The “real” digital trends that investors should look for in 2021
At a time when the majority of physical interaction is outlawed, the world of technology has undeniably come into its own. From shopping and education, to entertainment and, of course, work, our every move is now taking place in a digital environment. Unsurprisingly, then, digital deal flow is dominating the private equity agenda.
But with investment memoranda proliferating and valuations sky high, discrimination is key. The digital ecosystem is besieged by buzzwords – tech enabled, AI powered, data rich, community focused. And while buzzwords only become buzzwords through some intrinsic materiality, the relevance of this terminology is being diluted through overuse.
The investment mandates we see as digital experts are littered with references to the latest lexicon. And little wonder, when an artfully used adjective can send multiples rocketing. But while many may claim to be digital-first businesses, genuine examples of the finished article are a great deal harder to find.
It is important, therefore, to dig beneath these superficial labels, to find out exactly where a company is on its digital journey. Here, we deflate some of the most abundant buzzwords, dispel common myths and explore how private equity investors assessing deal opportunities, can separate the substance from the hype.
A number of high-profile deals in 2020 highlighted the value of community as a defensible component of the digital flywheel. But, in reality, many self-proclaimed community-driven businesses are actually just referring to their influencer strategy on social media.
Community, when it is truly achieved, relies on user generated content to drive the brand conversation. It is a lower cost, more authentic and sustainable digital business model that can generate real financial value; this is also notoriously difficult to achieve.
The preponderance of businesses positioning themselves as marketplace-orientated also climbed steeply last year. But – there is a vast difference between selling on Amazon and having a defined marketplace strategy.
Companies that really excel in this area view marketplaces as more than just another sales channel. They understand that any marketplace, be it eBay or Etsy, represents its own ecosystem, requiring significant investment in everything from fulfilment processes and dedicated resource, to integrated media strategies to drive demand. They also understand that marketplaces have a value, beyond pure sales, providing another data source for new product introduction and insights.
Covid is also changing our digital behaviours. As consumers we are spending more and more time shifting between screens, which is altering the role played by mobile devices in the customer journey. Mobiles are no longer simply a research tool but a transaction source. Businesses that call themselves mobile first just because they have a mobile website, are merely scratching the surface.
Truly mobile first businesses have thought holistically about the mobile customer journey and developed specific processes around this. It is about site speed, mobile user experience and conversion rate optimisation. It is also about how a multi-touch customer journey might span devices – starting on mobile, concluding on desktop, and possibly incorporating a call to a contact centre. To be genuinely mobile first, you need to be connecting these dots.
Businesses are talking more and more about the power of personalisation – communicating through a customer-centric lens. However, the majority are really just referring to market and customer segmentation, rather than a true one-to-one interaction.
Data is key to taking personalisation to the next level. Businesses succeeding in this space are leveraging their data and using it in real time through automation to generate bespoke customer experiences.
“In-housing digital is best.”
There can be a tendency to seek to in-house digital expertise as opposed to using external agency support. It is important, however, to consider what is appropriate for the company’s stage of maturity and needs.
Certainly, businesses have been growing their digital teams significantly throughout 2020, and we expect that to continue into 2021 – leading to a marked scarcity of talent. It may make sense to access external expertise in some instances, for example, the trialling of a new sales channel. What’s more important for investors to ascertain is that digital strategy is truly led from the top and that the resources and processes are in place to manage agency relationships effectively, if required.
“Free channels are superior to paid.”
Pressures on marketing spend, due to Covid, have intensified focus on the balance between free channels (e.g SEO) and paid channels, such as PPC and paid social to drive ROI and sustain the cost of customer acquisition. As a result, we see a growing number of businesses rely on an untested SEO strategy as a core driver of future marketing efficiency.
Claims are misleading; free channels are, in fact, not free at all. They may not require direct investment in media but rely on significant investment in teams to build and support SEO visibility and above the line marketing to drive direct traffic. It is also worth bearing in mind that free channels may take longer to establish, creating additional cost implications.
Furthermore, free channels are always subject to the whims of Google, for example, new plans to introduce hotel booking service introductions or the growing use of snippets on the SERP. “Free” may be in vogue, but the reality is that if paid channels are producing high returns and driving growth, the fact that this involves direct costs should be less of a focus.
“Cyber security is an isolated function.”
The widespread remote working that has resulted from Covid has shone the spotlight on both cyber and data security. IT due diligence, which may once have been a quick tick box exercise, has become an area of intense pre-deal scrutiny.
Critically, however, security cannot exist in a silo. It must be integrated into wider systems, processes and team frameworks. Cyber and data security, therefore, should be considered in tandem with other aspects of digital due diligence. As we embark on a second year of working from home, it is clear these areas of evaluation will remain interlinked.
“Data-driven attribution is the holy grail.”
Now, more than ever, it is important to be able to track the value of marketing investment. . And, indeed, this year we have seen some impressive examples including hard attribution models for influencer/affiliate activity to track ROI rather than relying solely on social metrics, such as likes and followers. But it is easy to become preoccupied with faultless attribution models. It is more important to explore practical solutions for driving incremental benefit, that are appropriate to the business’s size and maturity, than to focus on a perhaps unattainable end goal.
While it is important to maintain a healthy scepticism around some of the overused maxims that have crept into the industry, it is equally important to spot emerging trends that have yet to wind their way into sales messaging – the buzzwords of tomorrow.
In 2021, businesses will be focusing more on a culture of cross-organisational innovation and digital development. Digital will no longer be the remit of just a dedicated digital team. Investors should look for companies where innovation has been democratised, as entire workforces are empowered to drive change.
“A product mindset”
It will become increasingly important to view all digital assets as products. Apps, websites, CRM systems should not be viewed as a static offering, but as something that must continually evolve in order to remain optimised and to ensure they continue to add value to the end customer.
“Integrated systems and processes”
There will be a growing emphasis on how processes, technology and teams can be integrated to support growth. The focus will be on ensuring the flexibility and agility to respond to changing business needs.
It is vital that businesses are thinking carefully about how data can be used to drive business value and differentiation. This is about more than simple access to datasets; it is about the identification of use cases, structure and scalability of data sets. Investors must rigorously test the authenticity and fortitude of a company’s data strategy in 2021.
There is no doubt that Covid has accelerated the development of an already high-velocity digital sector. Companies are seemingly finding ever more innovative ways to interact with their end-user, driving revenues and reducing costs. And with theoretically almost infinite scalability, it is unsurprising that competition for digital assets is fierce.
But while sell-side advisers drop price-inflating descriptors with abandon, the reality, is, of course, more nuanced. Sponsors must look behind the buzzwords to see where the hype ends and substance begins.
Palladium is a digital and technology due diligence provider and digital transformation partner to Private Equity firms and their portfolios across Europe and the US. Palladium was named by Real Deals as 2020 Specialist Advisor of the Year at The Private Equity Awards.
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