July by D’Ornano + Co.: an update on our European Tech predictions for 2023, uncovering value in the Private Markets and a zoom on the MLops part on the GenAi tech stack.

This is our monthly newsletter dedicated to Tech x Investments.

Dear all,

I made a set of predictions at the beginning of the year on what was in store for European Tech in 2023, and as we wrap up this first part of the year, I wanted to see how those are turning out overall (I will go into full detail at the end of the year). Most are unfolding as predicted!

First, Macro. The new regime for Tech investing (i.e., the end of free money) has for sure continued over H1. Though we are seeing some optimism here with inflation that is easing (but still largely above the Fed’s target of 2%), yesterday’s quarter-point increase in interest rates marks the 11th hike in US interest rates since March 2022, in what has become the most rapid monetary tightening since the 1980s. We are still in an uncertain macro-environment, and continuous re-evaluation of the latter is critical for investors. 

Then, Growth (You, as readers, know that is my preferred concept). Tech and, more broadly, disruptive companies have in common that they are fast-growing. Assessing the absolute level of that growth and its quality is critical. H1 has brought us insightful perspectives on both these aspects. 

First, on the absolute level of growth, we are seeing a reset. Looking at cloud companies (with Annual Recurring Revenue (ARR) as the appropriate indicator for measuring growth), recent figures show that growth in new ARR is decreasing since January to stand at a negative 20% (in comparison to + 50% over 2020-2021, and + 20% in the five years before). This deceleration is unsurprising as the general economic slowdown has trickled into Tech. It will be interesting to see where we stand here at year-end, with profound implications on what we see as a “good” level of growth. 

And this leads us to our second point, i.e., the quality of growth. Early this year, I started talking (with quite some amusement) about the “jellyfish” that I proposed substituting to unicorns, though I admit it is far less appealing as a concept. I praised the jellyfish as it is the most efficient creature of the animal kingdom (!): companies want to grow fast, yes, but no longer at all costs (which was not sustainable anyhow for evident macro reasons). And with the end of free money, the ability to grow with lower Sales & Marketing input comes with a premium. It is no surprise that Datadog, which just surpassed the $2B ARR milestone, is valued at 18* ARR. On many grounds, this company is "what good looks like" in Tech: constant innovation and growth enabled (notably) by product innovation. 

The clear implication for these high-growth and disruptive companies (and their investors) seeking a path to liquidity (and notably through IPO when the window reopens) is to build a long-term plan for growth at scale and to deliver against it quarter after quarter. One that is efficient and that leads to a rapid and straightforward path to profitability. Remember, only best-in-breed ultra-high-growth companies have the option to escape this scenario right now. For all the others trading some growth points for profitability will allow for a sound transformation.

Last, “Scientific” Tech. The unprecedented development of GenAI, favored by massive investments in the sector, has put us in a new era of innovation. Like many, I view GenAI to be an enormous transformation and opportunity. There is undoubtedly much hype around the sector, with impressive valuations regarding current revenue levels. Still, the trend is real, with opportunities across the GenAI tech stack – and we focus in this month’s edition on MLOps – and in upending established business models by incorporating GenAI in their product roadmaps.

Of course, all of this reinforces – if needed – our vision that new lenses are needed to correctly assess these high-growth and disruptive models, not only to discard what could be bad investments but primarily to cherry-pick (ahead of others) the potential winners. Have a great read, a fabulous summer, and see you in September!

Dry Powder Roulette: Deploying Capital and Uncovering Value in the Private Markets

I recently had the opportunity to debate on the topic of "Dry Powder Roulette: Deploying Capital and Uncovering Value in the Private Markets" at SCALE Global last month. I focused on our core expertise at D'Ornano + Co.: High-growth + Disruptive assets, with the unique challenges that bring these fast-growing and uncertain companies. With several recent use cases, I highlighted how rigorous financial analysis grounded on a specific understanding of the asset's business model not only allows one to understand the underlying business truly but also to challenge the drivers of intrinsic value and resilience of the investment.

Decomposing the GenAI tech stack: what every investor should know at each level. Part 1 - MLops

Last month, we discussed what every investor should know about the generative AI tech stack, identifying three core components - the Foundation Model, MLOps Model, and Application Model - as well as the opportunities and risks that are specific to each. In this month’s post, we dig deeper into machine learning operations (MLOps and LLMops), a combined category encompassing machine learning, development, and processes that serve as quality control across several business functions.

• Hot Private Markets for GenAI | Forbes, Crunchbase, TechCrunch 

GenAI is a hot and capital-intensive market, with some big transactions over the last few weeks. Inflection raised $1.3bn from investors including Nvidia (with a valuation of $4B), to build the world’s largest GPU cluster. This is the second largest raise this year, behind only Microsoft’s massive $10 billion investment in OpenAI. Databricks bought MosaicML for $1.3bn - its last round valued it at $222m. Thomson Reuters paid $650m for Casetext, a legal software company that recently pivoted to LLMs.

• The Private Equity Machine will be tough to unjam | Bloomberg

In this OpEd, Paul J. Davies asks if it is the end of the golden age of Private Equity given the exceptional challenges faced by these investors, and in particular those doing Buyout deals. Interesting view that comes at a time where for the first time in a decade, Growth equity deals should surpass Buyout deals in the US in 2023 per latest Pitchbook data.

• Lessons from the Catastrophic Failure of the Metaverse | The Nation

Taking a highly critic stance, this article reflects on what the Metaverse, a hypothetical iteration of the Internet as a single, universal, and immersive virtual world that is facilitated by the use of virtual reality (VR) and augmented reality (AR) headsets, has become. Though the hype is over, the underlying technologies continue to develop. So don’t burry it yet please.

OrganOx

D'Ornano + Co. has advised Lauxera Capital Partners on their investment in OrganOx, a UK-based medical device company changing how donor organs are preserved in the critical time between donation and transplantation.

Digital Prod

D'Ornano + Co. has supported European Digital Group and Ores Group on their acquisition of Digital Prod, a Paris-based digital advertising agency specializing in designing and deploying luxury sector-specific digital advertising content for international advertisers.

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