Activant's Greene Street Observer No.2

Founders, Partners, and Friends,

It is easy to look backwards and think that moments in the past were never as unsure as they are in the present. The past is fully baked, and seems more obvious in retrospect, while the present feels as uncertain as ever. Most of us haven’t experienced this mix of inflation, recession (or potential recession), and ongoing conflict unless you are a baby boomer. I recall my dad saying the ‘70s were a scary time to bring a child into the world.

The current cocktail of inflation, slowing productivity, and low unemployment is too far a reach for even an East Village mixologist. The good news is we can look to the past to at least help us better allocate our time and capital. When looking back at periods of high inflation, like the Weimar Republic in Germany, there were two classes/assets that outperformed: one was a bit surprising, the other was not (hint: it wasn’t farmland).

The first and most surprising were wage earners within unions. Those that had collective bargaining power to negotiate wage increases from the government performed pretty well. Inflation is the #1 symptom of government overreach; the logical extension is that people get together into collective bargaining units. This of course then extends further into that unfortunate state of fascism or communism (siblings from the same mother), so let’s hope we avoid that…

The other strongest preforming asset were equities, or stocks. If you owned Mercedes-Benz stock before the Weimar Republic, you still owned it after. This makes logical sense, and owners of companies or equites consistently ended up better off after periods of inflation – assuming the government didn’t confiscate hard assets. Perhaps it makes sense the stock market takes its cue from Dua Lipa and continues to levitate despite all the concerns.

The private market typically lags the public market by a year or longer. Given what we saw in the last release of endowment performance ending Q2 2022 and early reads from year-end 2022, venture, growth, and buyout investors haven’t adjusted their valuations substantially to reflect the re-pricing in the market. Simply looking at the math, there will be more bankruptcies, recapitalizations, or acquihires in the back half of this year versus what happened in the preceding three years – all this without a proper “recession.”

This sounds bad, but the new cohort of companies that grow out of the ashes of this current environment (or those companies that simply survive), will have stronger DNA, more respect for capital, and grit. As Churchill said, “when you are going through hell, keep going.”

Warren Buffet’s annual letter came out a few days ago, and it is always worth a read. Nothing too surprising this time around, with the exception of him defending the earnings power of Berkshire Hathaway. It’s a reminder that the only thing that matters for corporate valuations are actual earnings – which brings up a relevant Buffet maxim: “interest rates are like gravity for the business world, they affect everything.”

Technology companies are extremely sensitive to interest rates, particularly those that push out profits. Some might be surprised, but HP, Microsoft, and many other of the greatest technology companies of our day ran at a profit from the beginning. These days, it is hard to find founders that are willing to accept constraints and build profitably. In a high-rate environment, this matters more than ever.

Why does this matter? Those companies that can generate cash-flow or generate DPI (return of capital) sooner are worth more. Early-stage companies, or even growth companies, that are unprofitable and that may not return capital for 7 to 10 years are worth a lot less versus a couple years ago when rates were 2%.

Higher rates amplify the magnitude of every operating decision. When capital is free, GDP is growing, and rates are low, mistakes get covered up. This also produces a cohort of mangers that are not as disciplined. As the tide ebbs, we see who is naked and who isn’t. Operating prowess matters, and management teams that can demonstrate this will be rewarded.

In the vein of knowing your costs and running profitably, a very smart investor recently asked me how many of the VPs, business unit mangers, and senior directors at our portfolio companies have lived through a technology recession (the Dot-com bust) or had to rationalize costs. Not many.

For early-stage companies, or those that can’t afford seasoned team members, it is imperative to have advisors or board members that you can lean on, in addition to a willingness to make hard decisions.

Across the board, managers will have to recalibrate what success means. How many direct reports one has is not a relevant metric. It is way more impressive when a manger can do more with less people – which seems to be a lost art. I can’t help but think this tied to productivity, and how productivity in the US is getting worse, not better. Let’s turn this around.

Steve Sarracino, Founder & Partner

On the research front, we published a deep-dive report on Hyperautomation. Check out the 5 things you need to know here, and the full 33-page deck here.

But here’s the gist: Computers are getting exponentially more powerful, but we’re not getting any more productive as a society.

And more tech tools certainly aren’t the answer, because we’re drowning in them. A recent study found the average enterprise uses nearly 190 software applications, up 2.4x over the past seven years. That means workflows are even more complicated, as humans move data between apps and incur switching costs - with no end in sight.

We think that pure automation of these workflows isn’t the answer; because what you think a process looks like is never what it actually looks like.

So what’s needed is a holistic view of an organization - like an X-Ray. That’s what companies like Activant family company Celonis are working on.

While ChatGPT and LLMs are the hype-du-jour - and for some good reasons - we’re most excited for tech that can bring deep automation to large, legacy markets like supply chain, manufacturing, and financial services.

Keep an eye out for an upcoming report from our resident expert Jono Vickery highlighting the No Code/Low Code market, and why the current macro environment makes it more important than ever. And if you’re building a company at the intersection of automation and the enterprise, please get in touch.

On another note, today marks the 1-year anniversary of Activant Research! 🎂

We’re committed long-term to proprietary research on private markets to be more thoughtful investors and better partners to our founders. This video showcases what - and who - make the team to so special.

It’s been incredible to have Rob, JJ, Jono, and Rebecca on the team - which is growing! We’re actively hiring a Research Analyst, based in Cape Town.

Thanks to everyone that joined us on February 16th for our Women in Tech Happy Hour in NYC, hosted by Holly, Juliette, Matilde, and Anna.

And last night, we threw the first of our Activant Activate event series in San Francisco, which are low-key gatherings of high-quality people and conversations.

More ecosystem events are on the horizon - stay tuned!

Portfolio News

1. Better launched a partnership with Amazon, which lets Amazon employees use their stock as collateral towards home loans.

2. Cardless launched a card for Simon Malls, their first American Express card.

3. JOKR raised $50M on a $1.3B valuation.

4. Research by Bolt found that 44% of shoppers would rather sit in the middle seat of an airplane than keep track of their online shopping accounts and passwords. They also launched with Casper Mattresses.

5. Current launched their new brand identity.

Activant News

1. “We’re going to see a lot more zombie venture capital firms this year” - our founder Steve chatted with Ryan Browne at CNBC about the coming rise of “zombie” VCs.

2. Our partner David Yang joined Tarang Gupta, host of Wharton Fintech, for a conversation on Activant’s approach and what David is most excited about right now. Listen here.

3. Along with the Research Analyst, we’re actively hiring a Marketing Analyst. Get in touch with Max Thoeny, Head of Design, to learn more.