// We are Thesis-Driven with Thematic Elements.
>> At āltitude, we focus on early-stage B2B software technologies targeting SMEs, as we recognize the pressing need to bridge the growing Tech Gap. <<
We envision a remarkable opportunity to invest in scalable solutions that address the automation and sustainability requirements of SMEs. To guide our investment decisions, we have identified a “Magic Quadrant”, where the B2B software providers we are targeting reside — the very place where we can find our metaphorical Cerberus, the magical three-headed dog from Greek Mythology.
In our context, Cerberus symbolises successful B2B software solutions that target SME customers but might have the potential to address Enterprise clients as well. The significance of small and medium-sized enterprises cannot be understated. Globally, they constitute 90% of businesses, contribute to two-thirds of job creation, and play a vital role in the seamless operation of global supply chains. Projections indicate that SMEs will experience a compound annual growth rate of 7.5% between 2022 and 2027, with IT spending on cloud-based categories expected to surge from USD 600 billion in 2022 to USD 1.0 trillion in 2027.
Importantly, this timeframe aligns with the duration of our fund. Governments worldwide recognize the need to foster SME development, as approximately 600 million jobs will be required by 2030 to accommodate the expanding global workforce. Consequently, SMEs have become a high priority for many governments. Despite their immense impact, however, a significant number of SMEs have yet to fully engage with environmental, social, and governance topics.
This is primarily due to their lack of knowledge, access to appropriate technology, educational resources, and the necessary mindset to initiate such efforts. Considering the mounting regulatory pressure, addressing these challenges is likely to become a priority in the near term. Additionally, SMEs are grappling with their digital and sustainable transformation endeavours, particularly in adopting automation technologies that enable their core business to remain competitive in the market.
// The Cerberus is our Holy Grail of Investments.
>> We aim to become the missing link to successfully master the SME challenges of the next decade. <<
In our classification, we consider SMEs with 20 to 1,000 employees and annual revenues of up to EUR 500 million as our sweet spot. These businesses face a range of challenges that they must overcome to maintain a competitive edge in the market.
/ Value- and Supply Chain Management
One crucial area where we expect to witness the emergence of technological solutions is in Value- and Supply Chain Management. The effective management of these chains is vital for organisational success, as it directly impacts productivity and profitability.
/ Leverage Software
However, SMEs often have limited financial resources and a shortage of qualified staff to oversee the entire process. Therefore, it is essential for them to leverage software that can minimise errors and inefficiencies, enhance transparency, and enable proactive measures and corrective actions.
/ Efficiency
Improving resource efficiency is another key aspect for SMEs. By maximising the output of available resources without risking overuse, businesses can achieve a Pareto optimum. To achieve this, SMEs need to gain insights and implement measures that enhance both productivity, profitability, and the sustainability of their processes.
/ HR - D&I
SMEs also face challenges in the realm of Human Resources, Diversity, and Inclusion. Skilled labour shortages, increased competition for talent, and a new generation of workers with higher expectations present unique hurdles for these businesses. The solution lies in adopting an employee-centric approach that fosters a positive and inclusive workplace culture, improves the overall employee experience, and aligns with the values and sustainability concerns of millennials and Gen Z employees.
Employees increasingly seek clarity on their employer’s ESG policy and its alignment with the organisation’s mission and values. ESG regulations loom on the horizon, with many larger SMEs expected to comply with EU regulations such as the Corporate Sustainability Reporting Directive (CSRD) and the EU Taxonomy Regulation by 2026. Ignoring these impending regulatory burdens is counterproductive.
/ ESG Compliance
Proper management and reporting of ESG requirements can be resource-intensive, making it crucial for companies to gain transparency regarding their social and environmental footprint. Effective implementation necessitates a top-down and bottom-up process that engages management and employees in unison. To avoid excessive bureaucracy and the need for costly experts or management consultancies, SMEs should embrace best practices and leverage appropriate tools.
/ Productivity
Productivity improvement is often hindered by a lack of measuring processes in SMEs. This is frequently linked to a lack of process digitization. When data cannot be readily prepared, analysed, and evaluated due to paper-based systems or outdated software, decision-making relies more on experience or intuition rather than timely quantitative data.
