We’re all living through one of the most disruptive times in recent history, and frankly, most of us are sick of hearing the term ‘the new normal’. In this article, I want to look forward and spark a discussion around the future of VC and SaaS investing post-COVID.
I’ll cover five key topics, starting with my background, then the current state of SaaS, the new environment for fundraising, major trends that will outlive the pandemic, and finally share a few suggestions and original theses and strategies.
My name's Patrick Arippol, I'm one of the founders of Alexia Ventures, a VC practice based out of Sao Paulo, Brazil. In this article, I want to bring some insights into how we see things from this part of the world.
The objective of this article is to spark a discussion on the future of VC and SaaS investing - obviously, this is just one vantage point.
I'm going to try to speak to things that are more global in nature, to the extent that we've had that kind of experience. I have five topics that I think would be interesting for me to address.
- Number one, I'd like to go through a little bit of background, because in the background there is the bias of why I might put out an opinion in one way or another so that you can filter through.
- Second, I'm going to talk a little bit about the current state of SaaS.
- Third, I'll speak about the new environment for fundraising, which definitely is still a work in progress, it's still moving and very dynamic.
- Fourth, I'm going to talk about some major trends that I think are here to stay after the COVID pandemic.
- Finally, I'm going to share a few suggestions and original theses and strategies that are possible in this environment.
Patrick Arippol's background
By way of background first, so that you know the biases that I have. I'm an entrepreneur at heart. I promised myself I'd never raise money from venture capital if I can help it at one point in my life.
For all the work and venture that I do, I try to be entrepreneur-friendly, in a way of trying to explain how things work and helping founders not do the same naive mistakes as I've done before.
Today I manage a VC fund that actually went live a couple of hours ago (at time of writing), we basically did our first closing post-COVID. That's where we're at today, which is exciting to get something started after this whole phase.
If we were to make a comparison, some of you reading might know the US market, emergence capital is similar to what I've been doing personally before launching Alexia. It's also the core of what we do.
We focus exclusively on software and SaaS companies.
Patrick Arippol's career
In my career, just to summarise the background, I've missed a lot of timings before. I think I've always had some ideas that made a lot of sense and frankly, many times I was not at the right time in the market, as many of you know, that is one of the biggest drivers to success as well is getting the timing right. That was a bit of an experience.
As a kid, I started programming young. Then I joined a US company that IPO'd in 1995, it actually didn't do that well so then I tried to figure more of the strategy side of things.
Then I did a Brazilian healthcare startup, in the bubble years, 1999 and 2001. Basically, the bubble blew up in the face of an exit we were about to have last minute. We ended up doing another exit, and I stayed on board to basically fix the company after that very interesting stage of 2001, when frankly, the crisis from a technology standpoint, I think was more severe than todays.
I'm going to talk about this a little later. I think today, at least what we know is that technology has a very big role to play in the recovery of the world and that was not the case in 2001. For those of you that are as old as me, who lived through that, for sure it's a different dynamic. Before we didn't even know when companies would want to touch technology again, they weren't as convinced it could change things as much.
Then I joined an AI company, a national language processing company in 2003 in Silicon Valley, I decided to move to the valley and stayed there for 10 years. Way before it's time, the VCs hired me to try to figure out where we should take this company from a technology standpoint - very hard to monetize. So there, again, trying to deal with that situation.
Then I launched FinTech in Silicon Valley before FinTech was the talk of the town. Before iPhone, everything was done through SMS and so forth, we ended up selling the company.
Finally, just to wrap up, this is where I think I got the timing right, I moved back to Brazil in 2010 with the perspective of SaaS, software, these are global markets, and since there were no big companies coming out of Brazil, at least they weren't that have a global angle, why not?
Because in the end, it's one of the easiest segments to take companies global, and it's also a place where there's a lot of talent, there's a lot of interesting original thesis coming out for why not. So what I've been doing the last 10 years since then, is I joined a group that was doing other types of investments, I led their venture practice, and all we did was SaaS, and a concentrated portfolio so that we can add companies more.
