Four Sectors that Will Flourish
After a tumultuous 2020, we are all ready to start a more typical year. However, we expect that 2021 will be a transition year as companies and investors adjust to changes in the economy, social activity, and new work practices.
Like many observers, we expect a rush to travel, leisure, dining, and entertainment activities due to massive pent-up demand. This by itself is likely to show stress points for some industries and the need for new platforms for bookings, ordering, and logistics.
But at the same time, we expect visionary entrepreneurs to focus on the long-term market pain points and innovative new platforms. We outlined Two Megatrends that we believe define the future of the Post-COVID world. The acceleration of the migration from physical to online platforms is the single biggest trend defining our investment landscape and economy for the next five years.
Our task is to dissect this Megatrend to find stress points and see where investments can lead to outsized gains by targeting big pain points and providing the 'lubricant' to facilitate this growth.
As such, we have identified the four areas of e-Commerce Ecosystem, Digital Health and Fitness, Enterprise Cloud, and EdTech as the most significant growth areas in the next five years. There are common themes that connect all these sectors, namely automation and acceleration of online platforms. The next five years will be building the infrastructure for this new wave of growth.
Within the four target areas, the following sectors are of particular interest to us:
E-commerce Ecosystem: Customer Communications; Logistics and Delivery
Digital Health and Fitness: Digital Therapeutics, Remote Monitoring, Drug Discovery, Diagnostics, FemTech, and remote Fitness
Enterprise Cloud: Data Platforms, Informatics, Collaborative tools
Ed-Tech: Re-training, Learning Management Systems (LMS) 2.0
As we discussed in our Megatrend piece, we believe the adoption for online platforms has reached a critical inflection point and is likely to reaccelerate in many categories. While we expect a downward adjustment (in Q1-Q2) once social distancing requirements are relaxed and COVID is more manageable, we expect the demand to continue to be strong in the second half of 2021.
We can simplify a commerce transaction consisting of three major areas:
We believe the two areas that still need significant improvements are Customer Communications and Logistics and Delivery. It's easier for companies to automate and improve the efficiency of their transaction processing and fulfillment. It has proven to be more challenging to gain the same efficiencies in delivery.
Customer Communications. Customer experience is still lagging during discovery and order, which is the leading cause of churn and cart abandonment.
With the increased demand, the need for a better customer experience will be critical. This involves customers' search, order, transaction, and support needs. We will be looking for companies that improve the efficiency of each of these stages for both e-commerce and offline retailers.
Improved product search with real-time updated inventory
Single-page ordering and payment with proper authentication
Streamlined customer support
The above areas apply to e-commerce and offline retailers who will find that many of their customers would prefer to first search for the product on their company's or store's website before visiting. We believe online browsing through the stores' website will increasingly compete with physically browsing through the aisles.
Logistics and Delivery. While the online delivery system worked better-than-expected during the pandemic, the cost structure remains too high, and deliveries are inefficient. A well-functioning delivery system requires both warehouse logistics (local distribution centers) and robust last-mile delivery technologies. We are investors in one such company, BoxBot, which improves the efficiency and cost of local delivery by as much as 30% through better package management. We believe this area needs almost a complete retooling so that we can create a unified and efficient delivery system, similar to what we consider below:
Notice that we envision a platform that can aggregate and combine deliveries from various sources on an optimized daily route.
In short, we are looking for companies that provide:
Demand aggregation and delivery syndication platforms
Local smart storage platforms
An optimized and scheduled local delivery model
Digital Health and Fitness
Covid 19 is a health crisis, but it provided tailwinds for Digital health sectors in 2020; we expect this sector to expand without moderation in a post-Covid era.
We have been focused on the Digital Health industry for many years and have now identified the following six sectors for investment in 2021 and beyond:
Digital Therapeutics. This sector has enjoyed the double benefit of showing efficacy (see CBT for chronic insomnia disorder) and, of course, increased adoption driven by stay-at-home mandates. Digital Therapeutics includes platforms and services that provide treatment and management of physical and mental disorders using digital means such as apps, programs, videos, and devices, used remotely by the patients.
