August by D’Ornano + Co.: Why GenAI is not Disruption – it’s Discontinuity, the Exit Conundrum and why Europe should embrace open-source AI
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Dear readers,
It is a great pleasure to be back to writing after the summer break as we return to work. Labor Day and the second half of the year are just around the corner.
The debate around GenAI is as heated as before the holidays, with much attention on Nvidia – the poster child of GenAI. In trying to assess whether Nvidia will become a $50 trillion valuation and whether its market cap growth is sustainable, many critics argue that GenAI is overhyped.
Though the GenAI era feels epic, it has been less than two years since Open AI released ChatGPT 3.5, the moment that brought this long-gestating technology to public attention. We are still in the early stages of what promises to be a significant financial opportunity for companies and governments embracing it. The US economy alone could gain almost 9% in productivity gains and 6,1% in GDP over the next decade through GenAI per GS senior global economist Joseph Briggs. Beyond economic opportunities, GenAI is also a transformative force for society, with far-reaching implications in the social and medical fields. Here, it has the potential to bring unprecedented advancements, such as personalized treatments. In yet another domain, GenAI also changes the art of warfare, its technology bracing huge geopolitical implications.
This is why I argue in my latest Op-Ed that GenAI goes beyond disruption and is instead a discontinuity. It marks the beginning of a more profound and far-reaching transformation than many leaders have fully grasped. It will unfold over a longer timeframe than investors and entrepreneurs are used to, which necessitates adopting a multi-timeframe perspective in investments, and in a way that is not linear: embracing GenAI is not a plus or minus game; it is about taking a leap hindering a new economic order between winners and losers. The result and form of that leap are yet to be determined. Instead of obsessing about the daily moves of Nvidia's stock price, now is the time to take a step back and try to understand this monumental sea change that is GenAI!
So far, most of the funding for the GenAI tech stack by venture capital investors and the hyper-scalers has been directed towards financing the foundational models behind the new technology. Innovation is ongoing in this area, with Meta recently announcing work on Llama 4, which is expected to be 100 times more powerful than Llama 3 (!). At the other end of the spectrum, there is considerable innovation in smaller, open-source models now seen as a more economic and sustainable choice for many enterprise use cases. There has also been significant venture capital financing for enterprise and consumer-facing applications in the fields of customer support chatbots, productivity tools for employees, and content creation, to name a few promising use cases.
Whether it’s GenAI native applications, existing SaaS start-ups, or SaaS incumbents integrating GenAI features and products, we are still in the "adoption" phase and have not reached the "monetization" phase yet. It is still too early to expect widespread monetization. Investors should focus on whether customers are genuinely adopting these features/products and how monetization is already evidenced for those "power users" of these features/products. Public market investors will need more patience before software companies truly demonstrate growth from the technology, but they can already start disinvesting from those companies that, by all evidence, will not be able to ride the wave.
This resilience to GenAI should significantly impact company valuations, both for venture-backed and private equity-backed companies, as we gear up for the next wave of exits. The exit problem has been a major challenge for both VC and PE firms. With an IPO market largely closed, except for high-growth SaaS companies like Klaviyo and Rubrik, there is an estimated 731 unicorns worth a total of $2.4 trillion waiting to achieve some kind of liquidity. In this context, articulating a clear blueprint on how GenAI will positively influence a company's earnings (even in the long-term) will help sustain valuations that will likely reflect a strong markdown compared to the current values in private market investors' books. Recent valuations of companies like Revolut, Ramp or Stripe remain an exception and are linked to these companies' successful pursuit of high growth at scale in a challenging growth environment. The combination of high growth, a qualitative one, and a clear GenAI blueprint will sustain high valuations in the next months. Both can and should be objectively evaluated.
As we enter the year's second half, there are many reasons to be optimistic. Let's ensure we do not get disappointed too quickly due to unrealistic expectations about a technological promise that is just beginning. Introducing rigor in the financial assessment of GenAI companies and the proper guardrails around adopting the technology will allow investors, business leaders, and society to continue to seize this once-in-a-generation opportunity. I reiterate my call for cautious optimism in the first part of the year.
Have a good read!
Why GenAI Is Not Disruption — It’s Discontinuity
Generative AI is following the classic hype cycle. After almost two years of unrealistic expectations and euphoria, there is a rising tide of disappointment because GenAI has not transformed the world overnight. While there are many questions still to be resolved, one of which being to what extent will we have the supporting infrastructure (chips, data centers, energy) to allow for this massive technological transition, the framing of the analysis on behalf of many critics is fundamentally wrong. To GenAI skeptics, I want to send a clear message: GenAI is not disruption. It’s discontinuity. I explain how that changes the game here.
The Exit Conundrum
As exits move into reach for Venture Capital backed companies, investors and founders are increasingly trying to get better insight into their present valuations before they go into the market to see what price they can command.
Having clear visibility into valuation is critical for optimizing the chances for a successful exit — no matter which form that takes. I want to share with you some high-level thoughts about why this is important, how to think about value, and how to properly assess valuations.
In a co-signed OpEd both the CEOs of Meta and Spotify who cite the directive as evidence of how Europe’s “fragmented regulatory structure” was hampering the growth of open-source AI in the region, underline the need for Europe to embrace open-source AI. This comes at a time when Llama 4 - close to 40x larger than the EU AI Act’s threshold for ‘systemically dangerous’ – is in development.
Generative artificial intelligence poses numerous risks to Fortune 500 firms, from competition to security threats, many of them included in 10-K filings. Quartz dives into just some of them. The list is long.
Andreessen Horowitz just published its list of the 100 most-used AI apps. Check out which ones are rising up the rankings. | Business Insider
Venture firm A16Z has just released a list of the 100 most used GenAI apps. Given how critical usage is at this stage of the new technology’s development, it seemed worth sharing!
In his Jackson Hole speech, Fed Chair Jerome Powell said that the time had come to lower interest rates. Though we do not know the extent of the cut, this has been the clearest statement yet that the Fed is likely to make a move in September’s meeting.
Captions
D’Ornano + Co. advised Index Partners in leading Captions $60M Series C round. Captions is a generative video creation and editing platform that transforms the creative process through AI. It enables users to produce high-quality, studio-style videos directly from their phones by automating tasks like editing, adding captions, and scriptwriting, catering especially to creators on platforms like TikTok and Instagram.
Pearl
D’Ornano + Co. supported Left Lane Capital in leading Pearl $58M Series B round. Los Angeles-based Pearl leverages AI to enhance dental care by providing automated, accurate diagnostic tools and patient care solutions. Pearl has made history by securing the first-ever FDA clearance for AI software designed to support dental professionals.
Cognigy
D’Ornano + Co. advised Eurazeo Growth in leading Cognigy €50M Series C round. Cognigy automates customer and employee communications using advanced conversational AI, enhancing customer satisfaction through natural, connected conversations.
Nutripure
D'Ornano + Co. advised PAI Partners on its acquisition of Nutripure, a leading DTC sport and wellness platform allowing consumers to take better care of their health, from Ardian.
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