Followers of Supply Chain Matters have likely observed the rather large number of private equity investments being made in supply chain focused technology start-ups and promising firms over these prior months. There was a time in late 2020 and all of 2021 when we could literally not keep-up with the numbers of funding rounds being announced in our Supply Chain Matters This Week in Supply Chain Management Tech column, along with the extraordinary large valuations being affixed to unprofitable or early-stage tech companies. It was literally mind boggling.
All of that is now changing, and consumers of supply chain focused technology and services need to be cognizant of the implications.
Changing Financial Climate
As interest rate hikes increase across a number of economies, increasing the cost of invested capital, coupled with heightened economic uncertainties and the growing possibilities of economic recession, a more sobering private equity fund raising climate is quickly emerging.
As tech columns have been pointing out over these past weeks, the prospects of valuation haircuts, more conservative focused PE investors and an overblown sense of optimism are coming home to roost.
This week, Business Broadcasting Network CNBC reported that essentially the private tech financing market is largely frozen in 2022, that private tech companies are avoiding the need to raise cash in a dreaded down round, and that private tech firms must show a more efficient sales model and stronger revenue retention in order to attract added funding. Other tech and business focused media are also noting this changed climate. In some cases, PE firms are now assessing whether to write-down the value of certain later stage tech investments because of unrealistic valuations. The same hold true for plans to take a tech company public via an IPO.
Venture firms are demanding clearer paths to profitability and more managed spending, rather than focusing on tech companies with multi-year growth paths. At the same time, with growing fears of a regional or global wide economic recession, investors are advising private companies to plan anywhere from 30 to 36 months of adequate funding to be able to sustain operations and support customer needs during a potential longer term economic downturn. Consequently, previously planned investments in added technology development, acquisitions or regionally based business expansion may be temporarily shelved without a clearly articulated and evidence-based strategy.
Already there are reports of tech companies exercising selective layoffs of workers along with trimming overall spending to preserve cash burn rates. CEO’s among certain high flying growth firms now face difficult decisions related to later-stage growth funding, especially shunning those that include added financial protections or claw back provisions among late-stage PE investors.
These trends parallel ongoing reports concerning very large and well-funded tech companies such as Google, Meta (Facebook), Microsoft, among others, taking steps to trim headcount and reduce hiring levels in the wake of the current uncertain business environment.
Supply Chain Focused Tech Investments
As noted in this column, a flood of new equity funding among PE firms flowed into the supply chain management sector over the prior two years. That were at rate that this technology analyst has not observed in over 20 years. New start-ups as well as existing players were especially focused on business process areas that including tenets of data and information inefficiencies. Hot areas of investment centered on enhancing online customer fulfillment and logistics strategies, more flexible shared warehousing business needs. Added areas have been supply network agility and resiliency, supporting select areas of supply chain digital transformation and in various forms of automation of operations and added operational efficiencies.
With the newer Cloud-based SaaS software delivery models, a tech provider becomes an extension of a customer’s IT systems and supply chain focused data infrastructure and thus the implications of ongoing equity funding take on added meaning for reliable system uptime and performance, not to mention data safeguards.
The supply chain areas of logistics, transportation and online fulfillment especially attracted larger equity investments among highflyer start-ups. According to PitchBook Data Inc., PE firms invested upwards of $50.6 billion in logistics focused tech companies during 2021, triple the amount invested in 2020. The latest data from PitchBook indicates that supply chain focused tech investments slowed to $14 billion during the first quarter of 2022.
A unique aspect of these investments has been for the most part, PE firms highly experienced with supply chain expertise and knowledge. This includes termed boutique firms that tend to participate in early start-up rounds and share in equity investments with larger PE firms in latter stage funding rounds. Indications are that even the boutique firms are beginning to cut back in their participation.
Implications and Reader Takeaways
For businesses and their supply chain management teams that have either invested in or contemplating an investment in a newer innovative start-up, caution and deeper assessment is at-hand.
While we remain of the belief that innovative supply chain tech and services companies will continue to find opportunities to leverage their technology and services deployments, their senior management teams are going to have to adapt to this more conservative business investment environment. The notions of continual investment monies flowing in to garner market share and growth are going to be tempered by clear paths to profitability and the all-important SaaS recurring revenue growth.
Supply chain technology focused team need to pay particular attention to the overall business model, the compliment of existing investors and the declared revenue and profitability growth plans of tech providers. Insist on securing a financial overview, or if given the opportunity, speak to a designated investor. The goal is to assess that the tech provider is adequately funded. Speak to experts and technology industry analysts that have more detailed familiarity with the landscape of supply chain tech providers.
The strategy should be one where exposure to a singular tech provider does not present an undue risk if that tech firm is forced to cut back staff and resources. Too often, this supply chain technology analyst has observed where a large and influential customer can place an extraordinary resource burden on a start-up company at the expense of other customer support needs.
For multi-year SaaS contracts that are up for renewal, rigorous diligence is equally called for. Determine if any changes in overall data center and cybersecurity measures or certifications have changed since the time of the initial contract. Pay particular attention to whether a SaaS software provider has outsourced all prior data centers to a subsequent third-party hosted data center firm in an effort to reduce overall cost structures.
For supply chain start-up and established tech companies that provide their own in-house consulting and systems deployment services, it is equally important to assess if those resources become strained because of a lack of staffing, jeopardizing implementation milestones. As we have noted in prior commentary, the current demand related to ongoing supply chain transformational projects have strained the entire network of available consultants and technical system integration resource needs.
In deal negotiations, system selection teams need to be cognizant that aggressive sales discounting may no longer be a supported practice. Start-up sales teams are likely under enormous pressures to deliver on higher margin deals to preserve or grow recurring revenue flows. Ensure that all terms of a sales and ongoing agreement are detailed in contract writing. When speaking to a tech provider’s referenced customers, probe on any changes that may have occurred of late, such as staff reductions or expense restrictions.
Finally, the current environment can provide added opportunity in the ability to hire experienced software developers, data scientists or other technical and transformational program management resources that become more available due to tech start-up cutbacks.
The takeaway of this commentary is that the coming months not only provides added challenges or business opportunities for businesses and their supply chain teams, but a far different funding and business environment for supply chain focused technology start-ups. Be aware and insure added due diligence in tech investments.
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