Ahead of Jefferies' Private Internet Conference, we had the opportunity to speak with Gaurav Kittur, Global Co-Head of Internet Investment Banking, and Cameron Lester, Global Co-Head of Technology, Media, and Telecom Investment Banking. They offer insight into the challenging investment landscape of 2022 and expressed optimism for a brighter 2023.
Many internet companies are better positioned today to navigate a still challenging macro environment after spending the last year focused on cost discipline and streamlining operations. However, they face financing terms that have shifted to favor investors, a sharp contrast to what we saw in 2020 and 2021. In 2023, new investments will continue, with investors likely favoring companies that balance top-line growth with profitability. Here are a few other developments Kittur and Lester think investors and companies can expect as they navigate the new normal.
Q: As we approach the halfway point of 2023, how do you view the current market landscape for private tech and internet companies? Is there reason for optimism?
GK: Since mid-2021, we’ve faced an incredibly tough environment, particularly for consumer-focused internet and technology companies. In general, public companies in this sector have traded well below issue price, and VC and growth investing has significantly slowed in the private markets.
Consumer internet companies have seen customer acquisition costs skyrocket. Changes in privacy rules have made it more difficult and expensive to target new groups of consumers, and businesses have also had to reduce their marketing budgets, causing growth to decelerate. The silver lining is that amid a changing macro environment and tighter funding, CEOs are implementing greater discipline into their businesses. Companies have completed RIFs [reductions in force] and are more focused on targeting high-value, profitable customers. Companies demonstrating cost discipline and profitability will have better access to capital. On the investor side, many funds have raised significant amounts of capital but have yet to deploy it. They are ultimately paid to deploy capital, so there is considerable pent-up investor demand to support companies positioned to emerge stronger from the current environment.
Q: Are investors now more willing to sacrifice growth for profitability?
CL: Internet investors will always be drawn to growth. They look for large, rapidly expanding markets experiencing digital disruption, where technology is augmenting or replacing the status quo. Growth is the most dominant element that can drive alpha. With today’s capital scarcity, growth paired with strong positive unit economics and operating leverage will be most attractive to growth and public investors. To that end, companies are extremely focused on spending to attract the right customers.
GK: I agree: growth will always be critical for tech and specifically internet investors. And to Cameron’s point, today’s focus is on targeting higher-value customers and growing LTVs, which will really drive positive unit economics and operating leverage.
Q: Are companies facing similar challenges retaining customers and preventing churn?
Covid had an interesting impact on ecommerce. Consumer-facing businesses initially benefited from the pandemic, as the internet became everyone’s window to the world and primary platform for interacting with society. Clothes, groceries, electronics, and services were all ordered or consumed online. As consumers re-entered the physical world, growth slowed, as many unsubscribed.
Q: As things continue to normalize following Covid-19, which businesses do you feel have the greatest opportunity in the latter half of 2023 and beyond?
CL: Travel is an intriguing space right now. The industry initially suffered enormously during the pandemic, but as new patterns emerged, businesses began to adapt. Capitalizing on the
popularity of working from new locations and outside cities, Airbnb had a huge resurgence, even without the benefit of international travel. Long-term stays are now Airbnb’s fastest-growing business segment, with more than 70 million Americans poised to adopt a ‘digital nomad’ lifestyle.
Another area that shows a lot of promise is the creator economy. TikTok has shown that even markets previously dominated by big tech can be unexpectedly disrupted by newcomers. Even attempts by established players to replicate TikTok’s formula have been largely unsuccessful. We are all creators, whether through short- or long-form, in written or video format. The next generation is defining market trends, as younger consumers increasingly shop on social media platforms.
GK: As investors evaluate what companies have the best opportunities, they should consider whether the product acceleration that occurred during Covid offers tangible long-term benefits. While online grocery shopping felt like a necessity during the pandemic, we have seen many customers return to grocery stores as daily life normalizes. As a result, online grocery or shopping platforms have seen a pull back. By contrast, streaming platforms and remote work, which also accelerated during the pandemic, are clearly here to stay. Additionally, online health platforms are surging due to increased demand for easy access and our society’s growing prioritization of health.
Q: What do you think will define the next phase of development for private internet and technology companies?
CL: I think there is a growing realization that management teams need to focus earlier on building sustainable businesses, not ‘science projects’. We’ve seen this play out among large tech companies where there have been significant headcount cuts in unprofitable business areas. It’s even more vital for young, private companies to prioritize capital investment. In an environment with a much higher cost of capital, they need to make difficult resource allocation choices to succeed. And this is a tough adjustment for some because we now have an entire generation of founders who have never experienced a major downturn or recessionary environment. However, I don’t see this development as a negative. Operating with limited time and resources often drives efficiency and productivity, enabling focused businesses to flourish under these conditions. What sets the end of this recent bull cycle apart from previous ones, and gives cause for optimism, is that many macro trends are more favorable now than ever before. For every failed business that hasn’t adequately addressed its problem space or efficiently deployed capital, three better-managed businesses will rise to take its place.
GK: Absolutely -- in a capital constrained environment, the route to success changes. A few years ago, tech product managers would have emphasized building the best product possible.
Now, the emphasis for product strategy lies in making the product usable, feasible, and viable. If they achieve adoption, they can refine it. What’s fantastic is that, after a tough few years, the ecosystem for private internet and tech companies is increasingly stable and the outlook for growth is very positive.