Venture Capital

EQUIAM Sector Assessment: August 2022

September 15, 2022

EQUIAM’s proprietary selection model is a systematic and data-driven model that ranks thousands of growth and late-stage private companies using 90+ proprietary investment signals derived from over 60 million data points. Each month, we generate a comprehensive ranking of our private company universe and thus can construct a real-time sector ranking based on the underlying constituents.

After performing our August analysis of private sector performance, we have highlighted a strong performing sector (HRTech) & a weaker performing sector (Real Estate Technology / Proptech).

HRTech sector constituents scored well due to:

  • High Capital Usage Efficiency, market share capture, and ultimately, value creation
  • Good hiring growth, positive internal and external sentiment
  • Attractive valuation metrics (e.g. EV/Rev) and growth-adjusted valuation metrics (e.g., EV/Rev/Growth)

On the other hand, the Real Estate Technology constituents displayed poor scores in each of the three above signal buckets, which contributed to the sector, in general, ranking as one of our worst performing sectors.

In the chart below, we highlight HRTech sector constituents that scored highest on the metrics laid out above, positively contributing to the sector’s overall rank. The opposite holds true for the Real Estate Technology companies shown.

HRTech Overview:

The COVID pandemic caused a tectonic shift in the HRTech sector as companies were suddenly forced to reckon with a distributed workforce. Software previously thought of as a nice to have became a need to have: how to manage remote employees, keep track of people data, and how to keep remote employees happy.

Much of the dynamism and innovation in the space is happening with private companies. The public sector HRTech companies tend to be slow growth legacy systems and once dynamic and high growth public companies like Cornerstone OnDemand have been picked up by Private Equity firms. Public EV/Revenue multiples tend to reflect the slower growth of the public companies, ranging from 3.0x — 6.0x revenue for legacy slow growth companies and 8.0x — 15.0x for the newer faster growing public companies (i.e Paycor, Paylocity, Ceridian). Whereas private companies EV/Revenue multiples are 10.0x — 20.0x+, reflecting the higher growth potential. It is not uncommon for the private HRTech companies in the EQUIAM GENIUS model to be projected to grow revenue at 50%+. From an EV/Rev/Growth perspective and the runway of a large TAM, we believe there are ample opportunities within the private HRTech space.

HRTech companies also generally score highly on EQUIAM’s proprietary Cancer Signal, a measure of combining employee growth, revenue growth, and profitability to filter companies growing at a sustainable rate. Many of the HRTech companies in EQUIAM’s GENIUS model score are in the top quartile of the Cancer Signal suggesting companies in the HRTech sector are poised to grow into their valuations and ultimately reach profitability.

The VC market is putting a premium on private HRTech companies due to the tremendous growth potential of the sector, large TAM, and ample opportunity for specialization, for example software tailored to the entertainment industry (Wrapbook) or hospitality industry (7Shifts). High scores for valuation, Capital Usage Efficiency, and employee sentiment and hiring metrics suggest outperformance within the HRTech sector.

While overall funding is down in the sector compared to 2021, not surprising given the current macroeconomic environment, the HRTech sector remains resilient with over $9.5 billion of capital raised YTD. As a sign of the strength of the sector, post-money valuation, post-money step-ups in valuation, and deal sizes showed an increase year over year.

Real Estate Technology Overview:

Adam Neumann’s latest venture, Flow, raised $350 million from Andreesson Horowtiz, their largest single check ever. Just another sign that the Real Estate Technology sector is still attracting large amounts of capital with hundreds of companies across all different parts of the real estate value chain (homebuying, renting, short-term rentals, property management, new home building technology, etc.). Whereas the private sector continues to attract capital, public companies in the space have struggled with many of the class of 2020 and 2021 IPOs like Compass, Opendoor, Zillow, Matterport, Sonder 70%+ off their highs and IPO prices and facing severe headwinds with a real estate market under pressure and mortgage rates not seen since 2008.

Given the lack of any profitable operating history and path to profitability for some of the companies, it is no surprise that multiples have been quite depressed for the sector. Many are valued at less than 2.0x revenue, and some companies like Compass and Zillow are valued at or less than 1.0x revenue. The industry also tends to be very capital inefficient, raising large sums of money with often little to show in terms of revenue growth, profitability or increase in valuation.

Our data shows much higher multiples in the private sector with many companies valued at 20x+ revenue (with a few below 10.0x), based on most recent price marks (many of which are now several months stale). This difference displays an obvious disconnect between the private and public markets that likely spells trouble going forward for private Real Estate technology companies. The data also shows a sharp slowdown in hiring and layoffs in the sector with some companies paring down operations or real estate buying activities. Given the premium these companies are currently valued at and their poor ranking in our GENIUS model, EQUIAM is less enthusiastic about the near/midterm prospects of the sector.

Disclaimer: This content is provided for informational purposes only, and should not be relied upon as legal, business, investment, or tax advice. You should consult your own advisers as to those matters. References to any securities are for illustrative purposes only, and do not constitute an investment recommendation or offer to provide investment advisory services. Furthermore, this content is not directed at nor intended for use by any investors or prospective investors, and may not under any circumstances be relied upon when making a decision to invest in any fund managed by EQUIAM LLC (an offering to invest in an EQUIAM LLC fund will be made only by the private placement memorandum, subscription agreement, and other relevant documentation of any such fund and should be read in their entirety). Charts and graphs provided within are for informational purposes solely and should not be relied upon when making any investment decision. The content speaks only as of the date indicated. Any projections, estimates, forecasts, targets, prospects, and/or opinions expressed in these materials are subject to change without notice and may differ or be contrary to opinions expressed by others.

Shachi Shah

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