/ Process Optimisation
As ambitious competitors catch up, SMEs cannot afford to shy away from digitization in the near future. Process optimization ties together the aforementioned challenges, gaining even greater significance in a dynamically evolving environment. Technological advancements, upcoming regulatory requirements, new competitors, economic downturns, and macroeconomic factors necessitate constant observation, analysis, questioning, and to some extent, automation of processes. The foundation for this lies in digitalization.
>> Organisations that fail to embrace digital transformation risk losing relevance and eventually disappearing. We firmly believe that these digital transformation challenges can be conquered through the adoption of automation and sustainability technologies. <<
These are the thematic elements we incorporated:
/ Automation Technologies
Artificial intelligence, process automation, cloud / data intelligence, no code & low code solutions and workflow technologies pay into solving most of the pressing challenges such as (i) value and supply chain (ii) hiring / D&I (iii) process optimization.
/ Sustainability Technologies
Decarbonization, energy & renewables, mobility & logistics, water and wastage and ESG management primarily pay into solving (i) ESG regulations (ii) productivity (iii) resource efficiency.
/ The Interconnection
Notwithstanding, both automation and sustainability technologies have a strong interconnection with various dependencies, such as (i) artificial intelligence & water and wastage (ii) data intelligence & decarbonization (iii) workflow technology & ESG management, among many others.
// The SME Tech Gap is Real and Underserved.
>> We believe that great B2B technology startups start with SMEs as their primary target customer and either succeed in capturing massive market shares as an SME solution or grow into fully fledged enterprise solutions over time. <<
That’s why we are deeply in love with identifying Cerberus startups, tomorrow’s SME B2B software outliers.
In the current macroeconomic climate, technology has become a crucial factor for survival, determining future growth and competitiveness for many businesses. SMEs are being compelled to undergo digital and sustainable transformation, leading to a rise in early-stage startups addressing their specific challenges.
Traditionally, VCs have exhibited reluctance to invest in the SME segment, citing various reasons such as:
/ Perceived small total addressable market (TAM)
/ Insufficient terminal value to justify the fund size
/ Assumptions of high churn rates with low return on investment (ROI)
/ Concerns about SME spending during economic downturns
/ Longer sales cycles compared to consumer products, but shorter than enterprise sales cycles
Here is a comparison illustrating how investors have traditionally perceived Consumer, SME, and Enterprise solutions:
However, we believe that significant market drivers are already in motion, and there is a misapprehension about the most attractive type of SME customers for the next decade:
/ Digitally native SME ownership
The majority of entrepreneurs are in their forties to fifties, with small business employer owners and co-owners primarily falling within the 35 to 44 (25%), 45 to 54 (31%), and 55 to 64 (26%) age categories. Over the next decade, a new generation of business owners will emerge.
/ Varying levels of churn
While the smallest businesses may experience churn rates of 3% per month or higher, mid-size SMEs exhibit almost zero net churn, considering both upgrades and downgrades, as well as cancellations (Quick-Ratio). Thus, having a balance of larger SME clients can prove to be a viable and lucrative business model. For example, a verticalized solution that caters to both SMEs and specific departments within enterprises.
/ Job losses and evolving sentiments toward the future of work
Economic downturns often give rise to new entrepreneurs identifying promising market gaps and new multi-billion market opportunities.
/ Dominance of Infrastructure as a Service
The retail sector has already witnessed the significant impact of IaaS through platforms like Shopify and Etsy.
/ Opportunities for upselling and geographical diversification
By understanding these changing dynamics and seizing the opportunities they present, we can bridge the SME tech gap and enable the growth and success of SME-focused software start-ups.
/ Emergence of new technologies
New technologies such as generative AI, to name one of the most popular at the moment, are transforming businesses and giving them an unmatched advantage over those companies that are resistant to change. This pressure is increasingly leading to either adapting or becoming uncompetitive.
/ Opportunities for upselling and geographical diversification
By understanding these changing dynamics and seizing the opportunities they present, we can bridge the SME tech gap and enable the growth and success of SME-focused software start-ups.
>> At āltitude we believe that the market perception of investing into startups targeting SMEs is changing, driven by factors such as digitally native SME ownership, varying levels of churn, job losses, dominance of infrastructure as a service, emergence of new technologies, and opportunities for upselling and geographical diversification. <<
Overall, we aim to be at the forefront of closing the SME tech gap through investing into automation and sustainability technologies, leveraging our innovative early-stage investment strategies combining collaborative investing with lead ticket, as well as our unique dealflow approach via Open Angel, Trojan Network, and Maven Networks.
