With Gaurav Kittur, Global Co-Head of Internet Investment Banking
Over the last two years, tech companies, particularly those in the consumer internet sector, have grappled with a range of challenges, from inflated consumer acquisition costs to a scarcity of IPOs. These complexities have forced companies to reevaluate their operational strategies, tighten budgets, and streamline their focus around profitable growth.
In the following discussion, Gaurav Kittur, Global Co-Head of Internet Investment Banking at Jefferies, shares his perspective on this transformative period. Speaking from Jefferies' Private Internet Conference, Kittur explores the effects of these challenges on the tech ecosystem, the strategic adaptations made by companies, and the emerging opportunities for growth and innovation.
Q: What challenges have tech companies faced over the last two years?
The last 18 to 24 months have been incredibly tough for tech companies, especially those in the consumer internet sector. This period has seen almost no IPOs. On top of that, the cost of acquiring new consumers for these companies has skyrocketed.
As a result, companies with constrained marketing budgets had to pull back spending on user acquisition (UA), which affected their top-line growth and, consequently, their attractiveness to investors. This has led to a real capital crunch for companies in this segment.
Q: How are companies adapting to challenging times?
I think companies have used this time to get really disciplined. As I speak with a lot of CEOs in the space, a lot of them have used the last 18 to 24 months to execute painful but necessary reductions in force (RIF).
These RIFs resulted in a decrease in product development expenses and a shift in focus towards building profitable products. Companies have been launching their products earlier, seeking feedback, and then concentrating their marketing budgets on profitable customers rather than just acquiring all kinds of customers.
Despite the harsh capital environment, I believe the tech ecosystem is in a healthier state overall. Things feel incredibly painful right now, but we may look back at this moment and realize it benefited the tech ecosystem. Many companies may find, two or three years from now, that they have healthier unit economics thanks to this challenging period.
Q: What’s next for the tech ecosystem?
We’re reaching a point where a lot of the hard work is behind us, in terms of stripping costs and refocusing on profitable growth. Now, companies are growth businesses, operating in massive addressable markets.
As a result, you have companies ready to go back out to raise capital, and this capital will drive profitable growth. It may also drive transformative M&A. I think companies won’t just try to grow organically, but also consolidate others around them.
Q: How has companies’ approach to growth and financing evolved?
Over the last 18 months, all we’ve talked about was structured financing rounds. This was primarily because company valuations dropped so quickly that many businesses weren't ready to face this new reality.
Today, everyone is open to new priced equity rounds, recognizing the realities of today’s valuation environment. Companies are talking about IPOs again. I've heard from a number of companies who are ready to go public earlier in their life cycle than they traditionally would have.
Part of this shift is driven by a desire to instill discipline, as public companies are inherently more disciplined than private ones. The other factor is alignment. By going public early, everyone holds common equity. This means that employees, investors, and all other stakeholders are aligned moving forward.
Finally, I should mention that companies are thinking big. They’re looking at their competitors, looking at adjacencies, and thinking: is there something we can do to fundamentally change the course of our business?
Whether these be cash transactions or stock deals, these inter-company dialogues have been incredibly active. This combination sets us up for significantly more activity over the next 6-12 months.