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Internet innovation boosts business investment, Wall Street analysts say

MarkMahaney-EvercoreISI

Mark Mahaney, Senior Managing Director and Head of Internet Research, Evercore ISI

Are we headed for a recession? Mark Mahaney, Senior Managing Director and Head of Internet Research at Evercore ISI, asked attendees to quickly raise their hands at Digital Commerce 360’s EnvisionB2B event in Chicago last week. The overwhelming majority answered yes.

It’s going to be hard to see how companies really differentiate themselves from their competition.

Despite the likelihood of a recession, Mahaney told attendees he doesn’t expect it to rival the dot-com bust of the early 2000s or the housing crisis of 2007 to 2009.

But how does the recession affect investment?

“Recession is a dirty word in venture capital,” said Michael Brown, founder and general partner of Bowery Capital, who joined Mahaney during a general presentation on internet investing trends. Brown told the crowd that the start of 2022 showed a slowdown in investment in online marketplaces. But despite rising interest rates, there are opportunities worth pursuing.

“The job of venture capitalists is to find attractive assets,” Brown said. “Innovation is always happening, and that’s why I always think it’s a great time to start a business.”

MichaelBrown_BoweryCapital

Michael Brown, General Partner, Bowery Capital

Existing investments can prove more complicated, Brown said. It’s a tough time to raise funds. “A lot of these companies are raising money at valuations that are significantly higher than they will be able to realize,” Brown said. “And it’s gonna be mostly a turn down to what your [company’s] the last evaluation is at.

Hot sectors

“There are no more government procurement agreements now,” Mahaney told attendees. “I think they just put it back at the end of this year.”

Despite a turbulent economic climate, certain sectors are attracting investors. Transportation and logistics are attractive areas for venture capital dollars, Brown said.

“These are pretty tough companies with tough take rates and margin profiles, but there are companies like Convoy or Long Haul Trucking that are doing well – there are dozens of these companies that have raised hundreds of million dollars,” he said, referring to internet-based trucking services.

Retail is also an attractive investment, Brown said. In particular, the retail distribution layer.

Brown also noted manufacturing marketplace Xometry, which in 2021 bought ThomasNet, a provider of product sourcing, sourcing and digital marketing solutions, as another company benefiting from the digitalization of the manufacturing industry. (Randy Altschuler, CEO of Xometry, discussed his company’s growth strategy during an EnvisionB2B “fireside chat” on Thursday.)

Sectors on the other end of the spectrum include recruitment agencies, such as companies that train the workforce in sectors such as HVAC.

“These businesses are so hard to scale because of location issues – you need to have a lot of geographic density to be able to actually build a business quickly. And that’s usually a low-skilled worker, which represents a different margin and price dynamic there,” Brown said. “And these types of companies tend to separate. It hasn’t been a very attractive market for venture capital investments.

It will be a tough climb for companies to stand out, Mahaney said. He noted that logistics companies will compete at a tight level as an example.

“It’s going to be hard to see how companies really differentiate themselves from their competition,” he said. “So instead of delivering 18 packages in 25 minutes instead of only being able to deliver 14 packages, it’s going to come down to that kind of level of accuracy.”

Long-term orientation

The recession will be a great opportunity for businesses to plan their long-term direction, Mahaney said. “By building a better cost structure under these test conditions, I believe companies will become more attractive investment opportunities,” he said.

“Most of our criticism is in the nuances – what we pass on are opportunities where it’s probably the right idea, but maybe it’s not the right people,” Brown of Bowery Capital said.

80% of Brown’s investments are for entrepreneurs who solved a problem while working at a medium or large company and want to start a business without being hampered by management or digitalization issues, he said.

Investors make money by buying the highest quality investments, Mahaney said. “We use valuation risk by buying the highest quality assets when they are on sale,” he said.

It is important to use an economic downturn to plan ahead for the eventual recovery. “Listening teams [plan for the next] two or three years will be the winners of the e-commerce engine market.

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