In 2023, we witnessed continued economic disruption marked by aggressive Fed action, recession fears, a fragile banking system, tech sector turbulence, equity market confusion, increased regulation for the private markets and record amounts of dry powder sitting on the sidelines. Meanwhile, we also saw transformational developments in areas like Generative AI. Furthermore, investors and entrepreneurs reckoned with the new normal, adopting greater discipline, with a renewed emphasis on profitability and resiliency as opposed to growth at all costs.
Against this backdrop, FTV Capital proudly celebrated 25 years of fostering long-term partnerships with innovative, high-growth companies. Our commitment to driving exceptional outcomes is reflected in our collaborative approach and distinctive growth equity model – what we call “powering growth together.”
Looking ahead, we maintain our consistent, disciplined focus on high-caliber companies that can endure cycles due to robust financial profiles, predictable revenue models, mission critical value propositions and highly motivated management teams. As growth investors, we are rational optimists, uncovering opportunities and innovations in expansive markets to deliver tangible results for customers and exceptional outcomes for our limited partners.
As we head into 2024, here are some of our team’s insights and expectations for this year.
MARKETS, INVESTING AND FUNDRAISING
Brad Bernstein, managing partner
Even with the market rallying, a plethora of undervalued small cap companies remain that will seek public-to-private deals.
This presents a promising opportunity, particularly for software companies that went public during the peak of the market but now find themselves disenchanted with being public or with waning conviction from their shareholders. These are still exceptional companies, and going private means they can better strategize for their next phase of growth and achieve their long-term objectives.
The private market will retain its barbell shape.
In 2024, the best companies with strong fundamentals and differentiated offerings will continue to earn premium valuations, while average companies struggle to get interest at levels that attract sellers. Consider that 75 percent of the public SaaS universe continues to trade at under 5x next twelve months revenue, continuing the slump we’ve seen over the past few years.
Valuations have bottomed out, but there are more flat and down rounds to come.
The number of venture-backed companies that need funding will grow meaningfully in 2024 with many having to restructure or accept a down round. We’ve reached the bottom in valuation, and we’ll see an upswing now that the terminal rate has been achieved. Flat and down rounds have been steadily rising since the first half of 2022 when the venture industry faced its great reckoning.
Karen Derr Gilbert, partner
LPs will be more selective than ever when choosing GPs.
Now that the investing environment has changed significantly, GP selection is going to be more important than ever for LPs. In the past decade’s low interest rate environment, making money was easy for many. Going forward, GPs that have a differentiated strategy (especially those focused on companies growing organically and generating cash flow) with a proven track record through multiple economic cycles will top the list for re-ups and new commitments.
Mike Vostrizansky, partner
Insurtech deal volume will hasten, specifically in scaled platforms in B2B services.
Following the recent lull in insurtech deal volume, this year, expect a robust resurgence with a higher concentration in scaled B2B platforms with a proven track record of solid unit economics. While distribution challengers who continue to burn will continue to face fundraising headwinds, insiders will be forced to come to the table to provide bridges or be forced to sell in a less attractive market. New capital is likely to proceed cautiously due to lingering inflationary concerns and the hard reinsurance market.
Automation will continue to force the insurtech landscape to evolve, setting the stage for strong market growth in 2025.
Anticipate a transformative shift in 2024 for adopters, as underwriting tools and customer engagement solutions embrace increased automation through AI integration and further adoption of broader RPA solutions. This automation will drive higher margins and generate industry-wide debate over its sustainability vis-a-vis pricing pressure in competitive markets/solutions – but this automation-driven margin improvement will only gain further traction in 2025 and beyond.
Adam Hallquist, principal
Every dollar invested in back-office efficiency will pay itself back several times.
To enhance growth in a challenging environment, RIAs will prioritize streamlined operations, particularly in areas like back office, aiming to boost revenue without a proportional increase in expenses. Prioritizing user-centric innovations, such as efficient upgrades, third-party collaborations, and seamless integrations will be more impactful than pursuing flashy initiatives.
AI isn’t a silver bullet for successful wealthtech solutions in the coming year.
While advancements in technologies like AI and data analytics are undoubtedly intriguing and crucial, their impact on wealthtech solutions in the upcoming year will be minimal. This is because their potential is constrained when applied to automate inefficient processes or analyze unreliable data within wealthtech systems. In order for wealthtech solutions to gain a competitive edge, a more nuanced approach is required – one that goes beyond the mere adoption of cutting-edge technologies and focuses on addressing the underlying issues of poor processes and unreliable data. This nuanced strategy will unlock the full potential of technological advancements and ensuring their meaningful integration into wealth management solutions.
Robert Anderson, partner
Payments will continue to be one of the most exciting areas of fintech.
The size, scale and complexity of the global payments industry will drive continued innovation. For 2024, expect greater adoption of “lower cost” payment options across enterprise payment use cases, such as account-to-account payments (A2A), real-time payments (RTP), PIX, etc., and the adoption rate of contactless payment volumes to continue to accelerate for point-of-sale transactions.
