M13’s Investment Thesis: Emerging Technologies Improving Daily Living
Our purpose at M13 allows us to find and nurture the bright spots within global challenges. We reflect on the 20th-century economist Joseph Schumpeter and his assertion that adversity like this will generate positive innovations. As in preceding macro crises, entrepreneurs have been inspired to create, and that has resulted in the next generation of truly iconic and beloved brands and business models that become part of the fabric of our daily lives and help make them easier and more fulfilling.
M13’s investment thesis is predicated on understanding changing consumer behavior, and we invest in companies that are building defensible businesses around these emerging behaviors. We believe pureplay direct-to-consumer companies have become commoditized due to paid marketing challenges; instead we look for businesses that have some technology or product differentiation and can generate network effects.
Two-thirds of consumers’ wallets are spent on health, food, housing and personal finance – the core areas of focus where M13’s partners have deep track records. Our focus on consumer wallet share is both in the established areas of recurring spend (e.g., pharmacy, housing) and in the growing discretionary areas we believe are integral to consumer behavior over the longer term (e.g., eSports, mental wellness).
We often ask ourselves: What are “nice to haves” today that will become “need to haves” tomorrow? We seek out and invest in founders who are driving this transformation and then use M13’s Propulsion Platform of vertically-focused operating partners to help them accelerate their businesses (e.g., achieving product market fit faster) and increase the probability of success.
How we see COVID-19 changing consumer behaviors
The sudden and acute health and economic crises resulting from COVID-19 are catalyzing consumer behavior changes today and will create new behaviors in the future. As investors, part of our job is to assess the timing and scale of these changes. Are there areas that were previously heavily invested in but that will now be ready for rapid adoption? What are the secondary and tertiary ripple effects of supply and demand shocks driven by this unique environment?
The changes associated with COVID-19 have been immediate and will be long lasting. Almost instantly, our day-to-day lives look radically different. We think about the way people’s routines, options and ways of doing things have been upended and where the white spaces for new necessities and innovation will be. Families are spending more time together, which may create interesting outcomes, such as: more babies, more divorces, a reversal in urbanization trends and away from cities and urban environments. Prolonged uncertainty, health fears and social distancing may also lead to increased mental health issues. New habits are forming – both good (e.g., healthy eating, meditation / mindfulness, fitness) and bad (e.g., substance abuse) – which will continue long after shelter-in-place restrictions have ended.
Office culture is now just culture. Teams have found ways to be productive in their individual homes across disparate locations, and that may fuel the growth of remote teams and the greater acceptance of work-from-home paradigms. Increased remote work can drive labor efficiencies, and those efficiencies, including mitigating or obviating commuting times, will drive potential redistribution of our scarcest asset: time. Consumers may then spend this time connecting with friends and family virtually which could evolve into people meeting new friends entirely online, potentially on new platforms that facilitate the feeling of more authentic human connections. Or perhaps that additional time will be used to find creative ways to generate additional income, drive new forms of entrepreneurship or consume novel forms of entertainment.
We believe safety (both physical and digital) will be prioritized over privacy. Higher unemployment – expected by some to be greater than 20% – will drive further expansion of the gig economy but with a greater focus on the rights of workers. Consumers will have less disposable income for the foreseeable future, which should further drive utilization models on both the supply and demand side. Consumers and businesses will both have a finer appreciation for data leading to an increased focus on measurement and the quantified self.
E-commerce penetration will accelerate. Online retail sales are currently at 16% worldwide and have grown at a CAGR of 20% over the last three years.
1 This should bolster Amazon’s position and also open up opportunities for brands driving significant utility to specific communities. Within six months, the monthly revenues of the best performing e-commerce companies are 68% greater than their lower-performing counterparts.
