Technology companies strong during the pandemic
As the pandemic continues on, reconfiguring the future of the global economy, a great divide between industries that are faring well and those that are struggling is emerging. We witness how technologies that help us translate from physical to digital world excel in these difficult times. But what will be technologies that will shape the next chapter of the future and the way we conduct business for the time to come? And what are the emerging trends that will transform the business going forward?
Our emerging technology specialists Patrizio Prospero, HLB Malta and Alex Duffy, HLB UK recently discussed these questions with Chris Maresca, Managing Partner at C32 and Katie Palencsar who serves as an Investor and Venture Studio Lead at Anthemis Group during the 2020 HLB Audit-Tax-Advisory Conference. In this article, we are sharing the valuable insights collected during this panel discussion, to help make sense of the future and prepare for the new competitive landscape that brings new threats and opportunities that are shaping up to define the economy for the foreseeable future.
Business models that thrive in today’s challenging times
Economic shocks often accelerate the creation of new business models developed as a response to a new environment. For example, the surge in new, nimble companies offering digital financial products was a result of the financial crisis in 2008. Katie Palencsar, involved primarily in investing in early-stage FinTech companies this time sees three areas emerging as relevant and thriving in the post-pandemic environment: risk management, e-commerce and fraud prevention especially as 81% of companies experience payment fraud. Also, as the labour market has been flooded with job seekers, this may have a twofold impact for start-ups: first, there’s a big opportunity for early-stage companies to recruit good talent; and second, as the pandemic has demonstrated that job security is a fragile concept, more people may try their chances with starting their own business.
Another impact of the pandemic is the widespread rise of remote work and digital business models that Silicon Valley pioneered decades ago. While remote working has been around for quite some time in some sectors, others have been sceptical about them. But with the virus outbreak bringing economic activity to a screeching halt, the world was forced to adopt remote working with sudden accelerated wholesale digitisation of businesses. As remote work is gaining credibility, we will see more people leaving expensive cities as employers realise that coming into the office is no longer required to get the job done, said Chris Maresca.
We expect that, as people limit their social exposure in an attempt to curb the spread of the virus, businesses that don’t rely on physical presence and human contact will excel as well as those that managed to position themselves as a solution for the gap which has opened up due to quarantine restrictions. Alex Duffy sees these solutions as products such as chatbots, video content management software, live fitness and virtual conferencing.
Where are companies looking for growth and market share increase?
The question is, how can companies pivot to meet the requirements of the new reality? Alex Duffy illustrated the need for businesses to swiftly adapt with the British shirt maker TM Lewin. A more than 120 years old business has decided to close all 66 UK shops and take all its sales online. Those companies that manage to reinvent their businesses to fit digital and online presence will be well-positioned to survive and thrive in times of restricted social interaction.
Admittedly, pivoting and radical changes will bring new challenges in their own right, as they lead to a completely different growth model. For example, with the easing of restrictions in the UK, pubs will impose a serving minimum, which will decrease the number of customers at the venue but will increase revenue per person – changing their growth model and how they conduct business for the foreseeable future.
With restrictions commanding social distancing and consumers changing their buying habits, businesses that are related to home delivery are rapidly growing. Chris Maresca reports that areas such as third-party logistics, including delivery and logistics backend, have seen explosive growth as many US small businesses which were let down by Amazon over the course of the pandemic are now looking for alternative third-party solutions. Similarly, with wholesale agricultural revenues dwindling during the lockdown, agriculture is seeking to find direct-to-consumers solutions. Direct-to-consumers solutions are reporting growth in other areas as well, but an important consideration is that these models are heavily relying on customer service and human touch.
“We are just at the beginning of some sort of revolution. I am not sure what that means in terms of new services that are going to emerge out of this, but this is the place where we start building completely new dynamics and new business models”, Chris Maresca, Managing Partner at C32.
The changing customer behaviour and how it impacts customer experience
As an investor involved in collaborating with early-stage FinTech start-ups, Katie Palencsar reports that consumers are currently craving information about the topics that are are all of a sudden more relevant to them as a result of the economic impact of COVID-19. As a result of this a growing number of consumers are becoming more interested in topics such as insurance, financial planning, retirement and end of life planning. Instead of just sending e-mail newsletters for example, companies are responding by creating and delivering content that is within the actual software platform their customers are using.
The current state of start-up funding
Discussing the possibilities of start-up funding in the current environment, Chris Maresca highlighted it is important to distinguish three types of start-ups as not all of them will have the same fate in the post-pandemic economy: 1) Those that have a solid business model and that managed to raise funds for 1-2 year runway before the pandemic hit; they will do well going forward, but might face challenges to raise funds in their next round in one or two years; 2) Companies without a robust business model which pandemic caught in the middle of fundraising; they will struggle to recover from the pandemic shock; 3) Start-ups with solid business models that were either in the middle of fundraising or will shortly have to fundraise; they will survive. There was far too much capital available far too easily in Silicon Valley for the last five to six years, funding a lot of speculative business models. What the pandemic changed is that investors now require companies to generate revenues right away, which is a good discipline. Although there is still a lot of capital in Silicon Valley, the revenue-generating capacity of new companies now takes priority.
Continuing along the similar lines, Katie Palencsar added that she has been witnessing record-breaking pre-seed rounds that go as high as US$1.5 - US$2 million, an amount that would be hard to imagine only a year ago. Another trend on the rise is that corporates are increasingly working together with VC investors, setting up accelerators, venture partnerships and developing initiatives in an attempt to address what is happening in the world but also understanding innovation is a long game, positioning themselves for the future growth of their business.
KPIs investors looking at during uncertain times
Despite heightened uncertainty, ventures are set up in a way that requires active deployment of capital as the funds are committed and there is a life cycle of those funds. What are the KPIs investors are relying upon in these volatile times?
Katie Palencsar works with FinTech start-ups at their pre-seed and seed stages. Her experience mimics that of Chris Maresca’s when it comes to the ability of companies to generate revenues. “What pre-seed and seed investors love to see is some sort of customer validation. Even with some concept companies, we have even seen founders present some signals of customer buy-in, whether that’s a hacked together beta with users or even validated survey data. “, shared Katie Palencsar, Investor and Venture Studio Lead at Anthemis Group. In addition, team is beyond critical when investing in early stage companies.
What is technology that will shape the future?
The world economy is at the inflection point, as almost every aspect of the way we conduct business is changing. The Tech sector is a clear winner during this evolving time, but what game-changing technology is going to be the one that will shape the future that is ahead of us?
For Alex Duffy, that’s blockchain and tokenisation. ‘’One technology that hasn’t yet found its place, but is increasingly doing so in this pandemic is blockchain and tokenisation. Blockchain will be the way forward to keep track of all the things in non-physical reality “, Alex Duffy, HLB UK. With increasing digitisation, cyber risk and fraud, blockchain is going to become more relevant and can position itself as a revolutionary solution for tracking digital transactions, monitoring assets, signing documents. For keeping track of things in the non-physical world, blockchain will be crucial going forward.
For Chris Maresca, that’s low-latency, high-bandwidth internet service with satellite communication. Although remote work gained credibility during the pandemic, we are entering a phase of distributed everything, not only work. For this, we will need a reliable, consistent internet connection. Distributed high-speed networks and distributed computing are going to change the dynamics.