The payments sector will see a surge in M&A activity.
We should expect a significant uptick in M&A and financing activity for the payments sector in 2024, driven by renewed investor confidence, strong corporate balance sheets and a more favorable economic backdrop. Companies that tap into trends around digital transformation, automation and efficiency across segments such as cross-border e-commerce, vertical software and payments, and business-to-business (B2B) payments will continue to be in high demand.
INFORMATION AND DATA SERVICES
Jerome Hershey, principal
Market volatility will enhance GRC’s criticality.
Continued fluctuations in interest rates, geopolitical instability and forthcoming elections in the U.S. and U.K. will further drive the value proposition for companies in the governance, risk and compliance sectors. In particular, we see opportunities for businesses providing insights around macroeconomic conditions, AML/KYC and operational risk. These companies help clients manage risk across the value chain, from initial customer touchpoint to the back office.
The explosion of data in the energy market will necessitate new solutions.
The global, renewable energy market is massive and estimated to be quickly approaching $1 trillion in size. The tailwinds around solar, wind and hydropower create unique opportunities for companies that help customers aggregate, process and analyze the vast quantum of data generated in this ecosystem. Vendors providing data and insights around renewable energy prices, consumption and infrastructure will see market share gains.
Alex Malvone, principal
Digital transformation initiatives will increasingly focus on AI/GenAI use cases that can demonstrate ROI.
This year, CIOs will emphasize digital transformation, with a particular focus on integrating AI and generative AI into their organization’s strategy. Leading CIOs will avoid shiny objects and maintain a strategic focus on technologies that generate significant value for their company, especially those that automate and improve critical areas like sales and customer experiences. Generative AI can significantly contribute to streamlining operations, enhancing efficiency and fostering innovation within an organization, but it will be important to prioritize the opportunities that can prove out their productivity impact and time-to-value. CIOs will increasingly adopt a data-driven approach to assess the real impact of technologies on business processes.
Integrating new technology will mean overcoming the hurdle of operationalization at scale.
Making technology accessible for business users and driving impact without overwhelming IT involvement will become more and more the norm for adopting new technology within an organization. Thus, we’ll see more organizations partnering with tech providers offering low code/no code platforms to facilitate the operationalization of technology at scale.
Kapil Venkatachalam, partner
Leveraging GenAI will become a necessity for HR leaders to drive productivity.
By automating many HR tasks and providing intelligent assistance, generative AI will free up HR leaders to focus on more strategic activities. Some of the important areas where there will be impact include recruitment, employee recognition and engagement, performance management and HR service delivery.
A one-size-fits-all approach to workforce management will no longer suffice.
With organizations facing talent challenges, expanding workforce management to incorporate more diverse and disparate sources of capability will increase in 2024. These factors, combined with the perpetual skills gaps will require a more flexible approach to planning, sourcing, hiring and deploying talent.
Kapil Venkatachalam, partner
Merging online and offline shopping experiences will be table stakes.
Seamless integration of online and offline shopping experiences will become more important and table stakes (ex. better product visualization online, guided store experiences via apps in stores). In addition, businesses are re-imaging their use of in-store space, which are transforming into more experiential hubs, building brand affinity and community (ex. fitness apparel stores hosting running clubs).
Retailers will leverage AI beyond the obvious (e.g. customer support) in core areas such as inventory and supply chain.
While conversational AI is a natural use case in retail, we will see AI being used in other areas like inventory management, merchandising and other core retail areas. There’s a lot of chatter around AI for customer support use cases, but the breadth of where it will fit in is much wider. This is particularly true with inventory and supply chain as retailers look to optimize increasingly complex supply chains with greater end channels (online, in-store, micro-fillment, wholesale, etc.) while concurrently trying to keep up with sustainability / ESG requirements and manage costs.
Alex Mason, partner
AI will take (some of) the pain out of Revenue Cycle Management (RCM).
Anticipated advancements in RCM software are expected in 2024. The cycle starts with a patient appointment and concludes when the provider receives full payment. Despite its apparent simplicity, the RCM process is intricate, involving various administrative and clinical tasks, medical coding, claims processing, billing, network authorization, reimbursement rules, and payment collection. This complexity, spanning multiple stakeholders and care settings, results in instances where providers either receive partial payments or face challenges in obtaining payment.
Healthtech will blur the line between employers and insurers.
In the U.S., more than two-thirds of individuals obtain health insurance from their employers, with 80 percent of large employers opting for self-insurance. In essence, this implies that employers bear the financial risk associated with healthcare expenses.
Value-based payments will get operationalized.
In recent years, health insurers have increasingly embraced value-based payments. Rather than relying solely on fee-for-service, providers now receive higher payouts for positive patient outcomes. This incentivizes health groups to prioritize excellent care over profiting from unnecessary visits and procedures.
- Why We Invested