Adit Ventures Q4 2020 Review & Outlook

February 4,2021

Reports

Review and Outlook

"Change is the Law of Life. And those who look only to the past or present are certain to miss the future.  

- John Fitzgerald Kennedy

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Digital Transformation is happening now, in virtually every facet of society. We believe consumer behavior will be changed forever, as will education, healthcare, and finance, as we either “Adapt or Perish” as Darwin succinctly wrote in his Origin of Species over 150 years ago. He was right and he clearly still is right.

2020 was a challenging, difficult year for investors and society. Markets began the year optimistically, but Covid-19 soon became the dominant story, as over 2MM people globally have died because of the virus, as of this writing[i]. Economic damage from the Covid-19 pandemic is real and lasting, despite any businesses being able to adapt, pivot or relaunch within the “contact free” protocols in place for the foreseeable future. Vaccinations are being distributed, inoculations are taking place and slowly we will begin to see a flattening of the death rate, and a decline in hospitalizations. Dr. Fauci, now back on the media lists, is seeing progress towards a plateauing of cases across the country. We remain optimistic, but realistic in knowing it will take months to begin seeing tangible evidence of economic traction in those industries dramatically affected like hospitality, leisure, restaurants & travel.  

S&P500 2020 Returns

q4_1

Source: (Washington Post[ii])

Equity markets initially saw a sharp decline, as the Covid-19-induced recession caused a 25% correction by the end of March 2020. Interest rates dropped to record low levels, and commodity prices: copper, oil and platinum collapsed from lack of demand[iii]. Central banks around the world reacted swiftly and unanimously with massive liquidity measures, followed by waves of both fiscal & monetary stimulus packages. Overall relief funding of $5 trillion was provided, including direct aid to all US residents and small businesses in the form of several trillion dollars of aid via the CARES ACT[iv]. The Biden administration is wasting no time adding to the stimulus program, increasing direct aid to $2,000 per person, and adding to the PPP program with direct outreach to industries like hospitality which were severely impacted[v].

Markets responded to the stimulus, with a record rally in Q2/Q3 following the record decline in Q1. “Stay at Home” stocks dominated, with DocuSign, Zoom and others leading the way. NASDAQ rallied back to record levels, with new highs hit in Q4, gaining 7.3% in 2020. For 2020, the S&P 500 rose 16.3% and the Russell 2000 index gained 18.4%. Even the small caps finally caught up as the rally broadened out to include economically sensitive cyclical stocks, which we believe will benefit once people are vaccinated and return to more normal activity levels. The big question is “When?”, Adit sees at least six months of transition ahead, likely more, if recent history is any guide. Drug companies produced vaccines in record time, regulators expedited approvals, some trials got done, but many continue with over a dozen promising candidates being scheduled for approvals globally. The current wave of initial vaccines is underway, albeit slowly, as we begin to move past the specter of Covid-19.

IPO Markets rewarded investors last year with the Renaissance IPO fund (IPO) up over 107% in 2020[vi]. Issuance was robust with over 454 offerings on U.S. exchanges raising $167B+ with SPAC’s driving much of the recent issuance[vii]. Adit enjoyed a banner year with 3 IPO’s in ’20: Lemonade, Palantir and Airbnb. Lemonade went public in Q3 ’20 at $29 per share, closing at over $69 on its initial trading day. It rose to over $180 per share making it one of the top performing IPOs in ’20[viii]. Palantir went public on September 30th, at $10 per share. It trades today over $30 per share, and it the largest direct listing ever done with a lock-up on 80% of the shares. Airbnb made its debut December 10th, 2020 and rose from its $68 IPO pricing to over $146 initially, and over $180 by the end of 2020. It was the largest IPO of the year, defying the odds after postponing its IPO from Q1 ’20 due to Covid-19[ix]. From Adit’s perspective, the leadership of CEO Brian Chesky and the Airbnb board will be a case study for decades to come on leading through a crisis. ABNB continues to develop, evolve, and grow into one of the globe’s leading consumer brands. Adit remains constructive on ABNB & sees great things ahead.

q4_2

SPAC Attack:

