Markets in Review
Part 1: Looking Back, Looking Forward
As a growth investor at 9Yards Capital, I frequently look to the public markets as a way to validate private market valuations and benchmark business metrics. Wrapping up this unprecedented year, please find below my thoughts on 2020 and what’s to come in 2021.
Technology valuation multiples are currently trading at all-time highs. At the onset of the pandemic, the stock market witnessed a historic 34% crash. However, Enterprise SaaS quickly rebounded and has continued to expand to record levels. Cloud-based business models have disproportionately benefited from stay-at home trends and investors continue to reallocate capital to these companies. As the Fed looked to support the market with compressed interest rates, investors have turned to equities for yield.
Fast forward to today, public technology stock valuation multiples are at all-time highs, far surpassing pre-pandemic levels. By year end 2020, Enterprise SaaS revenue multiples traded on average 50%+ pre-COVID levels. This creates enormous opportunity for private companies as they approach IPO milestones and is a primary reason we are seeing an accelerating number of IPOs since Q3 2020.
High-Growth Enterprise SaaS Index:
Not only have SaaS valuation multiples benefited from the pandemic but so have underlying financials. Between Q1 and Q2 of 2020, only seven public SaaS businesses saw an acceleration in YoY revenue growth rates (primarily Zoom, Shopify, and Fastly). Between Q2 and Q3, 26 companies reported accelerating revenue growth rates. Q4 will be a critical reporting period to see the lasting impact of this trend (Clouded Judgement by Jamin Ball).
There Will Be Winners and Losers
Over the next few reporting periods, we expect that there will be a dramatic dispersion between those companies that are long-term beneficiaries of pandemic trends and those that may have only benefitted from one-time or tangential exposure. 9Yards Capital is closely tracking the following verticals, which we believe will continue to display accelerating trends in a post-pandemic world:
(1) eCommerce — Digital Store Fronts & Marketplaces
This year has resulted in an unprecedented adoption of online purchasing across company websites and online marketplaces. While retail will certainly win back some market share in a post-pandemic world, I believe that online sales and consumption will continue to experience record growth.
Since the pandemic started, I personally made my first purchase within Instagram, became an Amazon-Prime member and began shopping on Etsy and Walmart.com. I have also developed an online grocery shopping habit and purchased clothes for the first time from digitally-native brands — a first for someone who usually likes to try things on. Even more surprising is that my parents and grandparents have had similar experiences. eCommerce has penetrated a wider range of individuals than previously predicted and has fundamentally shifted purchasing behavior moving forward.
On the flip side of the coin, the rise of eCommerce has enabled merchants to maintain strong brand loyalty amongst their customers, with minimal, or zero, physical retail presence. This ecosystem will also likely encourage a parallel wave of innovation around the future of the online experience — more digital-only brands, quicker checkouts, 2-day and next-day shipping, and consumer credit.
At 9Yards, we invested in a company called Deliverr, which is one of the fastest growing eCommerce fulfillment companies. Deliverr’s asset-light network of fulfillment centers enables merchants, regardless of size, to delight their customers with fast and cost-effective fulfillment across any online platform. We are inspired by Deliverr’s mission to democratize next-day and eventually same-day shipping and believe that this value proposition will only become stronger over time.
(2) Supply Chain Efficiencies
COVID cast a spotlight on the need for an even more robust domestic supply chain. Whether related to grocery stores needing to stay fully stocked, the mass production and distribution of masks and hand sanitizer, or even the swift and safe distribution of vaccines, our supply chain has and will continue to see substantial technological enhancements. We were excited to see our portfolio company, Trackonomy, front and center alongside UPS in the December U.S. senate hearings, as it relates to their end-to-end visibility tracking solution for the COVID vaccine.
The unprecedented rise in demand for shipping capacity will continue to strengthen the value proposition for our logistics portfolio companies across the transportation industry including telematics (Platform Science and KeepTruckin) and digital freight marketplaces, such as Emerge. Emerge continues to innovate technologies that fully digitize the freight procurement process while providing shippers with price transparency and increased visibility. I believe we will continue to see more innovation that will empower shippers and trucking companies with technologies to more efficiently manage their day-to-day operations, which have been stretched to the limits during the pandemic.
(3) Digital Payments
For reasons mentioned above, consumers have become increasingly dependent on digital payments. 9Yards Capital has always viewed the payments space as a large opportunity with enormous room for technological improvement.
That said, the payments industry has historically been slow to adopt technology. Paper checks, for instance, continue to be the most commonly used type of noncash payment instrument in the U.S., although their use is slowly declining each year (Federal Reserve).
This year set in motion a much more rapid global adoption of digital technology that I believe will continue to accelerate the pace of payment innovation in the coming years. I remain bullish on this coupling of an enormous market with low levels of penetration. Along with a broader adoption of digital payments, I am also excited about the parallel products in the payment space that make it easier for both businesses and individuals to transact and manage their money, both actively and passively.
At the beginning of the pandemic, the idea of a sustained remote work culture seemed inconceivable. Companies of all sizes, new and old, blue chip and startups, were forced to adapt to this new reality. The shift to remote work forced companies to embrace certain changes including digital collaboration and virtual meetings and presentations. In some cases, the result has been an even more efficient workforce.
These remote-work policies will require companies to allocate more budget towards cybersecurity systems as a distributed workforce is inherently riskier. I personally believe that workers will eventually return to the office. That said, the adoption of remote work will certainly not disappear and many companies will maintain remote-friendly policies. Compared to a pre-pandemic world, the market size for cybersecurity has dramatically expanded across existing companies. It will be exciting to watch the degree to which the next generation of startups create remote-friendly cultures.
(5) Remote Productivity & Collaboration
Many companies have learned the importance of remote productivity tools during this pandemic, either through adoption or lack thereof. Productivity
tools will continue help companies — both remote and in-person — stay better organized and track employee output. In 2020, 9Yards Capital decided to use Coda.io as a tool for many core internal processes including employee onboarding, industry and company diligence, personal KPI tracking, along with a variety of other use cases that have made us far more productive as a distributed team.
Professional collaboration tools will also continue to innovate in ways that make remote communication feel more personalized — as the likes of Slack and Zoom have done so well. I frequently hear stories from people who started new jobs during the pandemic and feel as though their identity is a mere email address to their fellow coworkers. Even after the pandemic, we will continue to see creative innovations that help companies define and build digital culture.
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