Investor Roundtable Contributors (Left to Right): Tiger Henderson (VP, Software), Emily Pawlak (Sr. Associate, I&C), Steve Achatz (Principal, I&C), Melanie Jordan (VP, Software), Kyle Howard-Johnson (VP, Software).
1. What sectors or areas currently excite you from an investment perspective? Where do you think the best opportunities currently lie?
Kyle Howard-Johnson (VP, Software): There are currently two areas that jump out to me in terms of which industries I am most excited about: Data Infrastructure & Vertical SaaS. From a Data Infrastructure perspective, as we enter this new world of AI-enablement, data has emerged as one of the key inputs and differentiators when training the underlying models.
In order for models to function properly, they need to incorporate the necessary data, which requires companies have access to their data in a consumable format. Establishing a common data model that spans applications and systems used by enterprises will allow for the necessary context to unlock effective AI use cases. I am specifically intrigued by companies not only helping others build and deploy this infrastructure but also those actively leveraging them with valuable underlying data assets.
Building off of the first point, Vertical SaaS companies have highly relevant, industry-specific data that creates a barrier to entry and unlocks AI capabilities for end customers/consumers. I’m interested in Vertical Saas companies that have been collecting market-specific data for years and are looking to leverage this to extract insights from the data and create value for end-users.
Steve Achatz (Principal, I&C): We remain really excited about consumer internet opportunities despite the uncertain macro conditions. The private investment community as whole tends to stop investing in consumer categories when there’s economic uncertainty which seems like an overreaction and creates opportunity for those willing to lean in. While some categories are certainly more discretionary and there’s perhaps a higher bar to success without the pandemic-era consumer spend tailwinds, there are still excellent companies out there.
If anything, the environment helps flush out the highest quality companies by removing the excess funding that can muddy the waters around unit economics and paid customer acquisition (sometimes for entire categories). The highest quality companies, who have been able to grow even with capital constraints, will be hitting their stride. Finally, the same generational consumer preference shifts that have fueled the emergence of so many new brands and companies over the last decade will continue through economic cycles.
Melanie Jordan (VP, Software): The subscription economy is encroaching on hardware capital expenditures. With interest rates up, companies are trading tax shield benefits from the depreciation of upfront payments to protect near-term cash positions. At the same time, the opportunity created by leaps in AI computing and 5G IoT connectivity builds to an immense opportunity in innovative, combined hardware and software products across manufacturing, security, asset management, and beyond. Software companies with hardware components also see more robust retention rates. We believe we’re at an exciting juncture.
In the last year, we’ve leaned into this thesis through our investments in HAAS Alert and HALO and look to continue to do so over the coming months.
2. What is something you will be watching closely in the back half of the year and into ’25?
Tiger Henderson (VP, Software): The resurgence of tech IPOs. Over the past few years, tech companies have delayed IPO plans due to market volatility, rising interest rates, and poor performance of recent public offerings. The valuation gap and sheer amount of cash reserves caused by the excesses of 2021 haven’t helped this dynamic. That said, with recent IPOs of high-growth tech companies like Reddit, Rubrik, and Klaviyo, and renewed speculation around behemoths like Databricks, OpenAI, and Stripe, it feels like the environment is finally thawing. As it relates to GenAI hype, I’ll be particularly curious to see whether the public markets support the rapid rise in valuations seen in the private markets.
Emily Pawlak (Senior Associate, I&C): An area that I have been particularly focused on is the state and federal changes to consumer data privacy and its implications for AdTech and consumer-facing brand companies. While third party cookie removal has been delayed, there are several new regulatory changes around the corner that could substantially affect how consumer data is used and targeted.
Nine states have new comprehensive privacy laws coming into effect in the latter half of 2024, and all eyes are on the new federal American Privacy Rights Act (APRA) bill. APRA aims to establish a national framework for data handling, mirroring the EU’s GDPR in terms of how consumer data is collected, stored, and processed.
As we saw with Apple’s IDFA changes, any consumer-facing company will likely feel the impact from this with acquiring customers and delivering personalized, targeted advertising. While APRA is still in its early stages, I’ll be closely monitoring how companies prepare for its potential impact and adapt if it is put into effect.
3. What would you recommend to founders who are trying to raise capital in this environment?
Steve Achatz (Principal, I&C): In this market, founders might feel like investors are simply on the sidelines or that they won’t be interested in growth rates that have subsided from pandemic-era peaks. However, there are investors like Volition with fresh, dry powder still looking to deploy these funds in high-quality companies. Investors have calibrated their expectations around absolute growth levels and are more focused on the quality of that growth.
For example, a few years ago there was perhaps an over-emphasis on showing early traction across several dimensions, often to demonstrate proof points around a larger TAM. But a strong focus on product, execution, and rock-solid unit economics will get you farther in this market. If you can demonstrate a really strong core business with great execution – even in a more narrow-end market or application – this is exciting to us, and we can connect the dots of potential extensions across the business to paint the picture for larger outcomes.
Kyle Howard-Johnson (VP, Software): My main piece of advice for founders looking to raise capital is to do what’s right for your business. We see a lot of founders trying to meet the needs of investors in terms of check size, ownership requirements, etc. Prioritize figuring out what the right transaction is for your business (both in terms of primary and secondary capital) and then find investors that are a fit for that transaction. Over-capitalizing a business can be as bad as (if not worse than) under-capitalizing a business, and unfortunately, a lot of companies are learning this the hard way after taking on a significant amount of capital in ‘21 and ‘22.
Tiger Henderson (VP, Software): Drive to profitability. A demonstrated history of profitable growth both mitigates capital markets risk, as well as helps prospective investors gain comfort in the long-term sustainability of your business. On the other end of the spectrum, an aggressive fundraising strategy can quickly mask the underlying business fundamentals of a company. As the spread between public and private markets continues to tighten, investors are increasingly prioritizing sustainable growth.
One other piece of advice is to always do reverse diligence. What a fund sells you pre-term sheet and delivers post-signage may not always be the same. I always recommend taking the time to speak with portfolio CEOs and those who have worked with your prospective investor in the past. Choosing the right board member is just as important as choosing the right fund, if not more so.
4. What industries specifically excite you when it comes to AI?
Melanie Jordan (VP, Software): I am particularly excited about AI’s potential to disrupt the “unsexy” industries. In the last major software infrastructure leap from on-premises software to single, then multi-tenant cloud, we saw adoption spread vertical-by-vertical. More “innovative” industries adopted faster than the “laggards.” For example, cloud-based marketing and sales technology came before widespread government and insurance cloud adoption. We’ve seen an accelerated adoption pattern for AI software, with traditional “laggards” such as government services and manufacturing adopting solutions more quickly than they adopted cloud technology.
I am specifically looking at areas where there is a greater demand than supply for workers, where AI can help the existing workers be more efficient. Examples of technology here include manufacturing, trucking, hospitality, home services tradesmen, and insurance. Last year coming out of this thesis, we partnered with Zenarate, an AI-based simulation training software focused on reducing the market-leading turnover rates within call centers by better preparing reps for customer interactions.
Emily Pawlak (Senior Associate, I&C): While AI is clearly creating new industries and spaces, what particularly excites me is how companies are leveraging the technology to improve existing experiences and processes for both customers and employees. Time is often in short supply when it comes to rapidly growing companies, so those that are using GenAI to maximize how a company delivers a product can be transformational. We are seeing AI speed up how companies iterate and build, with use cases ranging from new creative content production to driving coding efficiencies for developers.
While this may not be where the most attention is focused with AI, companies with the highest level of employee adoption will separate from the pack.
-Volition Press
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