I led 20 investments, no IPOs yet, but a very good cohort of companies as is possible with SaaS, and is harder in other segments. That being said, I have really fallen from the horse a few times and have a few bruises. That's how we try to help founders and help them really reach very big dreams. That's basically what we're doing today through Alexia Ventures.
The current state of SaaS
Point number two, which I wanted to focus on was the current state of SaaS and technology. I think Marc Andreessen mentioned software is eating the world, I think it's definitely the case. Post-COVID software is going to continue eating the world, perhaps on steroids, or with a lot more hunger than before.
We all know what's happening with the acceleration of digitalization, I think most SaaS companies are either helping to reduce costs or increase revenues but to digitize companies.
I think more and more, this trend post-COVID is going to be stronger. What we really believe in is in the space and the kinds of plays that we make are not so much nice applications, but platforms that are horizontal or vertical in businesses where the data or the intelligence generated by data is the core.
So now we're getting a new group of companies where it's not so much about the workflow, it's not necessarily about the business model, but it's actually a little bit more about the data intelligence. This is where we see a lot of opportunities happening today.
It's funny because in general before enterprise and SaaS was not as much of a priority, not that many exits, but if you look at the last 15 years, it's increasing more and more. The B2B angle is increasing and we've seen a lot more attention of the world face towards us SaaS companies and enterprise.
What's interesting in this COVID, I hope most of you reading have felt this, but our businesses are more resilient than many other segments. B2C, etc, - segments that are very capital intensive, you add a whole different layer of financing risk on top of the operational risk that every company already has.
I know that now everybody looks for the slogans - before people loved unicorns, liked that term too much, now everybody's gonna talk about camels, or maybe roaches, I don't know, but basically, the important thing about SaaS companies is being able to work and evolve in a more volatile capital environment.
I think it's good in SaaS, because these companies are more resilient, in general.
Founders vs. entrepreneurs
The important thing is, there's a pendulum also that I think is swinging back to where I'm not sure if it's where it should be, but it's going the other way, which is, if you think about one trait of founders, the founder is a lot more executioner and doesn't speak that clearly, and is not that much of a stage entrepreneurs, so to speak.
Then you have the stage entrepreneur and a portion of those stage entrepreneurs cannot execute as well, this stage entrepreneur had a lot more ease. Today, he or she's gonna have a lot more trouble.
I think in the end, the market is gonna swing in the direction of founders, they really execute and deliver results. KPIs are going to become all the more important. I think that's one important change that's happening as well. I think that speaks to the current state of how SaaS and technology is in my viewpoint. That's how at least I'm living it and feeling it now.
The new environment for fundraising
Some of you might be raising or might have raised capital, might be thinking of additional rounds, so I just wanted to share one perspective of how I'm seeing things on this side of business.
As a founder, many times I didn't get replies, I got replies I had a hard time interpreting, I was probably a lot more naive than most people that are reading here. But the why, why a VC or a whole industry behaves in a way, I'm going to try to shed some light on this.
Because in the end, all of us are doing our roles, and we're all human. As humans we're driven by motivations, we're driven by a number of things, as a former founder, I want to expound a little bit on this, why have VCs slowed down a bit?
Obviously, this is based on a bit of the experiences that I've been living, there are a few reasons.
First, is that VCs are really focusing on portfolios. That's the reason why we always had a more concentrated portfolio, so we can dedicate more time to these companies. But there's a lot of VCs that did a lot of the spaying and praying, and those large portfolios, they need a lot of help now.
One thing is there's funds, the bigger they are, their portfolios, they're probably going to be more driven to focus on those before thinking of new investments and new things.
Second is valuations are less certain, all the numbers that we see through Crunchbase, PitchBook, whatever source you might look at, they look at the deals that were done. But the fact is that less deals are getting done.
So part of the reason for that is that it's hard to say if the valuation of yesterday is going to be the same as today. Some guesses might even be higher.
But that difficulty at least in my case, I have a few boards where we're going to be acquiring companies and we actually put things on hold a bit because of that reason, so the uncertainty of evaluations is one aspect, obviously this is a little less of a factor in the Series A stage and the seed stage, but as you go to Series B and beyond that, you feel that a little bit more.
