Tech Pique (10 June)
It's not as bad as we first thought
Talks of a tech winter have subsided somewhat. We are now seeing more rationale analysis of the state of play and it’s not all doom and gloom, particularly for tech companies with sound fundamentals solving a real problem.
Early-Stage Market Conditions
An interesting survey of 430 founders by Tomasz Tunguz of Redpoint Ventures (see here) shows that startup founders, in general, aren’t feeling as negative about the tech / startup world as the media may have us believe [caveat: obviously while an impressive survey for one VC, it’s still a relatively small sample]. Not surprisingly, Web3 / Crypto founders are feeling most pessimistic. That sector has gone through some structural issues which long term I believe will be beneficial as a whole but have certainly put a damper on general investor confidence – those in the know (apparently) are still bullish though; as I blogged a couple of weeks ago Andreesen Horowitz raised a US$4.5bn fund focussed on the sector. SaaS company founders are not as pessimistic, and I understand why. COVID-19 brought forward the use of technology by both businesses and consumers. While cost of living / business pressures are rising, technology has become a staple, a need and not a want. Some SaaS businesses are the core operating systems of businesses and others drive important integrations and workflows that cannot be replaced. Pessimism is warranted for founders that have unsustainable businesses models that have raised too much money at too high a valuation. We’ve seen a broad-based retreat by VCs funding later stage businesses, in particular, that have focussed on top line revenue growth without thinking about business fundamentals – unit economics, margins, conversion rates etc.
Cut Through Ventures latest data on the Australian market confirms the above with a healthy number of early-stage companies, 52 to be precise, reporting funding rounds in May. However, there’s a noticeable absence of later stage deals and thus total funding in the month was down significantly on previous months. The deals reported in May likely concluded in March and April so there is still a bit of a lag in the data, but I expect this trend to continue. Significant capital has been raised in the ecosystem and yes, VCs will focus on their portfolio companies first, but they also appreciate this is a great time to invest as valuations are lower. Many of the fringe participants in the market - hedge funds, family offices and corporates – have also put the brakes on funding in the space which leaves the dedicated managers to set terms.
Superhero and Swfytx merger
Firstly, there’s no such thing as a merger. One company is always acquiring another. Semantics aside, Superhero, an online share trading platform, is joining forces with Swyftx, a cryptocurrency exchange (more here). The combined entity will have over 800,000 largely under 45 year old customers (I’m assuming), a demographic that the banks and larger fintechs would love to appeal more to. The combination makes sense: larger share of wallet, expanded services, lower cost of acquisition, higher average revenue per user etc. What they don’t talk about is that it’s likely going to come with layoffs (or transaction synergies in technical terms) which is not a reason not to combine forces but an often unspoken about side effect. Further, in today’s market where growth at any cost is not viewed as favourably, an acquisition to shore up business fundamentals makes a lot of sense. Superhero raised two rounds of funding last year, widely accepted as the top of the market, and thus may have been struggling to raise more in today’s climate (I’m speculating). Don’t be surprised to see more M&A activity during this down market as companies seek to boost growth, increase market share, cross-sell products and decrease expenses.
Apple launches Buy-Now-Pay-Later Feature
Finally, those that ask “What if Apple builds it?” have their justification for asking the question. Although Apple is notably late to the party with most BNPLs having gone through the highs and are now experiencing some of the lows as concerns around defaults and increasing regulation weigh on share prices. Apple’s entry into the space is surely a concern for incumbents as it has 1.8 billion active devices that could be active customers very quickly. We will likely see even more consolidation in the sector as a result. Block is already sufficiently diversified although Apple’s entry into the space was likely not part of its acquisition case for Afterpay. Expect other BNPL players to be acquired by diversified financial services companies. Unfortunately, that’s unlikely to be a great outcome for shareholders given most are trading at or near all-time lows.