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!