The Digitization Dilemma and Investing in a Pandemic Era

Insights from Greg Vanclief, Managing Director, Global Investments, at Wesley Clover International

Greg Vanclief is Managing Director, Global Investments, at Wesley Clover. His mandate extends to the Alacrity Global programs, which were initiated and continue to be evolved by Wesley Clover. Following his appearance as a panelist at the recent “Canada Week 2020 – Investor Panel” virtual conference, hosted by NASSCOM (the National Association of Software and Service Companies) and Canada’s Trade Commissioner Service, we caught up with Greg to discuss some of his observations about how COVID-19 has impacted businesses and reshaped how investors evaluate companies today and how they may beyond the pandemic.

Greg, to start off, what have we learned during the COVID-19 pandemic?

COVID-19 has changed everything. It changed the world as we knew it, as we know it, and as it will be in the future. The rapid transition to remote work models has driven digitization of operations in businesses large and small at an unprecedented pace. The simultaneous shift to shop-from-home, by both consumers and corporate clients, has also added complexity and forced change to the commercial operations of many companies.

These digitization initiatives are driving and accelerating change on several fronts, including cost-oriented process automation, cloud IT migration, workforce optimization, customer experience automation and adoption of digital business models overall. The market for ‘digital transformation’ products and services was already projected to grow at a rate of more than 20% annually, reaching US$3.3B by 2025, but it is safe to say those projections are now being revised upwards.

What advice do you give companies in your portfolio?

We encourage them to think about this as an opportunity, to adapt quickly, identify and seize new market and product offerings, and emerge as a stronger company as a result.

Research from McKinsey and Company says that any digitization strategy should encourage cross-functional collaboration. And once these internal walls are brought down, they must be kept down. The full digitization of a business literally touches every process inside and out – changing the ways employees communicate, design decisions are made, code is delivered, all the way through to how customers discover you, make their buying decision, and get onboarded and supported.

Has COVID-19 changed how Wesley Clover, as investors, looks at businesses in which to invest?

Yes, most certainly. In this climate, a much higher proportion of our available capital has had to be reserved to ensure that we can continue to support the companies that we are currently invested in for the duration of this pandemic. This can mean preparing for as much as 24 months of cash runway.

How those funds are allocated has also become much more heavily weighted toward businesses that have embraced the moment and taken proactive steps to not just survive – although that is important – but, more importantly, to adapt and accelerate.

Have there been any changes to due diligence and investment processes?

Yes, since the pandemic hit, we can no longer depend on meeting entrepreneurs and their companies in person. Instead, our Investment Committees are meeting remotely, and we are spending much more time and attention on researching and vetting opportunities. Our work on comparable analyses and valuations has become even more detailed and rigorous. And our funding models have adapted to include more convertible debt and internal rounds to delay repricing.

What about your definition of a good exit, has that changed?

We learned through this COVID-19 crisis that, as investors, we need to invest less overall cash, but place it into more capital-efficient, flexible and dynamic businesses. The likelihood of a successful exit is expected to be greater as a result. Instead of chasing unicorns, the focus is on value-based profitable exits.

What affect has all this had on your overall longer-term strategy?

The collapse of the WeWork IPO last year and the role played by SoftBank and others in pumping up the expected valuations is a great example. It highlights the fact that many large VCs are now facing, in some cases, considerable write-downs on the valuations of their portfolios. Obviously, this has made many limited partners unhappy, and they are hesitant to continue an approach of investing in the large, VC-funded, late-stage asset class.

That’s one of the reasons we, at Wesley Clover, find the small fund, early-stage asset class attractive. We believe in being part of the value creation and market growth as the basis for stable valuations in our investments as opposed to depending on market hype and inflated industry multiples to prop up less justifiable valuations without a clear path to profitability.

Any final advice you would like to share, Greg?

If you haven’t already, use this pandemic time to become a flexible, responsive, digitized business to emerge from the downturn stronger as a company and more valuable as an investment. Adopt a culture of change!

Greg Vanclief has spent more than two decades in executive roles with tech companies and as an investor and portfolio manager. Today, he serves as the Managing Director of Global Investment for Wesley Clover. As a member of the Wesley Clover Investment Committee, Greg is responsible for portfolio management and new investments, and holds Directorships with a number of the investee firms. In particular, Greg develops and manages investment opportunities in global markets under the Alacrity brand, and leads international business development for portfolio companies.