March by D’Ornano + Co.: a look at some of the changes expected in Startupland in the aftermath of SVB, why the creator economy is hot, and how PE might benefit from high inflation
This is our monthly newsletter dedicated to Tech x Investments.
Dear all,
In last month’s newsletter, I questioned whether you wanted to see the glass half full or half empty regarding Tech investing. Well, the events that unraveled this past month around SVB and a perhaps wider banking crisis have made this question even more relevant. As a result, founders and investors, once again, must recalibrate their thinking and strategies.
Let’s start with you, founders. With the fall of SVB, many startups who were expecting to postpone the tricky question of their valuation to better times are now confronted with the need for fundraising in an ever tighter environment than just before the current banking crisis. Tighter not because there is no liquidity but because private market valuations are necessarily made in light of those tech companies that went public over the recent period. Well those valuations are strongly down (on average by 70%) (see our Medium article on this subject, supra), and this trend has now come to VC land. As a result, more challenging times are ahead for founders, with difficult choices to make, notably on layoff decisions.
What about you, investors? The upside of the situation is that VC funds can now be picky again and should benefit from both lower valuations and more investor-friendly deal terms. Private Equity investors, on the other hand of the spectrum, are also seeing the glass half-full as they pursue dialogues with Management teams willing to reduce their sometimes abyssal cost structure, with Meta paving the way here, and to put a strong emphasis on efficient growth, while recognizing that PE firms can be the right partners for their next phase of development.
This latest crisis has not diminished our optimism about Tech in the coming years. The major macro trends driving digital transformation still represent a massive opportunity for investors and founders. But leveraging their potential will require greater vigilance and discipline, both at investor and founder level. That starts with facing reality and making hard decisions now. They will both lead to better survival rates amongst startups and to many opportunities for Private Equity as these companies become “fixable” and embrace a different track than the one that might have been the first choice. Then will come the time to diligence these companies to pick the winning ones, and as you know, we have the solution for that. Please feel free to reach out, and we will be glad to help.
Have a great read, and see you soon!
What is going to change in Startupland in the aftermath of SVB?
The SVB blowdown that unraveled last month comes as a massive shock in an already challenging period for high-growth startups. Though the FED and the FDIC’s reaction prevented a “Massive Startup Extinction Event” if non-secured deposits and loans has not been released, as well as perhaps a broader banking crisis (though this is still unsure at this point), the implications of the SVB collapse are massive and are not limited to tech or to the VC world in our view.
My goal in this article is not deliver a post-mortem on what happened, but to look at the future taking into account the weight of Venture Debt in tech financing that came as a consequence of SVB’s fast growth. We explore what should come next as startups and scaleups face new challenges in fundraising at a time where fundraising is much harder than in the previous quarters, and how founders should react to face the current (and coming) headwinds. Are difficult decisions to come?
The creator economy
The creator economy is a sub-segment of Tech that is hard to classify, and that is not a specific Tech vertical in itself. It is a critical one as it represents a market expected to be more than 100B$*, though market sizing is quite difficult. Some great start-ups, with varied business models, have emerged recently.
Though funding for the sector has declined**, in line with the general trend observed in 2022, we think the creator economy has a bright future ahead of it. Perhaps you have not heard this, but YouTube’s announcement that it would include Shorts creators in the YouTube Partner Program, thus allowing creators to make ad revenue for the first time, is big news. Those creators that qualify for the Partner Program will earn 45% of ad revenues from their videos, a welcome news for creators who have struggled to monetize short-form videos. And with the resulting expansion to come of creators, we expect that solutions, in many forms from software to design tools, which all support content creators will boom.
So what is really the creator economy?
It can be defined as the category of businesses built by more than 50 million independent content creators, curators and community builders, including social media influencers, bloggers, and videographers who make money from their audience, as well as software and finance tools designed to help them grow and monetize. It started in the 2000’s when media platforms created a distribution channel for creators. They helped creators get discovered and build an audience by investing heavily in their recommendation and curation algorithms. Subsequently, brands began to recognize the return on investment of paying creators to leverage their audience on the platforms to advertise their products and services. Having developed a strong fan base, creators are becoming full-time businesses with multiple revenue streams beyond brand deals and ads.
