Why enterprise tech is seen as a safe harbor in 2023

Investors are being scared by the current macroeconomic environment. A general slowdown in funding, especially in technology, is being driven by economic worries and falls in tech stocks across the market. The conventional wisdom is to be patient if you are a large institutional investor in technology.
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The good news is that conventional wisdom can often be wrong. This ongoing reset offers institutional investors the opportunity to strategically enter certain markets in a coordinated manner. The recent realignment gives institutional investors the chance to strategically enter select markets at rational valuations.
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Investing now is a better option than trying to circle the wagons. It is long past time for the current rightsizing of valuations in the private and public markets. The sky-high valuations enjoyed by technology companies over the last two years are being brought back to earth, for example.
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Klarna, a buy-now-pay later giant, was one of the most extreme, but still indicative, examples. Its valuation fell from $45.6 billion in June 2021, to $6.7 billion in the latest round. It is important to not assume that smarter, more technically advanced investment strategies are responsible for the historical frenzy of the private market in recent years and the enormous financial rewards many have received as a result. In a negative-real-interest-rate environment with cash aplenty, we have seen financial discipline, rigor, and good sense take a backseat to mega-rounds in search of the next big valuation
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A rising tide lifts all boats regardless, so 'riding' the wave is not a strategy. The ground is changing rapidly and dramatically now. Many high-flying startups have been devalued. This is a multi-sector and multi-stage set. It has encouraged a renewed focus on financial discipline, operational best practice, and strategic rigor.
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Enterprise technology is a viable alternative, especially in the current economic climate. An economic downturn will not affect the use of enterprise technology by government agencies, banks, healthcare providers, logistics providers, or healthcare systems. Large institutions and organizations need to be able use and benefit technology, regardless of the economic situation. Enterprise technologies are mission critical.
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A contraction can often be a good thing for a company's needs for enterprise technology. This is especially true if it serves existing clients and attracts new business. Salesforce customers aren't planning to unplug their CRMs to save money or play it safe in a downturn. In fact, they will double the effort to teach employees how to use Salesforce in order generate more revenue.
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This dynamic is best illustrated by the Great Recession. Between December 2007 and June 2009, two of the top three tech companies were enterprise tech companies, IBM and Oracle. Their stocks held steady, or even increased, despite the fact that the S&P fell 35% in the same 18 months.
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Many tech companies that are not typically classified as 'enterprise' have experienced large drops. Google is one example. Some tech companies, such as IBM, have done better than the average during the recent tech downturn. Top analysts recommend enterprise tech as a defense buy in the event of a larger downturn.
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This is intuitively obvious: companies will try to reduce costs and still compete for new clients in a downturn. These goals can be achieved with the most efficient and up-to-date software and hardware. Enterprise technology is a ray of light during difficult economic times that can resist recessions.
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Attractive investments in enterprise technology companies and companies whose products are powered by enterprise technology are now available to a wider range of investors. These companies have reasonable valuations that are driven by strong underlying performance. Venture firms that are focused on the discipline and rigor of their portfolio companies will be able to succeed in this new environment. This new world order will require that portfolio leaders, many of whom are going through their first major macroeconomic crisis, focus on operational excellence. They will need to grow their businesses and create value for shareholders and investors.
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Experienced investors will shine because they have deep operating experience and vast networks across multiple industries. They also have a willingness to roll up their sleeves with CEOs and founders, in both good and bad times. You can call me a contrarian but the current macroeconomic environment, coupled with an insistence upon financial discipline, capital efficiency and strategic and operational rigor and a go to market approach anchored in operating experiences-creates opportunities to firms to do their best work. Firms can operate side-byside with founders or CEOs to create timeless companies that will enable the future. Bobby Yazdani, the co-founder and partner at Cota Capital is a San Francisco-based company that invests in modern American enterprise technology companies.
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