April by D’Ornano + Co.: Rubrik S-1 teardown, a look into Mistral.ai’s economics and what the future holds for Venture Capital and Private Equity, two challenged asset classes
This is our monthly newsletter dedicated to Tech x Investments.
Dear readers,
Generative AI (genAI) continued to advance rapidly last month. Foundational models such as the Meta Llama 3 8B and 70B models were released in April, while French company Mistral.ai was speculated to be raising funds at a valuation of over $5 billion. Both companies require large amounts of capital to finance expensive hardware, such as graphic processing units, which explains the high levels of funding required. Additionally, interesting to note that both companies are open-source.
While there is no doubt about the technological advancements in this field, the economics of these models still need to be found to ensure that LLM providers can generate robust cash flows in the long term. Several companies, including Cohere, Stability AI, and Inflection, are struggling, and public investors are increasingly expecting clear guidance on this point. Meta's share price dropped after revealing a significant uptick in capex needs, despite the technological success of the Llama 3 so far. We offer some insights on Mistral's economic engine in this edition.
At the application level, genAI applications continue to receive significant funding, both within software and hardware business models. Robotics, in particular, received widespread attention, with Figure, a company building human-like robots, raising $675 million in Q1, the highest funding last quarter. Vertical applications also remained a bright spot, as smaller LLMs enable companies to leverage their datasets in a cost-efficient way. In total, venture capitalists plowed $2.2 billion into genAI startups according to The Information's genAI database.
As genAI continues to develop at full speed, understanding the resilience of an existing company to the technology is paramount. GenAI is increasingly becoming what we refer to as a single point of failure (i.e. an existential threat to a company) for businesses that are unable to embrace the implications of this new technology on their business model and transform themselves accordingly. In a recent interview, Nvidia CEO Jensen Huang summarized this well: "Your company is not going to go out of business because of AI. It's going to go out of business because another company used AI. There's no question about that."
Beyond resilience, understanding how the new technology is redefining valuations in the tech space is key. In our next edition, we will explore how genAI is reshaping the Rule of 40 for SaaS companies. Meanwhile, recent earnings reports from public software companies show an uptick in valuations for genAI adopters, such as Intuit. However, the precise impact on growth of the new technology is still to be understood as pathways to adoption and/or monetization are being figured out.
In any case, genAI is definitely shaking up the SaaS world, and what was a safe haven for investors has become a ground of instability. Rubrik's IPO (see after) will be an interesting test here.
In the rest of the tech world, the question of whether or not the IPO window is reopening is still top of minds. Although I think no one has the answer as this depends on numerous parameters, of which macro-economic conditions are just one, I believe that last week's Rubrik IPO will be a test for VC-backed companies awaiting their public moment. Rubrik is demonstrating a stellar 47% ARR growth at scale (43% restated from the effect of its ongoing SaaS transition per its S1), but remains largely unprofitable with one of the highest S&M spend per total revenue of public software companies. Its share price evolution in the coming weeks will reflect how investors weigh high-growth as regards profitability. I am happy to share an S1 teardown in this newsletter.
However, only a fraction of high-growth tech companies will have the privilege of taking the IPO route, or pursuing a strategic or Venture Buyout exit, in the next few months. As we had predicted, many companies will rather take the path of "sad M&A" as startups flooded with VC funding are getting their moment of truth. No industry or vertical is immune.
In the same sector as Rubrik, cybersecurity, Lacework provides an interesting case study. Cloud security startup Wiz is reportedly in talks to acquire the company for $150M to $200M. Lacework was last valued at $8.3B in November 2021, so the acquisition price would represent a 97%+ markdown and would represent just 10% of its total funding raised.
Although there are some bright spots, the tech extinction is underway, and it is happening across the board, from early-stage startups to mature technology companies challenged by the genAI wave. More than ever, investors need to make sure that the economic engine of their targeted investments or portfolio companies is robust.
Thank you for reading!
Rubrik S-1 Teardown
Founded in 2013, Rubrik Inc. has developed a data management and security SaaS platform for enterprises and has become a market leader in cyber-resilience. The Company went public in the first IPO of 2024 on the NYSE under the “RBRK” ticker on April 25, 2024, raising $752m at an implied valuation of $5.6b (i.e., 6 times forward sales). The Company’s stock price rose by 16% on its first day of trading.
I breakdown Rubrik’s S-1 whose performance should provide broader insights into the appetite for tech public offerings, and more specifically on that of high-growth unprofitable tech companies. To what extent will public investors prefer high-growth (Subscription revenue is growing at an impressive 47%) vs. profitability?
A look at Mistral.ai’s economics
Mistral.ai, a French champion developing and commercializing open-source LLMs, has made a global impact since it was founded one year ago. Just recently, Sequoia cited it as one of their “Top 50 AI Companies of the Future”. The Information reports that Mistral is raising “several hundred million dollars at a valuation of $5 billion.” We take a deep-dive into the company’s economics using an outside-in approach to try to make sense of the numbers.
In a recent interview, Open AI’s CEO Sam Altman shares his thoughts on how large language models (LLMs) should evolve. For him, progress should not come from models getting bigger and bigger which stands as a relief from an environmental standpoint. So how will LLMs evolve? Read more to find out.
Exits, where are you? In this article, Dan Primack exhorts Venture Capitalists to exit startups that they have been keeping private for longer and longer. A whopping 37% of "unicorns" are being held for at least nine years by VC funds, including 13% that are past the 12-year mark, per PitchBook and the NVCA. If the VC game is to continue, it is critical that the IPO window reopens combined with M&A, even if it is a “sad” one.
Is Private Equity actually worth it? | Financial Times
The pros and cons of private equity have become increasingly debated. Almost every major institutional investor in the world is investing more and more in private equity - it has become the go-to strategy for any pension plan struggling to hit its targets - but some experts argue the higher returns are a mirage, and even some insiders admit they are probably going to decline. This article provides an in-depth review of the asset class and its challenges.
Primelis
D'Ornano + Co. advised Sagard on the secondary LBO of Primelis, a search engine optimization agency. Combining SEO consultancy and advertising while expanding its SaaS model, the company intends to expand its customer base by penetrating the Canadian, Mexican and UK markets.
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