The other aspect is that VC's, some of them want to save their cry power. One of the reasons for that is that there is some vintage variation. Right now, you have some of the prior companies raising money, you have some new companies that have been born, and you might have new companies being born - different companies, once we start the recovery, which we're not sure when that's going to start.
So it's going to be a lot of changing drivers in the next six months or 24 months. In general, if you look at the companies that really perform well, usually they start either executing well during a crisis like this, or they really start picking up even more after the recovery starts picking up. But sometimes that's too late.
That's why this is a very important period of time for companies really to drill down and re-establish themselves to the new normal. Because this is where the fantastic opportunities come out. But this is a little bit more skittish if you will.
I had a few calls yesterday with some VCs in the valley, and many of them say that except for prior discussions, founders they were already really in close contact with, not much is being done.
One of the reasons for that, too, is that person to person is important, doing due diligence, meeting customers, meeting the team, we can replicate some of that, but there's some VCs that are less comfortable, they do want to visit.
I mean, we had one big round in one of our portfolio companies that the investor said, "You know what, we're still going to do it, but we got to be able to travel to Brazil, and based on that, we'll continue the process". So that's happening too.
But then again, the investors know that the best vintages are now, so funds that are capitalized or they're raising capital for this new phase, they really are going to be focusing on companies that are really more resilient and as soon as they figure the thesis that they like, definitely, the market is gonna start unlocking gradually.
In general, talking about the fundraising environment, everybody says that the bounce cycles is when terms get more investor-friendly, so less entrepreneur-friendly. This might happen. But then again, I think always entrepreneur has the option, if they have the option, to try to navigate to the investors that really add value because in fact, I think the board can add more value in more turbulent times and more difficult time.
So I think as much as terms might be less founder-friendly, still, I think really try to look for the investors that can really help if you think board-level help can be important for your company.
The other thing that's very important in my view is that new startups are going to become a lot more global, very fast. Basically, if we're going to be analyzing what happened during the early part of COVID, countries started closing their borders, started focusing on the core industries; health care, basic services, etc.
At that same time, the barriers of innovation to solve the COVID problem has been a global collaboration like we've never seen. You almost have an argument for regression of globalization on one side, and an exacerbation of globalization on the other. So this is probably going to happen.
Outside of some major geopolitical disruption, which might happen, but there's a lot of industries where the globalization effect is going to be a lot more substantial than we've seen today.
A few people from top funds that I follow a little bit, they really are seeing that as the way to go.
Also because one of the other dynamics, as all of you know, is startups are easier for you to be a remote work dynamic.
It's easier for you to have a decentralised team developing and operating your business all over the world. That's going to make the world a lot flatter. You might have a company out of Ukraine, or out of Hong Kong, that's gonna have a developer in Brazil, another one in Texas, another one in a small town near London.
There's a lot of dynamics like that that are going to change and the scale of the disruptive innovation is probably going to increase in my viewpoint.
Just to say, in terms of the funding dynamics, and fundraising dynamics, those are a few perspectives. It's tougher, for now, you have to weather the storm, VCs are slower, but in my view on the other side is something big this is going to exacerbate
I follow the development of ecosystems quite a bit because when I was living in Silicon Valley, right after I moved there in 2002 it was very soon after the bubble burst.
There was a lot of questioning around how much Silicon Valley as an ecosystem was going to eclipse or continue or grow. When I moved back to Brazil, here, it's not just San Paulo where I'm at, there's other ecosystems that are flourishing, and others are not. I've been very intrigued and have helped a few.
But I think, in the end, Silicon Valley will almost become like a constant where you have thinkers from there or originally from there but the concept of having physical regional ecosystems might migrate to digital and network ecosystems, where it's not so much the regional frontiers and the fact that an investor can drive an hour and be in any founders location so that they can have face to face meetings, but the world is going to decentralize a lot more.
