Internet innovation is driving investment in business, Wall Street analysts say

Dayana Jones

Are we headed for a recession? Mark Mahaney, senior managing director and head of internet research at Evercore ISI, asked attendees for a quick show of hands at Digital Commerce 360’s EnvisionB2B event in Chicago last week. The resounding majority responded yes.

It’s going to be tough to see how companies really differentiate themselves from competitors.

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

Investment analysts Mark Mahaney, left, and Michael Brown, right, appear with Digital Commerce 360 senior vice president Mark Brohan at EnvisionB2B.

But how does recession affect investment?

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

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

Existing investments can prove to be more complicated, Brown said. It is a difficult time to raise money. “Many of these companies raise money at valuations that are significantly ahead of what they’re going to be able to achieve,” Brown said. “And it’s going to be mostly a down round to what your [company’s] last valuation is at.”

Hot sectors

“There aren’t any deals coming into the public markets now,” Mahaney told attendees. “I think they’re just putting it off until the end of this year.”

Despite the turbulent economy, some sectors are appealing to investors. Transportation and logistics are attractive areas for venture dollars, Brown said.

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

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

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

Sectors on the other end of the spectrum include staffing agency ventures — such as companies training workforces in industries such as HVAC.

“These businesses are so difficult to scale because of localization problems — you have to have a lot of geographic density to be able to actually build a company quickly. And it’s usually a lower-skilled worker, which is a different margin and pricing dynamic there,” Brown said. “And these types of businesses tend to break up. It hasn’t been a very attractive market for venture capitalist investments.”

It’s going to be an uphill climb for companies to stand out, Mahaney said. He noted that logistics companies will be competing on tight level as one example.

“It’s going to be tough to see how companies really differentiate themselves from competitors,” he said. “So, instead of delivering 18 packages in 25 minutes versus only being able to deliver 14 packages — it’s going to come down to that sort of level of precision.”

Long-term focus

The recession will be a great opportunity for companies to plan their long-term focus, Mahaney said. “By building a better cost structure during these testing conditions, I think companies will become more attractive investment opportunities,” he said.

“Most of our criticisms lie in the nuances — what we pass on are opportunities where it’s probably the right idea, but it might not be the right people,” Bowery Capital’s Brown said.

Eighty percent of investments Brown does are with entrepreneurs that solved a problem while working at a medium or large-sized company and they wanted to start a business without being hampered by management or digitization issues, he said.

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

It’s important to use an economic downturn to plan ahead for the eventual upswing. “Teams that look out [plan for the next] two or three years will be the ecommerce engine marketplace winners.”

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Internet innovation is driving investment in business, Wall Street analysts say

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