Dear readers,
This has been an intense and fascinating past month, in which I had the opportunity to engage across Europe and the US in many insightful conversations with entrepreneurs, investors, and key stakeholders within academia and government. One notable highlight was the South Florida Dialogues, held by the Milken institute, from which I returned filled with new perspectives on our strategic priorities as a firm and the active role we want to play in a rapidly changing world.
As some of you may know, I fell into the technology industry quite accidentally when I started the firm almost a decade ago. I found it fascinating. Since then, our firm has worked on a whirlwind of more than 600 engagements. Across each one, I have strengthened my conviction that investors need to assess fast-growing, innovative models in a different way than they assess traditional companies. For the latter, looking at past performance will provide strong guidelines as to where a company is headed. But for companies bringing new technologies forward – from cloud-based to science-based technology, and from asset-light to asset-heavy models – or for those putting these new technologies at the forefront of their business models, a different approach is needed: one that rests on building confidence and conviction regarding a company's ability to grow quickly and resiliently.
This is a challenging exercise for investors due to the high uncertainty associated with these new technology companies, at both a technological and an execution level. Even if the technology is strong enough to isolate the company from its competitors at a given point in time, long-term, resilient high growth requires a solid economic engine. Specifically, the combination of a solid business model and best-in-class unit economics. The artificial financing conditions for many start-ups in recent years - that I refer to as "Zero Interest Rate Babies” (ZIRBs)- allowed companies that lacked a solid economic engine to prosper. Today, these ZIRBs are facing a period of reckoning, as I explore in my recent Fortune OpEd.
Long-term high growth also requires insulating companies from single points of failure that can arise from external shocks that - even if the economic engine is robust - will most likely kill the business or at least negatively affect it. Geopolitical turmoil, macroeconomic risks, climate change, and GenAI are some of the most pertinent. In the case of new technology, these risks constitute a second layer of uncertainty, in addition to that brought by the business itself, as seen above. Across the private markets, many companies are still struggling to cope with the adverse macroeconomic regime of the past two years, from the leverage risks of tech buyouts to the funding drought of the start-up ecosystem. But they must now prepare for these external, "unexpected" risks that are proliferating: management teams must therefore respond to and anticipate them adequately. The pandemic constitutes a recent example of such a threat.
As we continue into 2024, we are energized by the desire to help investors invest in winning businesses and by seeing the entrepreneurs who build them succeed. Our own evolution as a business is seeing our Hybrid Growth Diligence offer expand to create "Advanced Growth Intelligence” (AGI). AGI is augmented diligence – one that is incremental to that of the investment team – that aims to assess the quality of a company's economic engine and resilience to these external shocks. With AGI, our goal is not to eliminate or even reduce the uncertainty associated with new technology investments. Rather, it is to help our clients make more informed investment decisions and help management teams build a compelling growth strategy.
As the macro-economic environment brightens with a stronger-than-expected US economy, and despite the concerns we face as we continue into 2024, we are living in a fantastic time from an innovation standpoint. Putting aside all the threats and the hype, GenAI is a once-in-a-generation platform shift with profound ramifications well above the GenAI tech stack itself, and with multiple opportunities to seize. It is giving way to many new use cases within the field of technology itself, starting with the transformation of SaaS and extending beyond into traditional assets in education, healthcare, and financial services, just to name a few. Finally, it also spearheads tremendous opportunities around the tech stack itself, starting with the digital Infrastructure it require. In this specific case, Arm (+55% in its stock price since its earnings call) is benefiting from its status of being a GenAI stock.
Forward-thinking pattern recognition and preparation for the “known unknowns” are key ingredients to see around corners and achieve success in 2024. With that said, I wish you a great read!