January by D’Ornano + Co.: Exits in 2024, the opportunities and pitfalls of genAI for PE investors, a framework for assessing efficient growth in SaaS and the Crystal Ball for 2024
This is our monthly newsletter dedicated to Tech x Investments.
Dear readers,
I am thrilled to write this first edition of 2024 of this newsletter. Thank you for your ongoing interest and loyalty. As innovation continues to accelerate, I remain committed to providing fresh perspectives on high-growth technology assets and frameworks for their assessment across asset classes.
2023 marked a pivotal milestone for the firm following my move to NY early in the year to grow our US presence. The pace and dynamism of the city and the incredible connections I have built over the last year have brought me much joy. Despite a (very) challenging market environment, we are proud to have reached new milestones and continued strong growth in revenues and team members. And now, onto 2024!
If 2023 was a year of transition, 2024 will be the year of truth in which investors will complete deals with valuations that would have adjusted (perhaps not completely) to the new market environment. This will be a year of Exits as both Venture Capital and Private Equity investors seek to return capital to their LPs. Take a look at the stats below.
In VC, the value created by start-up exits in the US last year was $61.5B compared with a peak of $797B in 2021. In Europe, start-up exits reached less than $12B, the lowest in a decade (per Pitchbook data).
In PE, where the trend is the same, the number of exits in the last quarter was nearly a decade lower than in the US. As of today, Buyout groups have $2.8T in unsold investments, an unprecedented backlog.
A stressful question for investors and founders is to know what these exits will look like. When it comes to high-growth, unprofitable tech companies (including the herd of Unicorns and “Soonicorns", but not limited to that), the problem becomes more acute. What is the intrinsic value and resilience of a company raised in a low interest-rate environment with abundant funding? What conviction can be obtained on the duration and magnitude of growth and the steady-state operating margin? Also, what is the level of external cash still needed to get there (if any)?
The responses to these questions underpin the valuations to come of these high-growth tech companies. And thorough diligence will be needed to get them. Multiple scenarios exist.
Growth and “quality” of growth condition them first.
In some cases, growth has stalled and will not pick up again unless external financing is obtained and that runway is coming close to an end. As sent to Fortune for the 2024 edition of the Crystal Ball, Tech unicorns that have not adapted their financial models (to make it viable) to the new rate environment will begin to run out of capital and fail. Alternatively, these companies will be acquired through “sad” M&A, to quote one of my clients who coined this expression, which I find pretty accurate. Both these issues will not be epiphonema and, should concern roughly 50% of high-growth, unprofitable tech land.
On the contrary, those companies that have pivoted their business to drive efficient growth and that are growing at high-growth rates (i.e., north of 30% or better 40%), will be able to attract Buyout investors looking to invest in tech-native businesses (internet, SaaS, etc.) as long as profitability is reached or will be on the short term, or Strategic Acquirers. The best of them will even continue their route to IPO, the last 18 months having just marked a pause in their trajectory and allowed them to be even better companies. But the bar is high as evidenced by Klaviyo’s metrics in last year’s IPO. We explore how to define “efficient growth” below and are happy to share a study we conducted over Q3 in which we build a framework for assessing the efficient growth of SaaS companies (See Expert talk below). These companies will represent the remaining 50% of companies.
Next, genAI will play a critical role in parting companies from both scenarios. As we explore in our article below, the first job PE investors must do is to part from the losers of this platform shift, i.e., companies whose business model will become obsolete due to the technology. The others must then correctly grasp the impacts across their P&L of genAI. While some will be able to achieve significant productivity gains and create additional value in their offering, others will only partially seize the opportunities and face higher costs upfront.
Last, business model resilience is key. Farfetch’s recent rise and fall has given us an illustration of how critical it is to understand the quality of an asset’s business model prior to conducting any other analysis.
In the high-risk environment of 2024, where macro and geopolitical risks are expected to play a prominent role, building a conviction on a high-growth tech asset through adequate analysis of growth, genAI impacts, and business model resilience is more important than ever. Have a great read!
GenAI investing: the potential and pitfalls for Private Equity investors
At such an early stage of genAI and despite the huge wave brought by chatgpt 3.5, there are still many unknowns such as which version of the technology – open source or closed – or model size – large or small – will ultimately win. For Private Equity investors however, the opportunities in GenAI are not the companies building the infrastructure (i.e. the models). This remains better suited for venture capital, big tech and large asset managers because the costs (and risks) are still too high. Instead, PE should focus on the companies deploying it in their business. We identify in this article the opportunities and the pitfalls for PE investors.
Over the past 24 months, software companies have been hit with a myriad of economic circumstances which have caused a deceleration in growth through both decreased new bookings and, for most, higher churn levels. SaaS multiples have adjusted to this new reality: overall EV/LTM revenue multiples of public SaaS companies have seen a steep drop across the board from Jan.21, with high-growth unprofitable companies most penalized. However, some companies in the world of software have continued trading above 10x LTM revenues, considered as “best-in-class” valuations. What do these companies have in common in balancing growth and profitability? What lessons are to be learned? We explore the topic in this report based on Q2 figures and initially released to our clients on September 25th, 2023.
The Crystal Ball: VCs, private equity investors, and tech founders predict what’s coming in 2024 | Fortune
We were honored to share our predictions in the special edition of Fortune’s Term Sheet on what the coming year will bring for private market investors investing in tech, focusing on the fate of unicorns and how many will go extinct. Read on to discover many other predictions from early-stage VC trends to exits on behalf of key actors of the ecosystem.
Private equity groups hunt for new exit strategies as cash piles up | Financial Times
2024 will represent a pivotal year for PE with the double imperative of sourcing new deals and successfully exiting portfolio companies. This articles dives into what is to expect in 2024 for Private Equity investors who currently sit on a record $2.59tn in cash reserves.
In assessing a company’s resilience, biodiversity does not first come to mind. Yet it represents huge potential impacts. Despite its importance, biodiversity risk has received limited research attention, due in part to challenges measuring this variable. In their most recent research, NYU Stern Professors Theresa Kuchler and Johannes Stroebel, PhD student Xuran Zeng, and Stefano Giglio (Yale) develop multiple measures of biodiversity risk and work toward answering how biodiversity loss affects economic activity and asset prices (and Tech is not immune to this).
Nabla
D’Ornano + Co. has supported Cathay Innovation on its 24M€ late-stage investment in Nabla, a GenAI Vertical Application developing an AI assistant for doctors that automatically writes clinical notes.
You like what you've read? Tell and share with your friends!
Newsletter powered by D’Ornano + Co.