2 We expect that spread to widen even further in this macro environment.
While globalization is a positive long-term trend, we are also concerned there will be short-term challenges driven by nationalist leaders globally who now find additional rationale to close their borders and increase their authoritarian methods. That will continue to hurt cross border trade. Efficiencies driven by decades of supply chain optimization and low-cost labor markets, such as in China, may also adjust, driving up operating costs, the price of goods and global inflation.
There is a lot to consider and monitor on an individual, societal and global basis, and these factors will undoubtedly serve as the basis for our investment focus going forward. Changing behavioral dynamics are creating potentially unique and unprecedented investable opportunities, and we are exploring those both within specific and across multiple sectors.
We expect emerging technologies will accelerate changes across multiple sectors, as these technologies are focused on driving stronger human connections, creating greater efficiencies and allowing people to “take a break” from their current environments. These technologies include:
- Voice: As both a synchronous and asynchronous communication channel, voice is more emotive and faster than text. It can be leveraged for work or family, for 1:1 groups, and for 1:many (broadcasting) communications.
- Tele-presence: To support remote work, enterprises will move away from the VPN model and towards increased security. So, who will evolve Zoom? Will display and tactile capabilities become more advanced?
- AR/VR 2.0: Will there be a resurgence in AR and VR as consumers travel less and desire other ways to escape or have new experiences?
Consumer staples that impact consumers every day
Below are some themes in M13’s areas of focus:
- Verticalized telehealth and “telewellness”: Hyper-focused communities and specialists ranging from mental health and addiction to skin care and spiritual groups
- Medical testing & redefining the annual checkup: More frequent testing (including expanded testing for antibodies) with a need for and focus on data and benchmarks
- Digital health records: Consumers will want to control their records and easily access and share them
- Evolution of mindfulness and meditation: Will require new methods to improve compliance and demonstrate results
Housing & Real Estate:
- Shift in location and drive towards ownership: Consumers seeking out greater stability could mean a swing back to suburbs/rural areas and ownership instead of renting
- Creative ownership models: Rates are all time low, but there is less disposable income
- Greater focus on DIY: Home improvement and gardening
- Repurposed commercial real estate market: The results of working from home, WeWork implosion and increased e-commerce will drive down yields
- Tipping point for food and grocery delivery: Consumers who haven’t adopted delivery before are now unlikely to switch back given the convenience and safety aspects. Online grocery penetration of 4.5% is expected to increase to 12% by 2025 – and likely will be reached sooner. Expect significant disruption in restaurant supply chain / infrastructure, with continued increase in cloud kitchens, delivery-only restaurant brands, and wholesalers directly connecting to consumers
- Consumers looking for value: Expect consumers to trade down from restaurant meals to fast casual and from fast casual to fast food. Coupon clipping, value packs, private label will increase
- Increased health concerns: Greater awareness of food safety, an accelerating shift to plant based foods, and the need for long shelf life may change what consumers buy
- Increased focus on healthy eating: Desire to move away from poor eating habits as consumers seek out digital nutrition counseling, calorie tracking and new diets
- Acceleration of homeschooling: Homeschooling had nearly tripled over the last 20 years and 2.5M students were homeschooled in 2019. Currently, 3% of parents homeschool their children yet over 10% would prefer to. We expect the homeschooling trend to amplify going forward
- Accessibility and new formats: New software tools will connect teachers with parents/students and educational content and games will see increased usage
- Rise of vocational schools: Unemployment will drive the need for re-training. Small college closures may mean the cost of and access to a four-year degree becomes even harder, pushing more students toward vocational training
- Fitness: Connected devices and online fitness will see increased adoption. Will employers / insurance begin reimbursing for these services?
- Video gaming: Increase in number of people playing and shift back to console and desktop games vs. mobile / casual
- Short- to medium-term decline in air travel: May result in an increase in road trips. Conferences and trade shows that go virtual may broaden their roster of non-in-person events, even after quarantines are over
We look forward to continuing to invest in the next generation of household names. If you would like to learn more about M13, please contact us at firstname.lastname@example.org.