SPAC issuance dominated in 2020 with over $83B in assets raised across 248 deals[x]. Please see the link to a CB Insights “Guide to SPAC’s” at the end of this letter to get a primer on the structure, but suffice it is to say, SPACS are here to stay for the foreseeable future. They offer a more defined, efficient, and faster path to the public markets than a traditional IPO or direct listing might. The quality of the sponsors varies greatly, and Adit joined the fray upon pricing the Adit EdTech Acquisition Corporation January 12th, raising over $240m in our initial SPAC transaction[xi]. Expect to hear more from ADEX.u once we get a target company under contract in the coming year.

q4_3(Source: WSJ[xii])

Adit Nation clearly benefitted from the emergence of SPAC’s merging with established growth companies like those in the Adit portfolio. In fact, after purchasing a substantial amount of SoFi shares privately in December, on January 7th we learned news that Social Capital Hedosophia Holdings Corp. V (IPOE) was merging with SoFi to bring them public in Q1 21’. While we await the final definitive documents from them, Adit’s asset appreciated over 100% in value within its initial month of ownership. Team Adit is delighted with our 10th liquidity event from our 19 investments made over the past five years. However, while we enjoy these results, it should be noted that generally we see a 3–5-year period to generate returns like these. There are signs of excessive speculation in the equity markets like the 242 Electric Vehicle firms, or 18 EV Battery SPAC’S alone. We avoid crowded trades like this, preferring to focus on select niche opportunities, led by proven management teams, good sponsors and world class technology providing customers goods and services no one else can. These category killers remain dominant in growing sectors wherein we see substantial growth and potentially robust returns for capital invested. No doubt there will be big winners in the EV sector, we salute them, but Adit has made other investments.

Outlook Ahead:

Adit expects more dramatic activities as the business cycle accelerates from stimulus & reopening of the global economy, powered by record low interest rates & an estimated $20 Trillion in central bank liquidity and a panoply of assistance programs in both fiscal & monetary stimulus programs[xiii]. The spigot of aid is turned on for the foreseeable future, as the political aims of the new administration wind their way through the branches of government, and legislation begins to flow into Congress & elsewhere.   We feel valuations are in the upper end of the historical ranges, but we also see the growth ahead. Estimates for ‘21/’22 are still being clarified but we believe the direction is very clear. Interest rates remain subdued with inflation under control thus far in the economic recovery process.

Fundamental industries like Autos, Construction & Housing remain strong as the US Consumer has shown resilience & stability throughout the pandemic. Existing-home sales, which make up the bulk of the housing market, totaled 5.64MM in 2020, up 5.6% from 2019 and the highest level since the 2006 pace of 6.48MM[xiv]. We believe this is an essential tenet of the recovery. Jobs have come back but will need additional incentives and stimulus to complete the reopening as discussed. Adit believes that global GDP will see record levels in ’22 once vaccines take hold across the globe.

The powerful confluence of megatrends causing disruption across wide swaths of the economic landscape means great opportunity for the long-term investor seeking exposure to secular long-term themes driving capital flows and changing our world.

Consumer spending, constituting over 70% of the US Economy, is showing resilience throughout the pandemic. However, the digital component of that spending has changed dramatically during Covid-19 as total digital commerce now accounts for nearly 1 in 4 discretionary dollars spent by consumers[xv]. We believe education has changed forever, with hundreds of billions of dollars being redirected towards digital learning between public & private educational institutions as city, state & national governments seeking effective solutions for teaching, and training our citizens, students and employees. The path to greater equality starts with education, and as industries evolve, how we reskill, retrain and ready the next generation to work effectively, efficiently & productively in a new paradigm has never been more important than it is today. Education, corporate communications & training grew exponentially as digital classrooms become the new normal. Trillions of dollars go into education globally on an annual basis, and the global adoption of these trends will continue for decades to come[xvi]. Online education, with 50MM+ learners worldwide using vide lectures for digital learning today, will likely grow to several hundreds of millions of students daily[xvii]. HR, orientation & training will never be held in the same way and even classified government courses on data privacy, public policy, security, and other vital topics will be done digitally for the foreseeable future.

