VC money flows to collaboration start-ups as remote work booms

Collaboration software, which one analyst said was a “white-hot category pre-COVID” for investors, is “now hitting the stratosphere.”

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Investment in collaboration and productivity software start-ups, which was already on the upswing before this year’s pandemic, is set to grow as businesses seek new ways to connect remote workers

“Even before COVID, some of the trends were pretty positive on that, and I think it will just get better,” said Jean-Francois Marcoux, managing partner at White Star Capital, a venture capital firm that has invested in a number of digital workplace start-ups – including virtual-reality meetings app Spatial.

“It will become more competitive – a pricier environment for investors and the like - but from a market option opportunity stand-point, we expect this to be a fast-growing sector in the next few years,” Marcoux said. “We think [investments are] going to increase from a volume standpoint, and the valuation of those businesses will increase. We definitely see  quite a shift. What we're seeing out there is a kind of a perfect storm when it comes to adoption.”

That perfect storm – a global pandemic that has pushed companies everywhere to focus more on collaboration software and tools – meshes well with investor interest.  Venture capital firms have long been drawn to start-ups selling cloud-based workplace apps, with hundreds of millions of dollars flowing into software-as-a-service (SaaS) companies such as Slack and Zoom in recent years.

Investment growth that began in 2013 has continued, according to a report from White Star Capital, with the highest levels seen during 2018 when Slack announced a $427 million round ahead of its stock market flotation. In the last three years, $35 billion of VC money  has been invested globally in collaboration start-ups, according to White Star Capital, with U.S.-based start-ups seeing increases across all stages of funding.

In the first three months of 2020, a number of those companies have seen successful funding rounds, including collaborative email company Front ($59 million); social intranet firm LumApps ($70 million); and Spatial ($22 million) More recent funding wins include  document creation app Notion ($50 million); Postman, which bills itself as a “collaboration platform for API developers,” ($150 million); employee communication app Workvivo ($16 million); and Spike, another start-up focused on innovation around email, ($8 million).  

Those investments, all announced in the second quarter, and others bode well broadly for business, since the added money is likely to spur startups to innovate, said Wayne Kurtzman, a research director at IDC.

“Strong investment in collaboration start-ups will push the [vendors] to add features that are smarter and more intuitive for human/intelligent collaboration, create better team dynamics, more informed teams, and expedite results,” he said.

Collaboration start-ups remain resilient during downturn

SaaS apps that help teams and individuals stay connected and productive while working remotely have witnessed a surge in use during the pandemic.

“With many start-ups reeling from the pandemic, collaboration vendors are relatively well-positioned,” said Nicholas Pappageorge, senior intelligence analyst at CB Insights.

“There's no physical contact or supply-chain risk. And while collaboration software was a white-hot category pre-COVID, it's now hitting the stratosphere.”

 “The overall investment landscape for start-ups is dependent on the space in which they operate, and how that space has been affected by COVID-19,” said Marcoux. “For example, start-ups in the digital health, communication and collaboration, and industrial automation spaces are expected to see increased demand due to an increased importance on distance working.”

But that doesn’t mean all start-ups will benefit. Those products and services that require close personal interaction – such as those in the travel and hospitality or shared mobility sectors – are likely to be negatively affected, he said.

While funding may be harder to come by during the current economic downturn, those start-ups that support new ways of working should be better positioned than most, said Mathilde Collin, the CEO of Front who has invested as an individual in companies such as video-messaging firm Loom.

The shift toward work-from-home – especially as companies eye making recent changes more permanent – means there is plenty of potential for start-ups. That’s especially true given the number of businesses still scrambling to adopt technologies that will support communication and collaboration across both remote and in-office teams, said Collin.

“The opportunity to shape how this unfolds in the next few years is tremendous,” she said. “So, I suspect that the collaboration and future of work space will see more investor interest relative to other markets.” 

While total IT spending is expected to decline in most industries this year, many businesses plan to increase outlays for collaboration applications as a result of the COVID-19 crisis.

“Collaboration has become significantly more important to how an enterprise works, communicates and keeps records,” said Wayne Kurtzman, a research director at IDC.

An IDC survey of 582 IT decision-makers worldwide conducted April 6-15 showed that:

  • 64% expect to see an increase in outlays for videoconferencing.
  • 55% plan to boost spending on enterprise social networks to foster digital communities.
  • 54% expect a rise in spending on in collaborative apps.
  • And 44% will bolster employee engagement app budgets.

Where are investors looking next?

In terms of future VC investments, Jason Spinell, director of The Slack Fund – Slack’s investment fund for early stage start-ups in the collaboration space – sees particular innovation for three types of workplace apps.

“Today, we’re really interested in the following areas: voice and video; low-code and no-code workflow/developer tools; and culture and organizational health software,” said Spinell.

The initial business reaction to the pandemic prompted a quick rise in the use of video as a simple means of connecting co-workers, so it’s unsurprising that start-ups innovating in this area – Spinell cited Loom, Daily, Grain, Switchboard and Hopin – have piqued the interest of the investor community.

Low-code and no-code tools are also gaining popularity as more business processes become digitized through the use of SaaS apps, allowing workers to add their own automation and shortcuts. “Many organizations today want to empower their non-technical employees to automate and streamline processes without the need for an additional team of developers,” said Spinell. 

Apps that encourage employee engagement are also becoming important as organizations contend with a more distributed workforce, whether in the office or anywhere else.

“We’re seeing an intense interest in the culture and organizational health category since we’ve all started working from home during the pandemic,” Spinell said. This includes companies like Donut, which pairs co-workers at random in Slack to spur interaction between colleagues; employee recognition platform Disco; and Lattice, which helps  managers provide staff with regular feedback on performance.

“Companies are realizing that we’re going to be working from home for quite a while, and that means new types of collaboration tools are needed that drive not only collaboration and productivity, but also a sense of connection and company culture,” said Spinell.

With so many apps now at workers’ disposal, investors are being drawn by applications that help simplify communications between workers, Collin said.

“I've found that investors are very keen on our approach to not create yet another app, with yet another silo of information, but instead to consolidate and streamline communication so people can focus on serving their customers in genuine, human ways,” said Collin, whose company got funding from several individual investors, including Zoom’s CEO Eric Yuan and Atlassian co-founder and co-CEO Mike Cannon-Brookes, as well as from venture capital firms such as Sequoia Capital and Anthos Capital.

Investments are also flowing into technologies to connect workers in new ways, such as virtual reality for more immersive meetings.

“Virtual meeting spaces may be an emerging theme in coming years, as this can be a less expensive, lower bandwidth alternative to video calls,” said Paul Condra, lead emerging tech analyst at PitchBook, which conducts research on venture capital investments.

With White Star Capital investing in Spatial, Marcoux is bullish on the prospects for virtual and augmented reality as the next frontier for remote collaboration. That trend will be buoyed by reductions in the price of hardware used for remote meetings and improving hardware production capacities.

“The price point of those AR and VR devices will help tremendously. It remains a very small install base at the time being, but you will you will start to see AR glasses that look like regular glasses price below $300,” he said. “Combined with the push for 5G, we see a landscape where VR/AR – when it comes to communication and collaboration – will become pretty mainstream in two or three years….”

Copyright © 2020 IDG Communications, Inc.

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