June by D’Ornano + Co.: a proposed framework for assessing the intrinsic value of foundational tech business models, decomposing the GenAI tech stack and an expected revival of the IPO market?
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Dear all,
It has been a little over one year since the Fed started increasing interest rates in May 2022, and what a wild year it has been for investors across the private and public markets. I had the privilege of attending three global conferences over the last two months – Milken, Scale Global and just last week SuperReturn Berlin – and this was a terrific opportunity to take a much-needed helicopter view of the new paradigm we are facing and explore with bright minds how to play as an investor a new game with new rules. If the seismic shift is general, one sector has been hit hard: Technology.
Yes, for the first time in a decade, macro matters to tech, and for those unprofitable companies whose earnings lie in the future, the continued increase of interest rates since last year has led to a steep decline in valuations in the public markets. The combination of rising interest rates and faltering public stocks have now filtered through the private markets, yet still only partially reflected in the numbers as many late-stage start-ups are (still) avoiding a funding round that could crystallize a lower valuation. With a direct consequence: as growth falters, there is a decrease in the number and quality of start-ups in which late-stage and growth investors can invest in now despite still record levels of dry powder.
Weathering the storm, the recent wave of generative artificial intelligence (GenAI) has largely captured investor interest, leading to sky-high market caps for industry leaders and start-ups across the GenAI tech stack. The 105m€ record fundraising of French start-up Mistral AI (just a few weeks old) and the $90m Series C of Synthesia, the creator of “AI-driven” avatars, in a gloomy environment, show the hopes placed on this new foundational technology.
There is one clear implication here: it is increasingly hard to assess the intrinsic value of a tech company. Over 2020-21 we saw exceptional increases in valuations (skyrocketing around Thanksgiving 2021), but factor-based investing favored a lack of discipline around cost structure and cash burn that was neither sustainable nor healthy.
In our view, valuations should rest on solid financial fundamentals and not solely on growth or hyper-growth but on a subtle arbitrage between growth and profitability to reach the well know bar of 40% in the Rule of 40, which applies to many tech companies except for DeepTech. It is still ok for a company to remain unprofitable at the sole condition of hyper-growth (i.e.,>40%). Otherwise, arbitrage around the cost structure to become profitable is imperative.
If the Rule of 40 helps map a new frontier between unprofitable tech companies whose growth is low and who are trading at just about 4 times NTM revenue and profitable companies experiencing hyper-growth and who are trading at 10 times NTM revenue, it is not sufficient to grasp the question of how to value these companies.
Understanding the quality and ownership of the IP is the first fundamental item. Proprietary IP matters and to some extent the valuations of GenAI companies like Mistral AI and Synthesia reflect the uniqueness of certain R&D skills to build the foundational technology.
The second essential item is understanding the “quality” of a company’s growth and margins. Valuation should not be based just on the historical % of growth but more on getting a conviction about its expected duration and magnitude. Understanding how many resources will be necessary to get there, and hence its efficiency, is of prime importance. This depends on the unique characteristics of the company and of common traits of its foundational tech model [i.e. marketplace, AI + ML + Data Application or Infrastructure, etc.].
Our obsession at the firm is helping investors assess the intrinsic value of high-growth and disruptive companies. To help, we unveiled at SuperReturn Berlin a proposed framework we built to evaluate the critical valuation drivers across a large scope of foundational tech models. With this tool, we aim to help our clients build a robust process to make the right investment decision. This is what the next months will be about. And this is terrific news. Have a great read!
Redefining the means of higher returns for Growth investing: New rules in a new environment, SuperReturn Berlin 2023 edition
I had the honor to hold a keynote at the “Tech & Disruption Summit” during SuperReturn Berlin for this year’s edition on the topic of redefining the means of higher returns for Growth investors, i.e. for all those investors across Venture Capital and Private Equity investing in high-growth companies and disruptive technologies. I presented our new matrix at the firm in which we classify all of these companies according to their time to revenue and capital intensity, with for each of the corresponding categories specific rules relating to what are in our view, aside strength of technology and TAM, the fundamental levers of tech valuation: quality of revenue, quality of growth and quality of margins. We will keep you posted via the company page on when the replay is available if you want to learn more.
Decomposing the GenAI tech stack: what every investor should know at each level
The recent wave of generative artificial intelligence (GenAI) has taken investors by storm, leading to sky high market caps for industry leaders with downstream effects across related markets. This is not the first hype cycle for AI – investors have seen previous AI hype bubbles bloom and burst for decades – but it is the first of consequence for generative AI. Recent technological developments present a more powerful and mature opportunity for the technology this time around – especially in growing industries like healthcare, finance, climate tech, etc. – with the same transformational potential to change the business landscape as the internet.
In this article we will share the lessons we have learned from advising dozens of (venture) deals in the GenAI and AI space through a view on the three core components of the generative AI tech stack - Foundational, MLOps, and Application - so as to ensure that the questions that matter are effectively addressed.
This is the first part of a short series of four articles on GenAI and we will deep dive in the next articles on each of the levels of the tech stack. I hope you enjoy the read!
Private equity groups sell stakes at discount on expectations valuations will stay low | Financial Times
Crystallizing the decline in tech valuations mentioned above, and the expectation that prices will not regain their previous levels soon, the Financial Times points out an interesting phenomenon: that of follow-on deals, the sale of a portion of shares in portfolio companies that have gone public. Despite lower prices reflecting the general collapse of tech valuations, the pick-up in follow-ons is an encouraging sign for those hoping to see a revival in the market for IPOs later this year.
European Tech is at the center of investor attention these days it seems. US investors speaking at SuperReturn Berlin acknowledged that the European tech scene had matured and that the pace of value creation in Europe was fast, really fast, making Europe the fastest growing startup market in the world in their words. Looking at venture growth stage, venture capital investors are expecting several high-quality European listings will be on the way when the IPO window reopens.
Taking a multi-dimensional view on high-growth and disruptive assets is at the core of our approach at the firm. This notably includes understanding the financial implications of material ESG risks at company level. Quartz provides us with an interesting view on a risk that has long been eclipsed by climate footprint: water risk. Big investors are taking note as these risks are expected to grow with climate change, and Tech is not exempt.
NumWorks
D’Ornano + Co. has supported Aldebaran Capital Partners on their recent Buyout operation on NumWorks, a cutting-edge manufacturer of an open graphing calculator. The company's innovative calculator, featuring a high-resolution color screen, emulator and advanced mathematical engine, has become the market leader in France. The investment supports the company's international development ambitions.
Ringover
D'Ornano + Co. has advised Ringover on its recent €20M Series B Funding round, which saw investments from Bpifrance and Orange Ventures. Ringover, a pioneering cloud communication platform, is revolutionizing the business phone system landscape with its cutting-edge and user-friendly productivity tool, empowering businesses with communication and analytics tools to optimize conversations across channels for enhanced growth. This investment will serve as a catalyst for Ringover's AI development, enabling the company to further enhance its leading #SaaS offerings.
Sekoia.io
D'Ornano + Co. has advised Sekoia.io's on its €35M Series A funding round alongside Bright Pixel Capital (former Sonae IM) and Banque des Territoires. Sekoia.io, a leading European cybersecurity company, has developed an innovative platform enabling real-time cyberattack detection with a unique approach that emphasizes interoperability by integrating all of its customers' cyber solutions into a single control tower.
Beem
D'Ornano + Co. has supported Cathay Innovation on its recent €20M Venture Capital Late-Stage investment in Beem, a visionary developer of solar kits designed to generate green electricity right at home.
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