Investor trends are as fickle as fads. But with much bigger consequences.
There seems to be a growing backlash against companies, many of them solidly within or adjacent to the SMB space, that have outsize ambition, but very little hope of making money.
We know these companies. Uber, Lyft, and of course, most recently WeWork, are a few examples. They raise billions, generate incandescent hype, and are (sometimes) led by flawed and messianic CEOs. Among the three just cited, Uber and Lyft have had disappointing IPOs and WeWork had its planned IPO pulled and is now undergoing mass layoffs. And of course, it was at the receiving end of the epic “We WTF?” takedown by Scott Galloway just before the wheels came off.
A common denominator, cited by Yahoo Finance, is SoftBank’s $100 billion VisionFund, which has poured money into the likes of WeWork, Uber, DoorDash, and others. Many point to SoftBank’s profligacy as a factor in the rise and fall of the unicorns by providing much incentive to grow at a manic pace and less incentive to find a sustainable business model.
This week, The Wall Street Journal published a piece (subscription required) looking at Grubhub’s troubles in the face of so many food delivery competitors.
From the Journal article:
“Making money suddenly matters in tech. That is bad news for any company competing in a sector filled with rivals desperate to gain scale, such as food delivery, and could leave Grubhub investors with a bitter aftertaste.”
The competitive food delivery space seems particularly vulnerable to this seemingly sudden shift in investor sentiment from “growth at all costs” to a returned emphasis on rational unit economics. Grubhub, according to the Journal, has lost 26% of its value in the past three months and 53% over the past year.
Last week we covered the release of SurePath Capital Partners’ Q3 State of SMB Software Report. One of the observations from the latest analyst from Mark MacLeod and his team was that the story for SMB related IPOs in 2019 has been a mixed bag with four of the eight relevant companies that have gone public this year are trading below their IPO prices. The best performer is Lightspeed (LSPD), and the weakest performer has been Slack (WORK).
What’s the common denominator?
“Money-burning unicorns with low margins and high valuations have fared the worst,” the report said.
So what’s the lesson for the SMB software space?
Today investors seem to favor SMB software companies that are focused on a specific solution, like payroll, or a specific vertical like home services or restaurants. Growth still matters and many of these companies do operate in sectors that are competitive and perhaps ripe for consolidation. Restaurant tech may be a good example of this. But none are trying to conquer the world with brash leadership and unsustainable business models. They are generally pretty focused on metrics like LTV and CAC and they care about their NPS scores.
Sector focus, responsible growth, attention to unit economics, and emphasis on customer experience seems to be back in favor. We imagine with many investors they never really lost favor.
For more on this topic, we broke it down on the latest episode of the Above the Cloud podcast. The relevant clip is below.