Activant Capital Expands to Europe - US Investor Opens New Office

Activant Capital's Expansion and Investment Strategy

Early this week, a conversation was held with Steve Sarracino, the founder of Activant Capital, a growth-equity firm located in Greenwich, Connecticut. Our previous discussion with Sarracino occurred in early April of the previous year, coinciding with the onset of global pandemic-related lockdowns, at which time his firm was finalizing its third fund with $257 million in committed capital.

Currently, Activant, which primarily focuses on investments in companies providing e-commerce infrastructure and payment solutions, is approaching the final closing of its fourth fund, targeting $425 million, as indicated in a recent SEC filing. Like an increasing number of U.S.-based firms, Activant has also established a new office in Berlin, led by Max Mayer, a former investor from Global Founders Capital.

Growing Interest in the European Market

The discussion centered on Activant’s increasing focus on Europe and the factors driving this trend. We also explored the current pace of deal-making and Sarracino’s perspective on the prevalent trend of roll-ups involving third-party sellers on Amazon. The following are excerpts from that conversation, lightly edited for brevity.

TC: For how long has Activant been actively investing in Europe?

SS: We have a considerable history of investment in the region. We previously invested in Hybris, which was acquired by SAP in 2013 for $1.5 billion. We are also investors in NewStore, a SaaS company based in Berlin and Boston, founded by serial entrepreneur Stephan Schambach, who also founded Demandware.

Regular travel to London is commonplace, given its proximity to the East Coast. However, operating effectively across the European continent necessitates a local presence.

The Timing of European Expansion

Why the decision to expand into Europe at this particular time?

Europe has consistently possessed a substantial pool of technical talent – approximately twice the number of STEM graduates compared to the United States. Previously, the primary challenge was the relatively smaller size of the venture capital community, as a thriving early-stage ecosystem is essential for generating later-stage investment opportunities.

Europe also experienced a shortage of experienced middle management. In major U.S. cities like Los Angeles, New York, and Boston, it was possible to recruit strong SVPs and even C-level executives from companies such as Facebook and Amazon. However, this level of established corporate presence was previously lacking in Europe, a situation that has now changed. These large companies are now well-represented throughout Europe, providing the necessary technical expertise, venture capital, and managerial talent.

Valuations and Competitive Advantages

Are there any distinct advantages to investing in Europe? Are valuations more favorable, or is the influence of firms like Tiger Global also driving up prices there?

Valuations for top-tier companies are largely comparable across continents. However, Europe presents an attractive opportunity in the mid-stage investment phase. While seed and Series A funding are readily available, the landscape differs significantly for Series B, C, D, and E rounds.

A notable advantage of European startups is their inherent preparedness for global expansion. While marketing, sales, and product development may require slightly higher investment due to multilingual requirements, diverse tax regulations, and varying sales approaches across countries, this necessity fosters a global mindset from the outset. U.S. companies often initially focus on the domestic market, with limited expansion into the U.K. and Canada, whereas European startups are designed for broader international reach.

U.S. Market Entry for European Companies

Do European companies actively seek to establish a presence in the U.S., or has this dynamic shifted?

In certain sectors, particularly those with slower cloud adoption rates in Europe compared to the U.S., rapid growth can be achieved within Europe itself. Therefore, immediate expansion into the U.S. is not always a prerequisite. However, it remains a strategic objective for most technology-focused businesses.

Potential Competition with Existing Investments

How do you assess companies that could potentially compete with your existing U.S. investments?

We exercise caution when considering investments in the same company across different geographies, as we believe they have the potential to compete on a global scale. Our strategy is to identify and support the ultimate global winner. If a company operates within a limited geographic scope – for example, providing SMB infrastructure software solely in Germany without plans for U.S. expansion – we would not hesitate to invest in a comparable U.S.-based company. However, this requires careful evaluation, given our active board involvement.

Our funds are relatively concentrated. Our third fund comprises only six assets, and the new fund will include a maximum of 10 to 12 partnerships, simplifying management.

Navigating a Fast-Paced Investment Environment

Given the rapid pace of the market, how do you approach investment decisions? The sheer volume of deals and their similarities can be overwhelming for reporters; it must be exponentially more challenging for investors.

The market is indeed fast-moving and expensive, influenced by firms like Tiger and larger investors. However, significant opportunities still exist in the mid-stages. Our core philosophy centers on identifying startups that offer something genuinely different or address a need that has been neglected for some time. It’s crucial to differentiate between a mere feature and a comprehensive platform capable of attracting diverse customer segments. Furthermore, a deep understanding of specific sectors is more critical than ever, as numerous companies are pursuing similar concepts, necessitating thorough due diligence to identify the most promising candidate based on market trends, team quality, and product potential.

We respond to this increased competition by focusing on our core sectors of expertise and declining opportunities that, while seemingly attractive, would require excessive time to fully evaluate given the market’s velocity.

Distinguishing Features from Platforms

How do you determine whether a startup is developing a feature or a platform?

This is a critical distinction. Many feature-based companies can achieve substantial scale relatively quickly, generating $10 million to $40 million in revenue. However, sustaining that growth presents a challenge. Companies with strong network effects – where each new customer benefits existing customers – are more likely to succeed. This can manifest as two-sided marketplaces or embedded payment systems, but must include a significant value proposition beyond basic software functionality.

We are also observing a trend towards transactional pricing models, moving away from flat subscription rates. When pricing is aligned with customer revenue, the product must be exceptionally valuable and differentiated.

Amazon Third-Party Seller Roll-Ups

You’ve previously discussed funding companies that help SMBs avoid being disadvantaged by Amazon. What are your thoughts on the recent surge in roll-ups of third-party sellers on Amazon, occurring in the U.S., Europe, and Asia?

These roll-ups involve identifying promising products, acquiring them at relatively low multiples of EBITDA, and then enhancing advertising, visibility, and reviews on Amazon to increase sales and profitability. It’s a clever strategy, but I’ve experienced setbacks, often due to a single point of failure. Changes implemented by Amazon can introduce significant risk.

There are some genuinely interesting assets within this space, but it’s not our primary focus. The COVID-19 pandemic likely contributed to this trend, as consumers shifted spending from travel and experiences to goods and products. This shift is expected to reverse as travel resumes. Therefore, the long-term growth prospects of these roll-ups remain uncertain. Furthermore, it’s unclear how much technology is being applied versus whether these are primarily deal-driven businesses. However, some of these companies have raised substantial capital – up to half a billion dollars – indicating some level of success.