Asymmetric Thoughts: B2B Marketplaces 101
Since the late 1990s, B2C marketplaces (eBay, StubHub, Uber, Airbnb) have...
We’ve been busy at Asymmetric! After an active fourth quarter on the investment front, in early January we hosted the first of our annual team and founder offsites in Jackson Hole, WY. We spent some focused days with our internal team engaged in our Q1 and 2022 strategic planning, then had a handful of our founders and Advisor Partners join us for additional company planning sessions and group bonding on and off the slopes (with 36 inches of fresh powder to boot). This kickoff to the year reinforced our collective belief that we are building a differentiated firm; we are so grateful to have the support of our LPs, Advisor Partners, and portfolio company founders.
So, today we’d like to share some of the takeaways of those sessions, focusing on:
We’ve observed surprisingly little slowdown in the frenetic pace of early private markets investment rounds, despite tech’s public market unwind which we are unsurprisingly also beginning to detect in later stage private markets. We suspect we echo most other sponsors on the potent mix of 1) compressed due diligence timeframes, 2) a surplus of capital chasing deals, and 3) reasonably undisciplined price-setting which continues to bear little relationship to established valuation bands. We see it too. We continue to find opportunities despite this. As we often say internally, our LPs don’t pay management fees to hear about how thoughtful we were in passing on overpriced deals. And competing in a market where others may not share our return expectation just means we need to work smarter and harder to find the best companies at the earliest stages. We’re engaged by the task.
So, in response to what continues to be a frenzied market for all business models, we’ve chosen to double down in five core segments - consistent with our original founding themes - which we continue to believe favor our backgrounds and experience: 1) vertical software, 2) horizontal software, 3) digital marketplaces, 4) fintech, and 5) digital health / healthcare IT. We’ve aligned our firm’s efforts in a continuous flow process from research to sourcing to deal execution to post-close with light specialization / verticalization in those spaces.
Additionally, in the fourth quarter and January we made the following four key strategic decisions:
With Fund I approximately one quarter deployed at year end, we also took a pause to reflect on our composition across various vectors: stage, business model, and geography. We have been deliberate in constructing a portfolio to date diversified across growth / entry profile and thematic underpinning. As you can likely detect from this note, we perceive our mandate as finding creative, and at times contrarian, ways to deploy capital in what is unquestionably a frothy valuation environment. As such, we’ve zeroed in on a handful of sweet spots which we believe are addressable even in today’s market at attractive asymmetry. We characterize these as “tilts” within the portfolio, and what follows should reflect a handful of our underlying beliefs on relatively undervalued segments of today’s market.
First, from a stage perspective, we’ve leaned on a relative basis into early stage deals. We believe that an elite founder, pre-revenue, is more interesting at a $5M - $20M entry price than a less qualified founding team with < $5M of ARR but at $75M - $200M. Accordingly, our portfolio to date is 88% Series A and earlier and only 12% Series B or later. In the latter case, we’ve only invested where we see a clean path to a $1B+ exit, and only (to date) alongside elite venture firms playing an active role in company management.
Second, from a business model standpoint, we’ve complemented our core software and marketplace focus with two further subdivisions (vertical / horizontal and physical and commodity good / labor, respectively). Like nearly all sensible VCs, we appreciate the inherent advantages of software’s business model and have a particular affection for software-as-a-service. However, we’re also experiencing some of the most inflated (non-web3) valuations in SaaS; as a result, to satisfy our long-term expected multiple on invested capital constraint (a continual North Star for us) we’ve been disciplined in balancing entry point and market size. Accordingly, our portfolio to date consists of 53% software, with 29% in vertical and 24% in horizontal. Meanwhile, marketplaces represent 33% of the portfolio, with physical and commodity goods representing 17% and labor marketplaces the remaining 16%. 13% of the portfolio is in digital health and the final 1% of the portfolio falls into fintech investments and a short tail of others which don’t neatly classify into software or marketplace.
Third, on sourcing channels, we’ve leaned into two channels about which we’re excited and on which believe we have a unique angle. We’ve sourced just more than two-thirds of the fund invested to date (71%) via Advisor Partners, portfolio CEOs, and our active limited partners. This has provided proprietary “warm” intros from properly incentivized referrers (many of our founders are also LPs). As discussed above, we have confidence that our Advisor Partners and founders (with whom we’ve worked directly) understand what we seek, and how we operate. The remaining third of the fund (29%) has come via members of our team’s direct network, including (in the main) relationships with portfolio founders.
Finally, from a geographic perspective, we’ve struck a similar balance to our business model split. As a firm with team members in Boston and New York, we have advantages in the Acela corridor. Accordingly, we’ve invested 35% of the portfolio to date in New England. We’ve also worked to cultivate strong primary relationships with founders in between the coasts, in areas like Dallas, Chicago and Pittsburgh, where we believe asymmetry favors us on a relative basis. We’ve deployed 13% of the fund in those markets. Finally, as may be reasonably expected in any firm seeking high-growth technology assets, we’ve invested 52% of the fund in the Bay Area. When reviewing our logic across the lead or material checks we’ve written in California, we had unique angles into some combination of the founder, product and / or market.
* Note: all portfolio percentages presented use $’s invested (not # of deals) as of February 18, 2022.
As you can likely tell, we take company and firm building seriously. We could not be more honored that our portfolio company founders chose us as part of their growth strategy. As we like to tell both LPs and founders, they can be assured no stone will be left unturned en route to delivering the best possible outcome for each founder and we believe, by extension, our fund. We look forward to sharing more updates and more good news soon.
The Asymmetric Team