August by D'Ornano + Co.: Being a Technology optimist in 2023, Finding the right Path to Liquidity, and a quick S-1 - teardown of high-growth SaaS company Klaviyo
This is our monthly newsletter dedicated to Tech x Investments.
Dear all,
It’s great to be back from the summer break and to start this second part of the year with you.
I wanted to take a step back here and reflect on the first part of the year: so much has happened in both the Private Markets and Technology fields that we went through a whirlwind. Recent figures show the extent of the drop in late-stage and growth funding, and although the NASDAQ continues to show strong performance, keep in mind that companies out of the “Magnificent 7” are still strongly impacted from a valuation standpoint. On the other hand, money keeps pouring into the GenAI space.
I had the opportunity to attend a session on “Investing in The Technology of Tomorrow” at the Milken Institute Hamptons Dialogues, and it was great to confront perspectives with top minds across the VC to Buyout investment spaces. Here are my key takeaways so far this year:
The first change, which we frequently addressed here, is that brought by Macro, which has changed both the path to growth and to liquidity of most high-growth tech companies with the new imperative of “efficiency” and “profitability” as VC money has gradually dried up. Interestingly, all three companies who filed for IPOs last week – Arm, Instacart, and Klavyio – have hit the profitability milestone (See after for our S1 teardown of Klavyio). As these companies continue to grow and pursue disruption, finding the right path to liquidity for founders and investors appears critical, and we explore different routes in this month’s Medium article.
The second is the one brought by GenAI, which has radically changed the tech investing playbook in just a couple of months since ChatGPT was unveiled. There is a gold rush across the GenAI tech stack at the VC level, with still an unresolved question on the right choice for AI foundation models (open vs. closed, general vs. niche, etc.). For Private Equity investors, there is a massive opportunity (and challenge) to back those more traditional SaaS companies embedding GenAI at the heart of their tech stacks and creating the correct flywheel. A key point of attention is how this is changing the financial lecture of these models, with indicators such as the Rule of 40, which might quickly become obsolete (Stay tuned for our next article, on how GenAI is creating new assessment grids for SaaS companies).
But GenAI’s impact goes well beyond tech companies themselves, and my view here is that the profoundness of this impact on the broader economy is yet to be fully assessed. Per a recent Goldman Sachs study (see below), GenAI could cause labor productivity to rise 1% in the decade following widespread use. There is an open window here for established companies to take a (big) slice of the new GenAI-powered future. To reflect this change, we have chosen at the firm to embed GenAI resilience analysis in our work systematically. When performing Hybrid Growth Diligence, we will challenge the normativity of a company’s current and future profitability in light of this platform shift. We have already taken a similar approach to assessing Climate resilience.
More than ever, I am a fundamental optimist about what Tech can bring in the years to come, and I am genuinely excited to be able to take part in this massive transformation going on through building adequate frameworks of analysis and helping capital flow in truly resilient business models (which does not remove their inherent technological risk). The history of other inventions such as electricity, motor cars, and, more recently, the internet and the cloud suggest that GenAI will create new business models and transform existing ones to an extent that cannot be known today. And it is this uncertainty, and how we can help overcome it that is exciting.
On a more personal note, I am glad to have continued to build solid foundations for the firm in these times of adversity through building deep-sector and technical expertise across the field of Technology, and I will continue doing so in the coming months. I hope that our new website reflects this. Have a great read!
Finding the right Path to Liquidity
Given the pressures in VC and Growth fundraising, it’s no surprise that the path to liquidity is the n°1 preoccupation for founders and investors in this funding crunch. High-growth Tech companies have pivoted from “growth at all costs” to “profitable growth”. However, this new mantra is often misinterpreted to mean that a company can reduce its rate of growth as it seeks to reach profitability. Not true. Investors want to see both. I explore here different paths to liquidity for investors and founders to help chart a financial path forward using our Hybrid Growth Diligence framework. Read-on to findout which is the right one for you.
Klaviyo
I wanted to share my thoughts on the recent Klaviyo IPO filing for several reasons:
It is the first high-growth SaaS IPO after a long, almost two-year period in which they have been long awaited (!),
Initially bootstrapped, it then received a significant part of its funding during a period of large funding availability, and,
The company is well positioned to capture one of the major trends enabled by the boom in GenAI.
Using our HGD methodology, I offer a point of view on the upcoming IPO with many pros and some (minor) cons.
The impact of underperforming 2020 and 2021 US IPOs | J.P. Morgan
The IPO cohort of unprofitable tech companies of 2020 and 2021 was not a great one for sure. 80% of 2020 and 2021 IPOs have negative returns, with average net returns of -30%. Standout!
POs of the 2019 cohort bring some bright spots however amongst the wider disaster for IPO investors. In this study, J.P. Morgan deep dives into IPO returns and expresses a positive view on Tech IPOs.
Money is Pouring Into AI. Skeptics Say It’s a ‘Grift Shift’ | Institutional Investor
Taking a more nuanced view to the GenAI boom, this article by II highlights how many investment theses around GenAI are misleading with many companies trying to ride the wave to counter funding drought. It goes on to highlight the risks existing on “real” GenAI companies stressing that many models are yet unproven, starting at revenue level. This provides for an interesting counter-perspective on GenAI that I wanted to share with you readers, though not affecting the views expressed above.
AI Investment forecast to approach $200 billion globally by 2025 | Goldman Sachs
In this widespread article Goldman Sachs quantifies what AI investments could look like in the next years, and the numbers are impressive. AI investments could account for up to 4% of the US economy by 2025, Goldman Sachs estimates, with AI investing poised to hit $100 billion in the US and $200 billion globally by then. Read-on for more details.
Holy
D'Ornano + Co. has advised Left Lane Capital on leading the €10.5M Series A funding in HOLY, a direct-to-consumer brand producing a unique energy drink designed to boost energy, alertness, and concentration, formulated with health-conscious ingredients and environmentally friendly packaging, specifically targeting gamers for sustained energy.
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