SuperReturn International 2023 is just around the corner, and one of the most poignant themes recurring from recent years (and not looking to slow down) in the investment landscape is the growth in tech investments. We sat down with speaker Huda Al-Lawati, Founder and CEO, Aliph Capital, to discuss tech value creation, what strategies to use for creating better value through tech and how to find the right technologies for your next investments.
Why should you look to tech value creation in your full potential plan/value potential plan?
For most companies the ability to leverage, and take advantage of technology has the potential, if done correctly, to create more value than any other form of investment. No company can survive today without using technology tools, companies using them can keep pace whilst those internalizing technology and putting digital at the centre of their strategies thrive and realize outsized returns. Estimates suggest digital investments generate 6-7x return on investments vs. non-digital investments for any given company.
Technology is constantly changing. For instance, the release of ChatGPT3 and other AI technologies has taken the world by storm with record rates of adoption by the everyday consumer. ChatGPT was able to onboard 100 million active monthly users just 2 months after launch making it the fastest growing consumer application in history. For context, popular social media platforms such as Tik Tok and Instagram reached similar user bases in 9 months and 2.5 years respectively (4.5x as long as ChatGPT on the lower end) signalling not only tech adoption is growing but growing at a faster pace than ever before.
This is a clear signal for businesses to embrace technological implementation throughout their operations and earmark capital investment to better cater to the needs and expectations of consumers, not simply to grow wallet share but at a bare minimum preserve it.
On the backend, the potential for operational efficiency and cost savings is clear, and the return on tech capex dollars is justified, which only serves to increase competition amongst businesses across sectors, making it a minimum requirement to compete.
In GCC this is particularly relevant since the region boasts a digitally advanced consumer, with high internet and smartphone penetration of 82% and 99% in 2020 respectively, however only c. 4% of GCC economy is digital vs. 16% globally, representing immense potential.
At Aliph Capital, using technology is a priority for our value-add approach in many aspects - to improve communication and collaboration; to become data driven, to automate and create efficiencies, to serve customer better and, ultimately, to create digital products or services or effectively utilize digital channels.
I do not think anybody would argue all companies need tech enablement and digital transformation to achieve growth and sustainability.
How can private equity firms better create value through tech? What strategies have you worked on?
Overall, you need to be taking a digital-first mindset which is critical, particularly when private equity firms invest in companies with more traditional approaches, who perhaps require support and guidance to overcome internal reluctance to technology investment.
Where private equity – and Aliph Capital – can play an important role is providing capital to implement technology effectively, supporting in laying out a digital roadmap and ambition and leveraging networks to identify the specialist support required. Most importantly private equity can play an active role in bringing digital needs & ambitions to boardroom discussions, into strategy and management KPIs.
To date, we have developed several strategies to create value through tech, including:
- Investing in digital infrastructure, such as cloud computing and data analytics to enable portfolio companies to make more informed decisions.
- Leveraging automation to streamline processes and reduce costs.
- Identifying and investing in companies offering innovative tech solutions which can be integrated into our portfolio companies to enhance their value propositions.
As technological advancements continue – particularly as AI and machine learning develop – the potential to create value, reach customers more effectively, and improve profitability by embracing tech will only become more apparent. Private equity firms and their portfolio companies will need to keep abreast of these possibilities or risk being left behind by more agile or effective competitors.
At The Pet Shop, we identified digital transformation as a critical and high potential pillar in our value creation plan and in less than a year since acquisition we have a clear roadmap which was in the works right from our digital maturing assessment in the early phase of the transaction. We supported the company in layout out the digital ambition, hiring a CTO and establishing the recruitment and advisory networks which are now in motion.
Are there any risks or pitfalls when it comes to tech value creation? How can investors make their due diligence in this space?
As with any investment strategy, there are risks and pitfalls. Technology is constantly evolving and what may seem promising today could become obsolete in a few years. It is why keeping informed and up to date with advancements is so important.
The main pitfalls we witness are:
- Lack of a clear tech proposition with identified impact – resulting in tech investments are made in silos or on a standalone basis based on issues and/or incoming proposals rather than to serve a tech proposition
- Nonperforming tech - either in the form of legacy clunky systems, lack of ability to use systems paid for or lack of ability to make changes to stay current. We also find structural tech issues whereby there is absence of a clear system architecture to communicate purpose, manage attributes, plan, design for change, or understand/set limitations.
- Lack of leadership and/or skillset - tech talent shortage is a global phenomenon and to make things worse, owners and senior management do not necessarily know how to hire for tech or how to decide what expertise need to be in housed vs outsourced. We also often find companies are often hiring expensive tech resources which act purely as vendor managers and are not leading tech implementations or guiding it.
- A culture of resistance
One of the most common challenges in any digital transformation journey is stakeholder buy in. Incumbent teams and even leaders are often comfortable with modus operandi leading to lack of adoption and usage or outright undermining of digital transformation attempts. In addition to lack of data capture, lack of scalability, and increasingly relevant today – lack of focus on cybersecurity and data privacy. Companies need to adapt but they should be wary of creating technical debt; which is effectively a result of all the above.
There has been a trend since the pandemic of companies investing in and implementing new technology quickly. How do you sort the wheat from the chaff when investing in new technology?
By acknowledging you do not know all the answers and seeking expertise. Business leaders and investors should seek technologies to solve business problems, creating a clear path to greater profitability. Once this is clear, they must be able to have the right decision-making tools, inhouse resources or where necessary, third parties with track records. Referencing is critical as well. To be honest with the advent on cloud based SaaS products some of this is a lot easier than it used to be. But diligence is key – knowing what issues the technology is solving, are they the same issues business process owners are requesting, does the vendors have a track of successful implementation, is the solutions scalable, is it applicable in your market etc., are you creating dependencies, how easy is it to change?
How can technology be positioned as strategic value enabler vs a cost centre in a downturn?
I think markets have demonstrated technology is an investment not a cost. No leading company today has a strategy document or statement which does not include some aspect of technology. Results speak for themselves – take Ikea for example, the presence of robust online channels helped IKEA navigate the COVID pandemic and online sales increased by 73% in 2021.
What is important is to look at the long-term impact, assess investment considering stated ambitions and be aware of timelines. However, it is also important to not fall into continuous spending without results. Constant monitoring and agility are key to ensuring your expenditure is building value.
Want more insights from Huda Al-Lawati? Secure your spot at SuperReturn International 2023 and join her session.