Zoom calls have replaced the business trip and meeting, and while business travel will come back in time, it too, has changed forever. Hospitality remains in crisis, with a select few firms leading the way. In the hospitality world, Airbnb is one of these digital leaders, as is Turo, a peer-to-peer rental car firm in Adit’s portfolio which has seen growth in rentals despite the pandemic. In our view, the consumer perceives a private car, like a private home from Airbnb, as being safer than the traditional option of Avis/Budget/Hertz cars which are open to the public.  

Fintech also enjoyed a dramatic surge in activity evident by the record-high $20B in US FinTech VC deals for 2020. With a strong IPO By Affirm, now valued at nearly $30B, valuations are rising for both Klarna and SoFi, where Adit invested recently. We expect more exciting news in the Fintech space as we await more information on Robinhood’s upcoming IPO. We see continued activity in the space, and the rally is extending into the entire cryptocurrency ecosystem. Even iconic institutional investors like Blackrock are legally changing their fund documents, to allow them to invest in these currencies[xviii]. JP Morgan Chase, the US’s biggest bank, began offering custody services for these assets as well, further validating the sector[xix]. The Biden administration named Gary Gensler to head the S.E.C., who has been an advocate for cryptocurrency[xx]. Given the outlook for broader adoption and expanded use-cases we expect prices will rise.

We believe critical infrastructure needs investment capital and will improve our safety, security and generate robust returns for our clients. The infrastructure projects we have seen: Electrical, solar & wind power, water, and waste treatment are all solid propositions. In addition, we are seeking leading innovative companies in security, like Decision Sciences with scanning and Palantir in the software security space. Network security, to prevent cyberattacks & provide continuous connectivity and computing remain a priority for many enterprises & governmental organizations. Adit remains excited Cohesity’s outlook in this cybersecurity space, which will continue to benefit from global cloud adoption as other Adit names like Rubrik & Cohesity have. The Covid-19 virus has taught us to learn from the pandemic. Being an experiential learner, Adit is listening and in the coming year will embark on a series of infrastructure funds led by one our new team members Joe Bennett to capture these opportunities.

Looking forward, Adit sees a strong foundation for further economic growth across all our key secular themes: AI, Big Data, Cloud, Crypto, Cybersecurity, Digital Healthcare, EdTech, Fintech, HealthTech, IoT, Shared Economy & Wellness. Please stay tuned as we share several exciting, new growth names and launch Adit Genesis, our early-stage vehicle. Using these same secular themes and trends, Adit Genesis seeks to find the leaders at an earlier stage, so we can garner better value for our capital & returns for investors. These long-term drivers affect capital flows, consumer behavior and drive societal change, disrupting legacy institutions not nimble enough to change or adapt their services to evolving customer demands. SPAC capital pools, now over $80B, with almost 250 SPACS seeking deals also leads one to see additional liquidity events. Combined with $1.5 trillion in dry powder from PE/VC Firms means there will be lots of activity in the year ahead bidding on quality deals[xxi][xxii].

“Intelligence is the ability to adapt to change” – Stephen Hawking

An Adit is an entrance to a mine, as defined by Webster’s Dictionary. Team Adit strives to provide you, our investor partners, information, and access to these exciting growth companies such as SPOT, PLTR, SNAP, LYFT, LMND, ABNB and SoFi to name those with liquidity events thus far in our initial 6 years. Adit invests for growth and is growing its team. Joe Bennett & Nicolette DeVincenzo’s bios are on our website for your review. Expect to see many more new things happening at Adit Ventures. What lies ahead looks more promising than ever with the velocity of change increasing the pace of innovation, affecting all elements of daily life, home and work. Pandemic recovery will dominate the first half of ’21 and let us all hope the inoculation process improves going forward in our quest to vaccinate the globe. While we see some pockets of speculation, Adit remains constructive on its outlook, as the “Digital Transformation” cycle remains in its early days. Capital spending is driving productivity gains, which is occurring across major economic drivers, harnessing some of technology’s tools for the good of society. While Adit sees a 10% correction likely in the quarters ahead, it may be an ideal time to put cash to work adding to positions or initiating new names for diversifying growth equity portfolios in the decade ahead.

