As COVID-19 pandemic forced retailers to move to online marketplaces, this major shift has increased competition in the online economy in the twinkling of an eye. We have witnessed a phenomenal rise in independent brands and sellers jumping into the eCommerce sphere during the extremely long two years of the pandemic.
Throughout the transformation, the emerging e-commerce landscape presents a number of obstacles that prevent both consumers and merchants from taking full benefit of internet shopping.
That’s where Activant Capital appeared at entrepreneurs’ side to tackle these adversities. Founded in 2015 by Steve Sarracino, the fund is a global investment firm that partners with high-growth companies that are disrupting commerce.
With a strong track record of successful investments in sectors such as enterprise software, fintech, healthcare IT, marketplaces, and commerce, the firm has backed several unicorns that have gone on to achieve massive success. But few people know the backstage of this extraordinary performance of the firm. This piece of writing will give you a breakdown of how they do it. Let’s read on!
From an Unemployed Guy to the Silent Big Figure behind Problem Solvers
Steve Sarracino was born and raised in Irvine, California. Sarracino’s investing career began when his grandfather taught him how to read stock charts, but officially started its first chapter at Robertson Stephens. He conducted a lot of commerce and payments there, which was unusual at the time. Back then the focus was primarily on merchant acquirers.
Then, he had a summer internship at McKinsey. After that, he served as a vice president for American Capital, a private equity company, where he gained experience by working on buyouts. He also recounted working for Serent Capital, a small venture and private equity company created by two ex-McKinsey partners, in San Francisco.
Right there at this spot, he entered the next chapter in his life. Sarracino said he was fired from his previous position in 2009, and that when he found himself with “literally no job and no prospects” and had “nothing to do.”
Concerned that he might lose any of the momentum he had assembled, he talked with mentors who told him that if he intended to continue with investing, he would better start doing one deal at a time and hope these turned out to be good.
And he actually won. In fact, by 2015, Sarracino had persuaded investors to commit $75 million to Activant’s debut fund.
Steve Sarracino manages his capital firm with a long-term view and under the principle of “We don’t invest in the pail and shovel. We invest in the sandbox.” By focusing on high-growth companies with an active operational approach, he hopes to bridge the gap between venture and traditional growth equity.
Sarracino is the type of person who enjoys competing against slow old incumbents, and he gets the most nervous when things are going well because he believes that’s when you need to be the most vigilant.
He described his professional life as a “long process,” but Activant now sits among venture and growth deals, with a decade investing horizon and a focused approach to taking bets in companies, many of which happen to revolve around e-commerce infrastructure and payments.
Lock Horns with Old Slow Incumbents in Ecommerce
Sarracino appears to believe that Software as a service (SaaS) has been and will proceed to be an excellent business model. However, what is emerging now are value share transactional business models.
“A lot of them are built off the backbones of solid payments or piping infrastructure that allows you to charge based on the number of transactions. A lot of businesses we looked at started out as SaaS,” said the founder of the fund.
But now businesses are transitioning to charging for the amount of premium they’re putting through their system. The model simply allows companies to expand in tandem with customer base. That is why Shopify has grown so rapidly. They simply allowed themselves to expand because they have SaaS and transactional revenue, according to the firm founder.
Shopping shifted almost entirely online during the pandemic, hastening the adoption of SaaS solutions as digital tools by companies looking to increase online product availability and also improve order fulfillment and customer experience.
“The space is blowing up,” he stated. Activant’s primary objective is always about transforming the ecommerce industry, and its movement does align with its statement. Its portfolio is dominated by fintech representations such as Bolt, Deliverr, and Finix, to name a few.
Things are moving rapidly and at a high cost. Behemoths have shifted to the emerging market. However, there are still great opportunities in the game. At the end of the day, Activant’s philosophy is that in order to find the startup that is doing something unique or that no one has done in a long time, they must distinguish between a feature and a platform.
“Can this startup build out a real platform and acquire different types of customers?” Steve Sarracino wondered.
According to the founder, there’s a need that investors need to know these sectors much deeper than ever before.
For an example, if there are 15 companies doing the same thing these days, and to have that degree of trust, funders need to meet with all 15 and pick what they believe is the winning horse, and the final decision based on where the market is going, the quality of the team, and the quality of the product entrepreneurs can build.
In some ways it’s harder to make a distinction, and there are a few possible responses to that. Activant’s method is to pare back to their key sectors that they know well and say no to a lot of stuff that seems really appealing, but they simply won’t be able to run fast enough given the market’s velocity.
The shift to ecommerce has had a significant effect on how we shop, it also has changed the way retailers do their business. Even so, standing in front of this modern method, Activant doesn’t abolish those are the roots of shopping.
Sarracino once shared that, “The way we think about fintech is if you’re going to digitally transform, are you going to enable incumbents to compete and serve customers the way they want to be served today? Or do you crumple it up and throw it out and build from the bottom up as a brand-new way to operate in that industry. We’ve invested in both.”
Activant is constantly on the lookout for foundational infrastructure players who can support the future of commerce. However, Activant’s mission extends beyond making money to assisting small and medium-sized businesses in regaining their footing. This is well explained in the offers when it comes to funding.
Uncommon Investing Mentality That Stunningly Pays Off
The firm prefers to work with founders who have won their first battles and are ready to take on the next challenge. To receive investment from the fund, a startup must be at least 4-5 years old.
When two things come together, the capital starts to invest. For first off, the company has the potential to reach escape velocity and disrupt an entire industry. Second, they believe the founders can lead the company through hypergrowth, and their support increases the likelihood of this success significantly.
