The Apple store at Macy's Herald Square in Manhattan.

Since the advent of the smartphone, the first wave of technology winners have been on the consumer tech side. The market capitalizations of Facebook, Amazon, Apple and Google are all larger than the big enterprise software companies (IBM, Oracle, SAP, Salesforce). Similarly, China has seen the growth of Alibaba, Tencent and

As we look toward the next few years, we believe that the next wave of technology winners — those receiving the lion’s share of funding and generating the strongest returns — will come on the enterprise side driven in part by several key tailwinds: (1) the corporate investment cycle and M&A, (2) business model innovation, (3) shifting focus toward user experience, and (4) consumer technology headwinds.

Capital Replacement Cycle and M&A

Historically, for large corporations, capital investment as a percentage of depreciation ranges cyclically from 60 to 120 percent. During periods where this relationship is greater than 100 percent, companies are replacing their assets faster than they are using them. Since the 2008 financial crisis, corporate America’s investment rate has been at about 60 percent of depreciation — the bottom of the spend cycle. If history is any measure, companies are likely to accelerate spending back to the 120 percent mark, which would imply a doubling of the current level of capital investment, which would serve as a boon to enterprise technology companies.

In 2017, we saw an uptick in capital investment, and analysts expect growth in capital spending throughout 2018, further spurred by the new tax bill and repatriation of capital. For example, Apple recently announced that it anticipates investing over $350 billion of capital in the U.S. in the next five years as it brings over $252 billion in cash back into the U.S. Already this year we have witnessed Salesforce’s $6.5 billion purchase of MuleSoft (at a remarkable 21-times enterprise value to trailing 12 months revenue multiple), and Adobe’s recent purchase of Magento for $1.68 billion as it looks to diversify and battle in cloud-based commerce.

These factors do not, of course, function in a vacuum — corporate appetite for shopping in the M&A market is also driven by the long-term and short-term debt cycles as acquisitions through debt can be good arbitrage for stock price for a short-term focused chief executive. That said, this environment should lead to more robust exit opportunities for enterprise tech companies, and correspondingly drive greater venture investment in enterprise technology.

Business Model Innovation:

SaaS remains a key tenant of B2B tech, however, one key trend we are witnessing in our sectors (commerce infrastructure & IoT) is a shift in business model toward value share: a business model that shares in the upside created by the technology. Examples include a logistics company charging on a per container basis, or a retail software taking a percentage of the total sale. The primary reason for this shift is that companies that charge on a SaaS fee structure (or the more outdated license and maintenance structure), have struggled in many large industries to adequately maintain deal economics over the longer term.

Shifting to a value-share model does, however, require the startups in question to be solving for significant pain points with a best-in-breed product offering. Given that the enterprise customer is forging a deep relationship with a startup, and sharing in the upside created, it is unlikely that point solutions are capable of implementing a value-share model.

NewStore provides a good case study as mobile traffic to retailers’ sites has grown exponentially in recent years, yet conversion has lagged. Retailers recognize the enormity of this missed revenue opportunity, but their existing software stack and the complexity associated with strong omnichannel fulfillment requires a robust enterprise-grade platform offering. Founded by the team that built Demandware, NewStore has built a deep enterprise product that aligns with the retailer’s need, and charges with a revenue share model, aligning their success with their customers’.

Another means of generating strong economics over the longer term is through [business to business to consumer] B2B2C business models, where the ability to own the consumer relationship moves a startup from reliance on customer channels and the risk of commoditization to strong brand loyalty. This increases product stickiness and provides a strong starting point in enterprise contract negotiations. Examples include companies that offer financing options to the consumer at checkout — they help retailers reduce sales friction while owning the customer relationship. Although B2B2C doesn’t work in every enterprise setting and can be difficult to execute, such models offer enterprise businesses distinct staying power and upsell opportunities.

Increasing Focus on User Experience

As companies move toward tackling the multi-dimensional puzzle of B2B2C, increasing pressure is being placed on enterprise technology to catch up with the quality of consumer tech. User experience is a core component, with companies like Slack disrupting a cluttered market by offering consumer quality services to the enterprise. This changing paradigm creates space for startups to disrupt lagging enterprise tech, and drive adoption through more organic means in order to reduce the length of the enterprise sales cycle. For example, when a critical mass of employees are using Slack to communicate organically, the value proposition looks substantially different to the enterprise. Indeed, sharing and lightweight introductory products can provide a path to virality, and establish network effects over the longer term.

It’s worth noting that this shift has also been driven by huge reductions in the cost and friction of getting enterprise startups off the ground. With substantially lower barriers to entry given increasing access to infrastructure critical to operating a business (AWS/Stripe/Twilio), increased time and resources can now be focused on the user experience.

As we look forward to the next 10 years, we also expect this shift to translate into the physical world of retail, as it becomes more experience driven and multi-dimensional. Amazon continues to set the bar. The simple user experience of one-click checkout changed the game for e-commerce — Amazon Go is a simple strategy extension. If seamless user experience won the day in online, why won’t it win the day in offline? We expect in-store technology that can enable seamless checkout and improve user experience to play a crucial role over the coming years as retail adapts.

Consumer Technology Headwinds

In closing, it is worth noting how the wider venture and growth markets will play into the increased focus on enterprise tech. With record amounts of dry powder in venture capital funds, an enormous amount of capital needs to be deployed over the next five years. As enterprise exits look to rebound relative to the consumer since the dawn of the smartphone, many tailwinds exist to drive said change. One such example is the increasing complexity of navigating consumer tech markets given changing privacy standards with [the General Data Protection Regulation] GDPR.

As Mary Meeker pointed out in her latest Internet trends report, consumer tech companies are facing a “privacy paradox.” They’re caught between using data to provide better consumer experiences and violating consumer privacy. This isn’t to say that consumer tech is dead, rather that it is likely to take several years for companies to adapt to navigate choppy waters. This may drive increased innovation and offer a lifeline to new consumer tech business hoping to cut into Facebook and Google’s duopoly on online advertising, but we expect a lag that will not hinder enterprise tech companies in the same way. In sum, as we look into the next five years, we believe the next batch of tech winners will come on the enterprise side, both in the form of exits, and invested capital.

Andrew Steele is an investor at Activant Capital.