Now, I'm not saying that Silicon Valley geographically, is gonna cease to be as important. But there's probably going to be a different polarisation of how people assemble and exchange ideas in a very turbocharged manner through digital means.
There's probably going to be more groups based on topics, maybe based on AI, where they're going to be assembling and exchanging insights. That's probably going to, in my opinion, really decentralized innovation in a very big way.
In terms of decentralisation, let me speak of a specific company.
We invest in the board of one company called Rocket Chat. It's comparable to Slack, it's probably one of two companies after Slack that has an open-source offering to Slack that is very robust, used all over the world.
Most people don't know that it's based out of the south of Brazil. The first investor in the company found the company through the open-source networks and invested here. I think it was the first major round in an open-source company in Brazil, as far as I know.
The point here is this - an open-source company, I was always very bearish on open source to be very candid, but I think it brings a lot of the components we're going to see a lot more of which is product-led growth and decentralized teams.
Just in February of this year we had an annual gathering, which was two weeks where everybody from all over the world, the entire team for market share, they convened in Brazil, had a bunch of bonding experiences, etc. and then the rest of the year, they're all over the world.
They're working really effectively together. Now a company that has this capacity in a time when everybody's really thinking how much you can have the home office dynamic, to what extent can we take that right? You have these companies that open-sourced, they already are operating like this, right?
I think the companies that can operate like this, it's not for everyone, but this is a huge competitive advantage. All things equal - a company that has the capacity to do so, versus a company that doesn't, this company is going to be more resilient.
Because we might have other types of environment disruptions in the next 10-20 years, other types of disruptions that are gonna throw people off keel, and you have to keep on operating. That's a very interesting advantage, it's an advantage from an organizational standpoint.
There are two other reasons why I mentioned Rocket Chat as an example of an open-source company.
One is that if you are able to crowdsource or you're able to have a development capacity way beyond the biggest R&D budgets, I think that's a natural opportunity set that you can go after to this model.
Low touch strategy
But I think even more importantly is in SaaS, I think that the movement to a lower touch strategy is a very strong one.
If you think of ways in which you can sell and onboard customers, the typical field sales, long sales cycles, in-person meetings, and then you sell the software, then you onboard them.
From there, the higher-touch model, you have the inside sales, inbound marketing, then you have channels, which I think means a lot more now, and API's, and then you have freemium.
At the other extreme you have open-source, which is not just a go-to-market model but it's also a different way of developing software. In that trajectory, the push is going to be really strong downstream to the lower touch.
We're seeing this - the number of traditional SaaS companies of ours that are doing PLG - product-led growth - is very substantial. It's aligned with the way that people want to decide today, they want to test things before they reach for their wallets.
And it's also something that in the market like this, when budgets are more constrained, is going to be an enormous competitive advantage. PLG is a huge trend, I think, in terms of what's going to happen in the future of SaaS given post-COVID and also these decentralised models as well.
Those are a few trends that I wanted to call out.
Now I'll move on to a few other dynamics that we're seeing as I'm talking about these trends post-COVID. I've spoken about PLG, decentralized teams, the globalization of some segments, and the de-globalization of others.
A less homogeneous world
For example, I'm on the board of a company that's a very robust big data platform. We already are, since we're not in the US or China, aware of that tension.
We know that when we're talking about some important customer's companies in one area versus the other, that there is some tension and that tension is probably going to increase.
So for businesses that are very strategic in nature, or related to the core industries like healthcare, etc., there's going to be a lot more splitting of the world, it's not going to be just one large technology world, but you got to eventually make that and move in one direction or the other, like we might with this company, eventually move towards the Asia-China market versus more of the US Western world side of the market.
That's another trend, which is the world is going to be less homogeneous in a way to founders.
That being said, you have these trends, low touch PLG, decentralization of teams, you have some markets going global, some de-globalizing if there's such a word.
I spoke a little bit before about how city hubs of innovation might be replaced by digital hubs, so to speak. Now to be quite frank, this last one is the one where I have the least vision of how things are going to evolve, but I definitely see that movement taking place.
And if you go back to what was happening before, in my view, huge decentralization of innovation all over the world, any metric you use was pretty strong, it's probably gonna be stronger now.
