April by D’Ornano + Co.: ideas from Milken on navigating the Private Markets in a new paradigm, the new state of play of European Deeptech and questions on the race to “God-like AI”

This is our monthly newsletter dedicated to Tech x Investments.

Dear all,

I am writing this newsletter on my way back from the 2023 edition of the Milken Global Conference. What a great moment I had discussing the new paradigm in the Private Markets (and in dealmaking) and the shifts fostered by Data, AI, and Machine Learning in our economies (with what better persons than Eric Schmidt and Reid Hoffman themselves, who honored us with their presence at a panel on Tuesday).

There was a consensus that the Private Markets have profoundly changed over the last year, mainly due to macroeconomic shifts. The 5pp interest rate rise we have undergone in the past year to curb inflation is here to stay, perhaps with some attenuations, but only modest ones. This high-interest rate environment combined with high inflation is a new paradigm (at minimum, a sharp contrast with 2020-2021) with profound implications on dealmaking across all asset classes.

In Venture Capital first, where valuations are hit the strongest (-58% over the last 3 quarters in US Venture per Pitchbook). If the Power Law still applies to early-stage companies (and is perhaps even reinforced with the excitement over Generative AI), in-depth assessment of execution risk through surgical analysis of a company’s Unit Economics to assess whether profitability exists or is attainable has replaced growth at all costs. For sure, those companies whose growth is driven not by high-quality recurring (or re-occurring) revenue but rather by online ads will have (significant) trouble finding financing. And this is a good thing in my view.

Now on to Private Equity, where the impact of a 5pp environment goes beyond picking the right companies and questions the playbook at large. The new paradigm is forcing PE firms to commit to solid value creation plans at the portfolio company level through add-ons (representing the bulk of PE activity over Q1 23 per the latest Pitchbook data) and operational improvement plans. This playbook is not new per se – instead, it is ending a period where value creation was more accessible and often linked to multiple increases. However, one difficulty is unique and challenging to tackle: inflation. Understanding it clearly, and establishing scenarios for how it will impact portfolio companies from investment to exit is imperative and should be done with due diligence applying new lenses to assess resilience ultimately.

Last Strategic M&A, which is also facing its own headwinds, the strongest one being strong anti-trust pressures which were a topic of discussion on almost every Financial Markets panel.

In this paradigm, taking a long-term view of an asset is imperative, even when the road has never been traced in the case of high-growth and disruptive assets. In other words, investors should assess targets not just based on their current or past earnings but by taking a multi-timescale approach to gain a clear conviction of the company’s pathway to growth and profitability: will it reach its endpoint, and how bumpy will the trajectory be? Two key questions whose difficulty is perhaps reinforced by the inevitable impact of generative AI and ESG considerations on these companies and which make the overall assesment truly challenging (but so much more exciting).

Discipline and openness to change are my two key takeaways for dealmaking from Milken. Have a great read!

From Hype to Hard Science: An investor's guide to understanding new frontiers in European Deeptech

At the 2022 DealBook summit, BlackRock CEO Larry Fink predicted that the downfall of FTX would cause venture capital firms to rethink where they put their money. “It’s not going to go to all this stuff that provided us good utility to get food quicker, or find a taxi sooner” Fink said. “I think it will be much more hard science, and require a lot more technical understanding.” Fink’s prediction is playing out in Europe. According to Dealroom, European Deeptech startups raised $17.7 billion in 2022. While that’s 22% less than 2021, it’s still up 60% from 2020, making this one of the most resilient startup investment sectors. But this sector has its own risks, with models that are largely different to what asset-light SaaS start-ups had accustomed us. We explore in this article the state of European Deep Tech, the unique challenges of these models and how disciplined due diligence should be conducted on them.

Ynsect: Exploring the frontiers of agriculture with insect alternative proteins

In this Use Case, we highlight how we applied our Hybrid Growth Diligence methodology on a late-stage investment in one of the world’s leaders in Alternative Protein, French-based company Ynsect.

The investor wanted to make a Late-stage investment in a business that operates large vertical insect farms. Ynsect has developed, through years of research, a proprietary method for breeding mealworms and then processing them to create premium organic alternative proteins. Assessing this company from a financial and legal perspective brought its specific challenges, some of which are common to many companies operating in the space of Deeptech. Read-on to see how we tackled the complexity of assessing this highly disruptive company in a constrained financing environment.

• We must slow down the race to God-like AI | The Financial Times

Of course, this newsletter could not be complete without talking about Generative AI, which has become “The” word in recent weeks and was on perhaps all the panels at Milken this week. Despite the technological breakthrough that NLMs represent and the acceleration/transformation of the industries it will impact, Generative AI comes with its (massive) sets of ethical issues with the fear that the Technology will come to be out of control and/or in bad hands. Philosophy is now intersecting with Technology.

In this great piece, AI specialist Ian Hogarth brushes the state of play and states his doubts on whether the race has gone too far or not. Though the picture painted is one that implies a high degree of inevitability, Ian Hogarth himself highlights how just one KPI - the proportion of alignment vs. capability FTEs - can help assess ethical compliance of a Generative AI company. So we have a power to act, and should seize it. Read on for an exhaustive view of the subject.

• People Started Buying Crocs During the Pandemic. They Can’t Stop | The New York Times

Not all factor-based only investments made during the wake of the pandemic were bad and some bets on companies betting on long-term lifestyle changes have proven to be successful. In the space of retail, Crocs is a company that has demonstrated the ability to build a proven business model not based on hype but on a combination of best-in-class execution in Consumer goods and Retail and capitalization on long-term changes (i.e. work from home). The NY Times brushes a portray of this company designing perhaps aesthetically questionable shoes.

• Bed Bath Moves Into The Beyond | Bloomberg

At the other end of the Retail spectrum: Bed Bath and Beyond. The filing for Chapter 11 of this behemoth in Consumer Goods + Retail has come as a shock and a symbol of the difficulty of many companies in that space to adapt to a new state of play. Matt Levine tells the story of the descent.

This comes a couple of days later after another filing for bankruptcy of another well known and loved company, Tupperware. Both illustrate the ongoing transformation of the Consumer Goods + Retail space fostered by the pandemic and here to stay. Technology is revolutionizing both the consumer experience and retailers’ ability to tailor their product, innovate and to meet the needs and wants of an increasingly dynamic and diverse customer base. More to come.

Ynsect

We advised investors in Ynsect’s €160m Series D megaround. This disruptive French #AgTech company is committed to the challenge of providing sustainable, high quality nutrition to farmers and domestic animal feed markets and is a pioneering force in the transformation of the agricultural world.

PAI Skincare

We advised Famille C, the holding company of the Courtin family, owner of the French cosmetics group Clarins, in PAI Skincare’s Series C funding round, a fast growing #Ecommerce company producing organic skincare products.

Deltalys

We supported Tilt Capital in Deltalys’s funding round. This disruptive #ClimateTech company operates biogas purification systems to optimize gas production. This funding round will accelerate the company's growth in supporting producers and operators of renewable gas recovery units to improve the profitability and environmental performance of their units.

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