Adit Ventures is deeply grateful for your partnership & support. Team Adit appreciates you and is looking forward to communicating with you soon on our quarterly Adit Update Zoom calls, and hosting you “Live” at an event in the fall as conditions allow. Until then, we wish you good health & safety for your families – now & always. Check out website regularly www.aditventures.com and please reach out if we can answer any questions.

 

Happy investing

Eric Munson & Team Adit

 

RELEVANT ARTICLES 

SoFi, A Leading Next-Generation Financial Services Platform, Announces Plans to Become Publicly-traded via Merger with Social Capital Hedosophia:

https://www.sofi.com/press/sofi-plans-to-go-public

EXCLUSIVE-SoFi nears deal to go public with SPAC backed by venture capital investor Palihapitiya -sources:

https://www.reuters.com/article/sofi-ma-social-cap/exclusive-sofi-nears-deal-to-go-public-with-spac-backed-by-venture-capital-investor-palihapitiya-sources-idUSL8N2JH4XB 


[i] https://coronavirus.jhu.edu/map.html

[ii] https://www.washingtonpost.com/business/2020/12/31/stock-market-record-2020/

[iii] https://www.worldbank.org/en/news/press-release/2020/04/23/most-commodity-prices-to-drop-in-2020-as-coronavirus-depresses-demand-and-disrupts-supply

[iv] http://www.crfb.org/blogs/fiscal-response-covid-19-will-be-larger-great-recession-response

[v] https://www.cnbc.com/2021/01/14/biden-wants-to-raise-stimulus-checks-to-2000-how-payments-will-work.html

[vi] https://www.renaissancecapital.com/IPO-Investing/US-IPO-ETF

[vii] https://www.wsj.com/articles/record-ipo-surge-set-to-roll-on-in-2021-11609324381?mod=hp_lead_pos7

[viii] https://finance.yahoo.com/news/10-2020s-top-performing-ipos-145334482.html#:~:text=Lemonade%20Inc%3A%20Insurance%20company%20Lemonade,performing%20IPOs%20of%20the%20year.

[ix] https://www.morningstar.com/articles/1014850/the-10-biggest-ipos-of-2020

[x] https://spacinsider.com/stats/

[xi] https://spacinsider.com/2021/01/11/adit-edtech-acquisition-corp-prices-upsized-240m-ipo/

[xii] https://www.wsj.com/articles/record-ipo-surge-set-to-roll-on-in-2021-11609324381?mod=hp_lead_pos7

[xiii] https://www.reuters.com/article/us-global-economy-inflation-breakingview/breakingviews-does-20-trillion-buy-much-inflation-idUSKCN25711P

[xiv] https://www.wsj.com/articles/u-s-existing-home-sales-reach-highest-level-in-14-years-11611327933#:~:text=Existing%2Dhome%20sales%2C%20which%20make,that%20boom%2014%20years%20ago

[xv] https://www.prnewswire.com/news-releases/comscore-uncovers-significant-rise-in-digital-consumer-spending-in-state-of-retail-report-301155309.html#:~:text=Key%20insights%20include%3A,a%20faster%20pace%20than%20desktop.

[xvi] https://gem-report-2019.unesco.org/chapter/finance/#:~:text=Analysis%20for%20this%20report%20estimates,at%20US%244.7%20trillion%20worldwide.

[xvii] https://www.edukatico.org/en/report/edx-vs-coursera-which-mooc-platform-is-better

[xviii] https://www.coindesk.com/blackrock-give-two-funds-go-ahead-to-invest-in-bitcoin-futures

[xix] https://www.theblockcrypto.com/daily/82334/jpmorgan-digital-asset-custody-subcustody

[xx] https://mitsloan.mit.edu/ideas-made-to-matter/biden-sec-pick-gary-gensler-fintech-regulation-and-blockchain

[xxi] https://files.pitchbook.com/website/files/pdf/Q4_2020_PitchBook_NVCA_Venture_Monitor.pdf

[xxii] https://www.wsj.com/articles/private-equitys-trillion-dollar-piggy-bank-holds-little-for-struggling-companies-11593212136

 

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