The capital started with a focus on technology companies, building ecommerce and retail infrastructure, and has since expanded into logistics, fintech, insurance, and healthcare.
When it comes to the investing process, the fund’s standard practice is to invest in rounds with 5-6 participants. Despite the presence of Activant Capital, startups are often financed by August Capital, Flagship Pioneering, Tribeca Venture Partners.
August Capital, Stephan Schambach, and NGP Capital are significant sponsors for the fund’s investment in the same round. August Capital, NGP Capital, and the Investment Corporation of Dubai typically obtain funds in subsequent rounds (ICD).
The fund has no specific preference for some portfolio startup founders. If a startup has four or more founders, the chances of it being funded are slim.
The firm’s checks typically range between $25 million and $65 million, but the team has gone “as low as $15 million.” Activant will also make $3 million or $4 million investments in young startups that are too early-stage for the outfit but that it wants to track closely.
When asked how much of a stake it wants for its checks, Sarracino said he doesn’t think in terms of targets. Instead, it’s more about “targets returns.” He also said that he doesn’t care if who else is involved in a company before his fund finds it.
Albeit somewhat hard to believe, Sarracino once shared that when the firm is discussing deals, no one is allowed to bring up the information of who invested in a company previously since he doesn’t want a specific brand to influence Activant’s judgement call.
Thanks to its long-term strategy, Activant gets them honor, and especially very significant returns to the capital. Looking at its track record, we can see it all.
Ardent Vision That Broadens the Stream of Abundance
Activant Capital is a well-established venture capital firm that has made 61 investments to date, with a diverse portfolio of successful investments across a range of technology sectors. Their most recent investment was on January 12, 2023, when Welcome Homes raised $29M.
In addition to their regular investments, the fund has also made 9 diversity investments, with their most recent diversity investment being on June 28, 2021, when Harness Wealth raised $15M.
Besides, this backer has had several notable exits, with 7 exits in total, including companies like 98point6, Deliverr, and Turvo. These successful exits highlight the firm’s ability to identify and support companies that are poised for significant growth and success.
In terms of funding, the capital has raised a total of $493M across 10 funds, with their latest being Activant Ventures III, announced on April 7, 2020, which raised a total of $257M.
With over $1.5 billion in assets under management as of March 2023, Activant Capital has the resources and expertise to continue supporting high-growth technology companies and innovative startups in the years ahead.
As mentioned in the previous section, insurance is one of the industries on the list of preferred target industries. In fact, Activant finds the sector especially attractive since it is spending a lot of time in the industry.
Hasten Insurance Distribution Marketplace
It started with a concern from Sarracino.
He once said in an interview that, “It’s like – how do you enable the incumbents to do even better? With a lot of fintech products, the name of the game is customer acquisition.”
He added, “It’s so expensive to acquire customers that if you’ve got a customer acquisition model, you should be able to offer them a bunch of products that are at a really advantageous price and with a great experience. That’s how you’re going to win. But from an investor perspective, the acquisition cost is just so expensive.”
Insurance is a unique industry. Nobody has ever waited in line to buy insurance, but it is an important part of protecting our possessions, interests, and lives.
Insurance companies spend billions of dollars on marketing each year, but nearly 40% of customers who come to buy a policy are turned down. Connectivity is required to unlock the distribution opportunity and enable insurers to always say yes. It necessitates the construction of new infrastructure.
P&C insurers spent $6.7 billion on advertising in 2018, accounting for about 3% of all advertising spending in the United States.
Because insurance is a low frequency purchase with high retention rates, these insurance carriers are willing to spend so much money on marketing. Insurance is one of the few products that almost everyone owns (and in many cases is required by law), resulting in high revenues and massive advertising budgets.
In the insurance industry, owning the customer relationship has always been critical. As the industry shifts toward more digital distribution, the issues of unsatisfied customers and poor experiences become more pronounced, and it has never been more important for insurers to offer more efficient, accessible, and bindable policies online.
That is why capital has poured money into companies that have developed insurance-driven solutions. bolttech is one of them; the startup enables distributing carriers, brokers, and independent agents to seamlessly quote and bind insurance products underwritten by other carriers.
As already mentioned, besides investing in a wide range of sectors, the capital is also a true “nerd” when the capital highly concentrates on building such deep knowledge from what they are doing. This is the driving force behind the launch of Activant Cape Town, an office dedicated to conducting deep research to further the fund’s thesis-driven approach.
Celebrate the Nerdy Club in Cape Town
Since its inception in 2015, Activant has been a thesis-driven firm focused on commerce infrastructure.
But what does “thesis-driven” really mean?
For them, a thesis is a point of view on where the world is going, what it will look like in 5 or 10 years, and what technology will be needed to facilitate – or produce – that shift. It is supported by a foundation of facts that serve as the foundation for making high-conviction investments.
Activant was founded on the belief that the digitization of commerce represented the greatest opportunity of the coming decades, and that they needed to create a firm to invest behind it. Beginning with e-commerce in 2015, they have come to see the value chain as “make, move, sell, and consume.”
They invest up and down the value chain using the thesis approach. The firm believes that if they stay grounded in a thesis, they can make high-conviction investments in founders who share the same vision of where the world is going and are building the companies that will pull the world into that future.
This approach is now more important than ever for capital firms to help them find signal in an increasingly noisy world. They wanted to double down on this work and form a thesis research team. That’s pretty much the motivation behind the office.
The firm decided to open an office in Cape Town because they met incredible people there, beginning with Robert Lamprecht, who brings 25 years of investing experience to the team. JJ Brink and Jono Vickery back him up. The fund is eager to expand its team and go deeper than ever before in its core sectors.