But we don't know if these different new regions are still going to be the hubs of how these things gravitate. In the end, if you push things forward, if these trends continue, you might have founders that are in the Czech Republic who have a fantastic view of this specific pain point, etc, they're going to hire people all over the world and in essence, they're going to either gravitate to a VC - anyone in the world that can help them, and they're gonna hire people from anywhere in the world as well.
In the end, to a VC, the sector specialisation might even more important than the geographic one. As a VC, still at least as of now, the difference is, there's still a cultural aspect, at least today.
The way that we're thinking about this is that we want to look at the best founders from Latin America to look at Latin America's important segments or regions. Then want to go into the region or want to go global. Tool back the number of entrepreneurs that have really become leaders in the US and other places.
But we think that this is going to accelerate quite a bit and when we speak with founders that are from this region, we can support them with their R&D here, if they want to keep it here, or support them, we understand how they think.
If we back founders that want to go after this region, that don't know that much about the region, we can complement with that perspective. That's a bit of how I'm seeing the evolution of the market in the medium long term.
Original theses and strategies
I think one of the other things that is important to mention is that I think now the market and the world's going to be more open to original thesis for business models and for globalization strategies.
Breaking the norm
It's funny how there's a lot of box thinking that happens, even in Silicon Valley, in my opinion, there are maybe 10 VCs in the US who really lead - they have huge thought leadership - and in Europe.
There's a lot of other ones that are followers, I think we're going to see more people breaking the norm now.
But one of the things in terms of international expansion is that before everybody thought, if you're a company from Brazil you've got to expand to Latin America, and then eventually sell to the US, European, Asian competitor.
Now, if you think about how valuable your company is, that's not a good strategy, because if you just bought for your regional presence, it tends to be one of the lowest valuations after Aqua hire, Regional expansion, and you have product expansion, and at the very end, you have existential threats.
It doesn't really move the needle, and a lot of investors think like that, ‘Go to Latin America, or if you're out of the UK, go to Europe.’
We're kind of in that box and a lot of the companies that we back, they have the model that I call the Israel model, and we have the emerging-market model.
The Israel model
The Israel model is basically taking your technology into a big hub, which could be in Europe, in the US, and Asia, and that hub helps to take you to the world. We think of the US being the best place for that so far and that is kind of the Israel model. And even Israel also, of course, it's doing innovation not just directed to the US now so that's changing a bit.
But this idea of building something - a huge and very interesting business model and taking it to the world, that's one path.
The emerging-market model
There's another path that is less thought of which is large emerging markets, a lot of businesses that are not low touch, it takes as much of an effort to go after a smaller country as it might to a larger country. Why not just pick the large ones?
The sophistication of users tends to be kind of similar in emerging markets. And frankly, in SaaS, my opinion is that large emerging markets are a complete blue ocean, because the strategy, the playbook from Silicon Valley, etc, of growing usually goes into the US, major countries in Europe, and this and that, and you leave these other markets completely with a proposition that doesn't really fly.
We have one company, RD Station, which is really growing well in this strategy. So there's a lot of things out of the box that I think we have more liberty now to think of.
Increased need for tech
The final point here, on being more creative, and thinking out of the box is that the world is going to need technology even more than it's needed it before.
I think there's not a more important industry to be in today than in tech. We are more supporting actors and actresses, as VCs, the protagonists are the founders, you most of the readers here.
Be sure to think, obviously if it is within the scope of what you want to do, question yourself and see if there's something bigger, something more important that can be done, because still we're going to see a lot more things happening in the next six months or so.
We have to really make sure that we're able to address those problems and help really the world to recover in a different way.
I think the recovery of the world will be one where technology will be very central. Founders that are starting out or that are just seeing their models to the new market I think this is a fantastic time, but it's also very challenging so you need to be more resilient.
Those were the points I wanted to make, I covered a little bit about what is the state of SaaS today? What is a new fundraising environment? Major trends post-COVID and how that opens up a lot of original theses for growth and for expansion around the world. Thank you.