change.”

This concept applies when thinking about companies. For instance, what is the rate of change with regard to industry, team, distribution, and business model? A simpler thought experiment works in sports. It is harder to execute something important, like making a shot, when we are accelerating or decelerating. The same I believe is true for decision-making in business. When any of these variables are outside of a standard deviation, my belief is it can impair decisions or create opacity.

Practically speaking, with higher rates the cost of capital and time increases. Poor decision-making is not only magnified but punished much more quickly. A recent book, The Price of Time by Edward Chancellor discusses rates and there was a great chart about the history of rates. He posits rates are more of a social construct than generally market driven. Thousands of years ago, during Hammurabi’s time around the near east and western world, rates were set at about 1/3 or 33%. Over the last couple thousand years, the mode is more likely in the 4-8% range, which is where we find ourselves today.

It isn’t the rate itself that causes pain, but the rate of change that has been so dramatic in recent years that is creating the opacity. In today’s environment, there is less certainty about a forecast or the future when making any type of capital allocation decision (which could be a new hire, project, or investment). Therefore, in order to make the capital allocation decision, I suggest modeling a much higher return on that capital outlay in case things continue to change. Some call this a margin of safety – either way, the underwriting changes substantially.

What does this mean for the private markets? We don’t know yet, but let’s look at some examples. In real estate, if cap rates move from ~6% to ~8.5%, that could wipe out an equity investor. In terms of leveraged buyouts, the increased cost of debt, on average, will likely wipe out most or all the positive cash flow of a business. In the venture market, valuations are extremely sensitive to rates as they are long-duration assets, and valuations, in our view, may not have settled. Lastly, the credit markets are completely in flux.

Contrary to the above, the NASDAQ is having one of its best years ever. This feels a bit like 2003 when the market was performing, but no one believed it would last. It took 18 months, or until late 2004 for the private markets to truly recover.

Could that happen again? Who knows, but we can all be thankful it’s summer in the northern hemisphere, so we can take time to reset, be outdoors, and make time for walking. From Thoreau, to Einstein, and Aristotle, many great thinkers were all notorious walkers when working through a problem. They claim some of their best ideas came while walking – likely at a constant rate of speed!

Besides getting outside, what do we have to fall back on in the face of opacity in decision-making? Culture. As Peter Drucker said, “Culture eats strategy for breakfast.” What is culture? We view culture as one’s guiding principles, but more simply, culture is what you are doing when no one is looking. In good times, small transgressions against culture can be overlooked, but in difficult environments, they are magnified and noticed by many. Strong culture allows us to temper what can be the destructive force of opacity when making decisions dealing with capital and time.

A company’s culture provides the first and best defense when rates of change are high. Having seen thousands of companies, the best cultures are generally simple - they offer kindness, enforce the use of common sense, as well as reinforce manners (or common rules), which can go a long way. This sets a company up well for healthy debate and skepticism around capital, and time allocation decisions.

The primary currency of a great culture is truth and honesty. It builds over time and can be destroyed in a single moment. Truth shines through and being forthright becomes a powerful store of value. What are you doing when no one is watching?

Let’s go! 🚀 

Steve Sarracino

Founder & Partner

Research is the foundation of our process at Activant. Our team has been hard at work this summer investigating over a dozen cutting-edge subjects across the commerce value chain - from what’s next for embedded finance, to generative AI’s impact on ecommerce, to the future of fuel cards - we have lots in store.

Stay tuned for our first article on the next generation of transportation management systems (TMS), set to drop on July 18th.

  • We hosted a dinner for SuperReturn International in Berlin early this month, welcoming LPs and founders.

  • Activant Partner Maximilian Mayer took part in a panel at the South Summit conference in Madrid and discussed the opportunities and challenges around the Pan-European startup ecosystem.

  • We’re hosting a mixer in our Activant Soho office later this month to celebrate the summer with our ecosystem → Get on the list here!

Portfolio News

  • Truework announced a $24 million investment and strategic partnership with consumer credit reporting bureau TransUnion. [TechCrunch]

  • Hive, which provides lightning-fast eCom delivery to merchants across Europe, was featured as part of Sifted’s B2B SaaS Rising 100. [Sifted]

  • Gr4vy, a payment orchestration platform, announced a strategic investment from W23, the venture arm of Woolworth’s Group. [Gr4vy]

  • Sardine has announced the launch of SardineX, an industry-wide consortium to fight fraud, AML, and economic crime. [Sardine]

  • Summer Fun: The team kicked off the 4th of July weekend with our annual BBQ with the team from Greenwich and New York offices

  • More Team Bonding: Activant Berlin went go-karting - Josh took the top spot on the podium!

  • Our partner Andrew Steele appeared on the Soar Payments PayPod podcast to share his latest thoughts on the fintech and payments investing landscape. Check it out below.

  • New Faces: John recently joined the team as an investor, Claire as our very first marketing analyst, Luca, Drew, and Teddy as interns, and Charles as a fellow.

Activant is a global investment firm that partners with high-growth companies that are transforming the way the world makes, moves, and sells.

Founded in 2015, Activant has invested in category-defining companies like Deliverr (acquired by Shopify), Hybris (acquired by SAP), Bolt, Better, Celonis, Sardine, and many more.

The firm has $1.5B assets under management and is headquartered in Greenwich, CT with offices in New York City, Berlin, and Cape Town.

The Greene Street Observer is published monthly from Activant’s office on Greene Street in New York City.