Disrupting Traditional Distribution – the Key to Venture Capital’s Success in the Midst of a Pandemic?

This article was published in the Winter 2020 issue

by Ben Capell, Managing Director, Peterson Ventures

During a time of so much uncertainty, it is a bit strange to be writing about success.  Clearly, there are a lot of challenges today as we find ourselves wrapping up 2020 amid a global pandemic. However, despite all of the uncertainty brought on by COVID-19, no matter how you measure it, venture capital across the US and in Utah has performed incredibly well in 2020.  That is not something we would have predicted during the economic shutdown in March and April of this year.  Here are some facts that might be of interest according to the Q3 2020 Money Tree Report:

  • Venture Capital funding in the US had its second-best quarter ever, reaching $36.5B in investments during Q3.
  • There were 88 mega-rounds (raising $100M or more) closed in Q3, a new historical record.
  • 51 IPO’s in Q3 marked the second-highest quarter ever for IPO’s and more than double the number of IPO’s from Q3 2019.
  • Utah is part of this trend as well with just under $450M in venture capital raised in Q3, up ~80% quarter over quarter and ~50% year over year.

In addition to the above, Utah also experienced over $20B of exit value in 2020.  This included several exits close to or over a billion dollars in value including Conservice, Finicity, Galileo, Vivint, Workfront, and several others.  It has been a truly historic year for the state of Utah.

Why is this the case?  There are likely several reasons including record amounts of dry powder (capital already raised to invest in companies) going into 2020.  However, just because the capital is available does not necessarily mean it needs to get invested.  What we have seen with this global pandemic is that many trends we have observed for several years have accelerated in the pandemic era.  It may be that no trend is more important in today’s environment than the role technology is playing in disrupting traditional distribution.

The combination of the Internet, the mobile device, and more accessible marketing channels via search and social media have ushered in an era that has brought companies closer to their customer than ever before.  Companies in today’s economy can go directly to their customers, resulting in more direct feedback and faster product iteration, all without the help of traditional middlemen.

Over the years at Peterson Ventures, we have invested in two high-level categories of interest for us that exemplify disrupting of traditional distribution: SaaS and Digital Commerce.

SaaS, the bread and butter of Utah’s growing technology sector, at its core is a business model that disrupted how software was delivered to customers.  The faster iterations enabled by software delivered remotely brought consumerization of the B2B and enterprise software category.  Numerous companies in Utah, highlighted by Qualtrics and its $8B exit to SAP but represented by so many other successful SaaS companies here locally, have executed on this model by building best of breed software for their respective categories.  SaaS businesses have become the backbone of our day-to-day work lives and have become increasingly important in the work from home era ushered in by COVID-19.  Private and public market investors as well as strategic acquirers have recognized this and have continued to invest in and acquire SaaS business in all stages of development.

Digital Commerce, as we broadly define it at Peterson Ventures, is bypassing the middleman and going direct to the consumer, delivering a higher quality product at a better value to the end consumer.  Visionary entrepreneurs are building direct to consumer business models in retail, healthcare, financial services, and other large categories.  We have seen retail lead the way in effectively bypassing the middleman and engaging directly with the end consumer where Amazon has become a trillion-dollar behemoth.  At Peterson Ventures, we’ve been fortunate to invest in brands like Allbirds and Bonobos as well as local companies Cotopaxi, Chatbooks, and Taft that are building digitally native vertical brands that are changing the way we interact with brands today.  For a while, many prognosticated that retail was dying.  We do not believe that is the case, however, we are seeing fundamental shifts to a smaller footprint and more specialized retail.  We are witnessing similar trends in financial services and healthcare services markets as entrepreneurs reimagine these industries from the consumer’s perspective.

In most cases, technology is not replacing the products or the services, but it is replacing how we access those products and services.  By disrupting traditional distribution and providing more value to the end consumer at a better price, technology has become increasingly important to how we live in our day-to-day lives. This is evidenced by the performance of venture capital and public markets in 2020, in spite of a historic pandemic.  Look no further than the Nasdaq, largely made up of technology companies, up just under 40% since the beginning of the year as of the time of this writing.

Although we have many serious issues to tackle in 2021, the technology backbone that enables digital distribution will continue to play a key role in our business and personal lives.  There is no doubt that, as with any form of disruption, there has been and will be some pain felt along the way by those being disrupted.  However, we believe that many of those same technologies will help us to solve some of those serious issues we face and help us adapt to the lasting changes we will experience as a result of this pandemic.  The private and public financial markets are betting that will be the case.

The portfolio companies identified and described herein do not represent all of the portfolio companies purchased, sold or recommended for funds advised by Peterson Partners.  The reader should not assume that an investment in the portfolio companies identified was or will be profitable.  A full listing of investments can be provided upon request.

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