February by D’Ornano + Co.: is the Tech investing glass half-empty or half-full?, the importance of a new form of due diligence, building strong revenue models in AI, and why the Tesla recall matters

This is our monthly newsletter dedicated to Tech x Investments.

Dear all,

As we set in 2023 and take a broader perspective on investing in Tech - in its widespread acceptance in which Tech is much larger than pure “Technology” but an enabler of growth and transformation, I want to raise the following question: How optimistic do we want to feel at this point?

To provide a tentative answer, let’s look at that Tech investing glass in both ways: is it half-empty or half-full?

Let’s start with half-empty first.

We have now seen, almost all 2022 stats being out there, that the last twenty-four months have been characterized by over-investment and a loss of discipline. The pandemic fostered a wave of innovation to deal with a new paradigm in which remote was the new normal in many aspects of our lives, and that resulted in numerous “factor-driven” investments in which the strength of unit economics, which in most cases tell the truth when looked at correctly, were forgotten in a context of a record level of dry powder, free money and intense competition amongst investors. In addition, the FTX scandal and the collapse in public Tech valuations, which have now hit private markets in Tech, have reminded us that discipline is key and that, in all cases, investors must complete diligence. But not in any form (see infra).

Also, for the first time, macro matters may have come to matter in Tech when free money was no longer an option. On this ground, macro news is not excellent – inflation is still around (and should be here for many months, looking at historical inflation cycles), and interest rates might not have reached their peak. But investors have now factored this into their thesis, and while this remains an uncertainty factor, it is not hampering deal-making in our view.

Last, perhaps worse than the macroeconomic outlook, the geo-political outlook is still highly uncertain. The war in Ukraine is a quagmire with implications at many levels, and the suspicion of Chinese balloons in the US is not bringing any help on the international relations side. In our view, geopolitics will be the critical element to watch over the year, on top of the direct implications it brings in supply chain disruptions, the surge in raw material costs, etc.

But there are many reasons why the glass should be seen as half-full too.

First, there is still a long road for enterprise software with further room for increased enterprise workloads in the cloud. Per Gartner, worldwide end-user spending on public cloud services is forecast to grow 20.7% to total $591.8 billion in 2023, up from $490.3 billion in 2022. Many SaaS native businesses that were still at the venture stage only a few years or months ago have reached maturity, and the recent quest for profitability imposed by the new funding environment has accelerated “path to profitability,” turning part of these businesses into ripe Private Equity targets for Growth or buyout operations.

Second, we are in a fascinating period in which innovation is continuing at full speed: generative AI has replaced crypto and blockchain on top of venture capital firms’ priorities, which reflects the forward-looking nature and optimism of the industry. Sure many of the models being created are just “hype,” but this is the implicit rule in Tech and the role that VCs are continuing to play: funding many startups knowing that only a fraction will thrive. In the end, generative AI will probably reach maturity (as AI has actually) and be embedded in strong enterprise use cases.

Last, Tech has for sure reached more maturity, and successful Tech and tech-enabled business models are now built in (better) compliance with Regulation. Innovative business models are even shaping new forms of Regulation as evidenced by the recent Tesla recall (see analysis after), which is a premiere for over-the-air recalls as it applies to software. Also Tech is increasingly compliant with ESG considerations as reflected in the very recent announcement of France’s list of prominent scale-ups which takes a holistic stance at showcasing Tech companies by taking into account climate and gender diversity as a ranking factor.

So will you see the glass half-empty or half-full? Have a great read, and see you soon!

The Importance Of Due Diligence And Key Takeaways Going Forward

In this first piece as a contributor to Forbes Finance Council, I explore the #FTX fallout while stressing the importance of the Hybrid Growth Diligence approach, which allows investors to accurately assess high growth and disruptive assets with the right level of discipline applied to all material matters.

Once the adequate framework for analysis is set, resting on an in-depth understanding of the specificities of the target company’s vertical and business model, a holistic approach connecting the dots between financial, legal, and ESG matters allows for identifying the relevant opportunities and deal-breakers.

Building strong revenue models in AI

Artificial intelligence (AI) and Machine Learning (ML) are one of today’s most “hype” technologies.

First, AI is in a bright spot when it comes to funding. Venture capital investment in generative AI has increased a whopping 425% since 2020 to $2.1 billion in 2022, according to PitchBook, even as the broader technology industry shrinks.

Second, every startup, it seems, calls itself an “AI company.” And with significant advances in data capture, labeling and manipulation, cloud computing and machine learning becoming low-cost and mainstream, this is partly true.

However, true AI + ML companies — ones whose products are built on proprietary AI, both horizontal platforms or vertical applications— are now emerging in more significant numbers and the Tech giants are looking to take the lead.

However, startups and larger tech companies bringing AI technologies to market still need to select the right revenue models to monetize their technology and advances truly. In a recent conversation in NY, we shared our thoughts with Tanya Dua, Technology editor at Linkedin News. Read on to find out some of the key takeaways.

• Why The Tesla Recall Matters | The Atlantic

Last week, the National Highway Traffic Safety Administration recalled Tesla (NASDAQ: TSLA) vehicles. The recall would impact about c.360K of its vehicles that are equipped with Full Self-Driving Beta software. This article explores why this recall is positive as it is of a new kind - it is "over-the-air" and concerns Tesla’s software (no hardware involved here) – and at a critical point in automotive safety history.

• How pervasive is corporate fraud | Review of Accounting Studies

In this thorough exploration of corporate fraud, Alexander Dyck (University of Toronto Rotman) provides a tentative answer to the pervasiveness of corporate fraud. We understand that accounting violations are widespread (i.e., in an average year, 41% of companies misrepresent their financial reports, even when we ignore simple clerical errors, per the author). Fortunately, securities fraud is less pervasive (i.e., in an average year, 10% of all large public corporations commit (alleged) securities fraud). Still, these numbers are material, and the FTX case is not an isolated one urging for widespread caution when looking at potential investments.

• Introducing Pitchbook Patent Research | Pitchbook

Building on our conviction that hybrid lenses featuring financial, legal, and ESG, are vital to understanding new and disruptive business models, we feature this new research done by Pitchbook on how proactive patent strategies can help drive valuations during the lifecycle of the investment and at exit. This emphasizes why legal data (and here IP) can be a positive factor in an investor’s decision and not just a potential dealbreaker. 

Welcome to the Jungle

D'Ornano + Co. has advised Revaia and Cipio Partners on their €50 million investment in Welcome to the Jungle, a recruitment platform hosting company showcases and offering its own applicant tracking system, which is now looking at expanding in the US.

The Exploration Company

D'Ornano + Co. has assisted Red River West and EQT Ventures on their €40m investment in The Exploration Company, an innovative Munich-based firm developing reusable orbital capsules. This historic Series A financing marks the emergence of the European #spacetechnology ecosystem in the global space industry turnaround.

Kickmaker

D'Ornano + Co. has supported MML Capital on its investment in Kickmaker, a specialised outsourced engineering and product development consultancy firm, which has a deep expertise in robotics and the integration of electronic and mechatronics systems.

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