We are especially interested in Digital Therapeutic platforms targeting disorders that traditionally suffer from low patient participation due to perceived stigma, lack of easy access, or cost. The second category of Digital Therapeutics that targets more common disorders, such as high blood pressure, anxiety, or obesity, is also interesting since they reduce the barrier to adoption by making the service highly accessible. Examples of this category include the success of companies like Livongo and Omada Health.
Remote Patient Monitoring. We believe this is a developing area that has only started to show promises in cases that previously required frequent practitioner check-ins. Chronic disorders such as COPD, high blood pressure, or certain coronary diseases often require monitoring of patients by health care professionals. Advances in new wearable and other at-home devices are making this highly costly operation far more effective. We are also hoping to see this category expand to include broader health care monitoring, especially for at-risk patients, and for non-chronic disorders.
Next-Gen Drug Discovery. The use of both AI, as well as massive databases, has opened the possibility of a) finding new molecules that target specific indications, b) significantly expedite the drug testing process through both simulations as well as pre-targeted design. We are also very focused on the next generation of aging-related discoveries that can form a platform for many new categories of drugs and interventions.
AI-Enabled Diagnostics. This is an area that some people, justifiably, believe was overhyped. For example, while there were promises of radiology becoming obsolete, say by 2022, we are far from that. On the other hand, diagnostics of breast cancer and other tumors by machines have improved so rapidly that they nearly match the best radiologists now. We are very hopeful that AI, as well as could-based data models, will significantly improve both the accuracy and the depth of diagnostics. This is one area that the value of data is exponentially beneficial in each new diagnostic task.
Femtech. Technology, products, and services that focus on improving women's health and fitness have found a golden opportunity in a market that had been largely neglected by most health care providers. We expect to see the success of companies such as Nurx and Pill Club to expand to many new players and categories in pregnancy/motherhood, reproductive health, gynecological, and overall health.
Femtech companies benefit from the dual advantage of a gap in the market and new digital therapeutics technologies that have made such services easily accessible. We also consider femtech technologies potentially enabling disadvantaged populations, particularly low-income women.
Fitness and Wellbeing. We are looking for new models that take advantage of video, app, and wearable technologies to provide remote fitness training. Peloton, Tempo, Whoop, Apple Fitness +, and others are examples in this category, which we believe has room for significant expansion.
We believe the fitness market is not one size fits all but rather segmented by budget, goal, lifestyle, and location. The essential characteristics of a successful platform is to motivate and make the training comfortable while showing the results and thus closing the loop for the consumer's effort.
We are more interested in equipment-light models that don't require significant investments from consumers and are also available to large swaths of income groups. Using a few wearables and minimal equipment, with the right content and mix of automated, group, and individualized training, a company can achieve significant market share.
Within the enterprise market, we believe Cloud adoption has clearly defined the next areas of growth. We are specifically interested in three segments:
1. Cloud Data Platforms. We believe that there are opportunities in this space to disrupt the on-premises data platform vendors by building these solutions as SaaS applications on top of the IaaS services of public cloud platforms. For example, Snowflake is disrupting the data warehouse market by creating a Teradata equivalent product package as SaaS. The advantages are that both the initial costs of engagement and the development costs are significantly lower given the public cloud services' leverage.
2. Collaboration Tools. Given the mass adoption of remote work, there is an enormous untapped opportunity for integrated platform plays. Current tools are often disjointed and requiring a lock-in to a vendor's platform. We believe there is a white space for an independent vendor to create a comprehensive platform for collaboration leveraging AI/ML to improve productivity, efficiency, and allow analytics to measure remote workers.
3. Bio-informatics Data Platforms. We have observed that the majority of bio-informatics platforms are proprietary and vendor-specific. Given the rise of gene sequencing and the massive data sets created, we believe there is an opportunity for an open and extensible platform optimized for the storage and data mining of genomic data.
EdTech and Re-training
We believe online education, as well as specific job training (beyond the usual STEM categories), is not only crucial but will be in high demand over the next ten years as we transition from a mostly service industry to a more automated and cloud-based models. We are looking for new platforms such as Income Share Agreements (ISAs) and the next generation of online teaching models that target re-training the labor force for new jobs.
We also believe that the existing EdTech platforms are inadequate and need more collaborative elements within the Learning Management Systems (LMS). One area that we recently invested in is peer-review and collaborative content creation provided by Canada-based Kritik.