Pizza might not be the first thing that comes to mind when you are thinking about the world of growth-tech investing, especially as we struggle to come out of the pandemic.
But for KKR, pizza delivery, of all things, became a big focus in a recent growth investment. In May the firm injected capital into Slice, an ordering and marketing platform for local pizzerias.
The company has shown promising growth and is well-positioned to take advantage of the fragmented pizza delivery marketplace dominated by the big four: Domino’s, Papa Jones, Pizza Hut and Little Caesars.
Well before the pandemic, KKR Growth saw an opportunity to bring value to the rest of the market, comprising nearly 55,000 independent pizza providers in the US, Jake Heller, co-head of KKR’s Technology Growth team in the Americas, tells sister title PE Hub. “There was an opportunity to have what we call a ‘reverse franchise model’ to help those independent pizza stores with basic tools from supply chain all the way through to online order processing,” Heller says. “Those tools will help them in aggregate to compete against the big four.”
That strategy was proven out shortly after KKR Growth signed an exclusive agreement with Slice. In fact, the company has experienced an explosive growth in activity on its platform nobody could have accounted for. “As restaurants have been forced to shut down, independent pizza stores that have delivery and online capabilities have been a huge beneficiary of the pandemic,” Heller says. “Slice has had an outstanding year – far exceeding all initial projections.”
The playbook executed by KKR is just one example of how growth-focused firms have found success nearly a year into the pandemic.
While KKR Growth has ridden the wave of high-growth end markets reaping the benefits of the move to digital, others chose to double down on the sustainable business model of recurring revenue. A few even turned to segments that fell out of favor during the crisis, taking advantage of lower valuations and betting on pent-up growth once markets recover.
Investing behind acceleration
For Permira, March to December of 2020 was as busy as it gets. The firm announced eight growth equity investments last year, betting on technologies accelerated by the move to digital.
Notable deals include Clearwater Analytics, an SaaS provider of investment accounting and analytics; Zwift, a global online fitness platform; and Mirakl, the only marketplace SaaS platform that empowers both B2B and B2C organizations to launch and grow an enterprise marketplace at scale.
“I think the most important thing about the pandemic is that it validated our business strategy to be on the ‘right side’ of covid: to be technology forward in a way that when this acceleration happens, we see growth across the portfolio,” says Andy Young, principal at Permira.
Being a global firm in the shut-in world of lockdowns has come in handy during this unprecedented time: “No one has been able to travel to meetings the way we used to, but we have still been able to safely meet with management teams and demonstrate our differentiated in-country expertise, and effectively conduct diligence during the pandemic without missing a beat,” Young says.
Powering through covid
For Spectrum Equity, the crisis validated many of the trends spotted by the firm ahead of the pandemic – be it around EdTech, e-commerce or food delivery. The lockdown cast a spotlight on things that were already working.
According to Ben Spero, a managing director at Spectrum, all companies in the firm’s portfolio produced revenue despite the crisis. Nearly 70 percent saw deceleration in growth while still producing revenue, while 30 percent of the firm’s portfolio saw acceleration in growth.
For instance, Spectrum-backed AllTrails, a fitness and travel mobile app used in outdoor recreational activities, has been in high demand during the pandemic. “A lot of people are getting outside and hiking, and I don’t think that’s going to go back after the pandemic,” Spero says. “I think some of these tailwinds are permanent in terms of people’s lifestyles and remote collaboration over the Internet.”
Yet to be announced, the firm also recently backed a tech business that plays in both the food e-commerce marketplace and telehealth that, according to Spero, “was growing gangbusters.” However, this growth momentum has made valuing such businesses a challenge for some.
For Spero, recent conversations have focused on how to discern normal sustainable growth when many businesses experienced a one-time benefit that could dissipate when the world reverts to normalcy. “That underwriting is hard, and you don’t want to be investing behind growth rates that aren’t sustainable and betting on one-time tailwinds,” he says.
Growth: now versus later
Accel-KKR has found its own way of navigating the momentum-driven valuations – not investing behind the immediate changes wrought by the remote environment. Instead, the firm prefers investing in areas set to experience growth in a year or two, after the market recovers.
“I think where we are spending our time is a bit different than a lot of other investors, who are still primarily investing around the popular themes, which is collaboration, e-commerce, video conferencing,” says Tom Barnds, managing director at the software-focused growth equity firm.
“These are all great areas, but that’s not a secret. A lot of the money is going into those themes, and valuations for a number of those companies have risen quite sharply in a short period of time.”
In the last several months, Accel-KKR invested in Pinc, a digital solutions provider for the railroad industry; Navtour, a technology supplier of navigational products and services for the maritime sector; and ATP, a global information services and software maker for privately owned and operated airplanes. Barnds says those sectors are on track to fully recover in a few years as the economy rebounds, driving more active rail transportation, global trade and private aviation.
Recurring, not reoccurring
Growth investors have also started paying closer attention to the resiliency of business models they are investing behind versus just focusing on the end markets.
In the case of contractual recurring revenue, when a software provider sells a subscription to a customer and the customer is obligated to pay regardless of its sales volume, the business model has proven to be more resilient to a downturn, than, for instance, when such contract secures revenue on a per transaction basis, Accel-KKR’s Barnds says.
“It’s the contracted subscription pricing that has proven to be very resilient, where transactional reoccurring revenue, even backed by a contract, felt a much bigger impact in the downturn as transaction volume dropped in many subsectors of the economy.”
Spectrum Equity has also been taking a more careful look at business models. The growth equity firm has always focused on information businesses and chose to invest behind those that have a stable recurring revenue profile, he says. “More than anything, we don’t care as much about the end market that our companies are serving as we care about the business model,” Spero says. “Using information and software delivered over the internet is sort of common theme, whether it’s a consumer, or a small business, or an enterprise; whether it’s horizontal or vertical.”
The test of new FinTech
In FinTech, growth investors at General Atlantic noticed another phenomenon. During the lockdown consumers became more adventurous about giving digital-only fintech providers a shot. “I think people are sitting at home and they’re more willing to try some alternative providers, be that in wealth management or banking. We have seen digital adoption significantly accelerate as a result of the pandemic,” says Aaron Goldman, managing director and co-head of financial services at General Atlantic.
With bank branches initially closed to minimize the spread of covid-19, more people opted to try alternative banking providers like neo-banks, which don’t have physical branches and can only be accessed through mobile apps.
“With traditional banking providers, you can either go to the branch, or interface with the bank online or on the phone,” Goldman says. “And all of a sudden it becomes clear that the banks potentially are not providing a good online or digital customer experience. At that point, you become a consumer who’s up for grabs. And you’re up for grabs for other traditional banks, but you’re also up for grabs for a number of these fintech providers.”
Consider Chime, a neo-bank backed by GA that was most recently valued at $14.5 billion.
Chime has seen a number of new users joining its platform throughout the covid-19 pandemic. According to Goldman, the company is one example of broader acceleration in the shift from offline to online in terms of how people pay for things, buy things and interact broadly with the financial services industry.
He also pointed out its portfolio company Alkami, which helps banks interface with clients digitally, caught tailwinds during the pandemic. “I think you see as result of covid an increase in software being purchased by banks to allow them to connect digitally with their clients,” Goldman says.
This acceleration of trends already in existence reveals inefficiencies that modern technology can help resolve.
Pizza is a bonus.