The creator economy is now a very broad movement, encompassing a wide range of content-creating people: from hobbyists to people who can make a living from their creative work but do not have the experience of running a business - which takes time away from their creative activities – to stars who can form partnerships with external brands to maximize their reach and revenue: the creator economy has its own levels that require companies to meet the challenges of each type of creator.
What are the dominant business models in the creator economy?
This variety of levels within the creator economy leads to an important diversity of business models. Here are some of them with their specific challenges:
First, companies providing back-office tools for creators from fintech startups that makes accounting and tax management easier or provide cash while creators wait for invoices, to start-ups enhancing creators’ productivity by helping them manage operations, partnerships and endorsements. Some public companies have already entered this segment, such as Vimeo, Intuit, Bill.com or Roblox.
Second, companies which help creators better do their job by providing them the necessary tools. Kittl, a German startup that recently raised a Series A round with Left Lane Capital, is a good example. The company which operates a freemium SaaS model offers its customers access to their automatized logo designing tool in exchange of a monthly subscription fee.
Second, companies whom enable creators to maximize their reach. This can be done by helping creators engage with brands (n.b. 77% of creators relying on brand deals as their primary source of revenue). Launchmetrics, a French SaaS platform, is a good example here. The company's technology helps brands to accelerate their launch into the marketplace and build exposure through the activation of the influencers where digital has changed the speed of the market, enabling brands to have data analytics, profitability, accountability and efficiency while enabling the type of quick decision making required for agility. Public companies in this space include HubSpot or Brand24.
Also, alternative platforms are emerging to help creators find new fans and engage more deeply with existing ones by building richer personalization engines and analytics, as well as developing new revenue streams from their output, such as content subscriptions, ticket sales or Web3 technologies like tokens and NFTs, both to make more money and to drive their community. Until now, much of the money in this segment has come from social giants like Snapchat, Spotify or YouTube.
Last, in some cases, the creator economy includes companies that act as more traditional media companies producing original content to a more “niche” audience. In the case of Animaj for example, a FrenchTech company, the company produces kids' entertainment content based on various universes, characters, and stories, enabling kids to get entertained, enjoy, and learn new things while watching animated content.
From this diversity of business models stem revenue models that are heterogeneous. The dominant revenue models come from advertising (for creators), subscription (for SaaS platforms) and take rates (for marketplaces). Key metrics to follow are determined by the nature of the business model itself, with a specific attention on operational and financial metrics.
*Insider Intelligence, 5 things to know about the creator economy in 2023 **Per Crunchbase data, Q1: 58 rounds worth $343.2 million; Q2: 42 rounds worth $336.0 million; Q3: 19 rounds worth $110.2 million. Article co-written by Raphaëlle d’Ornano, Founder and Managing Partner, and Thomas Boisleux, Associate.
PE Has Outperformed Stocks for Decades – And Especially During High Inflation | Institutional Investor
At a time where macro-economics conditions have severely hit unprofitable tech companies, it seems that things might not be too bad for Private Equity. In a recent research piece, PE giant KKR reveals that PE funds actually have the strongest relative performance when public equities falter: From 1981 to 2021, PE funds delivered an excess annual return of 6 percent during periods of high inflation, according to KKR. This rests in operational improvements conducted by PE firms at portfolio level to transform them into resilient businesses.
The Demise of Silicon Valley Bank | Net Interest
To understand how the SVB collapse happened, read this article that is perhaps one of the best explanations in my view on what happened and how we all got here.
Even Meta is following the mantra of profitability! We share the note that Mark Zuckerberg shared to Meta employees, with an immediate positive effect on the stock price, in which he describes the ongoing restructuring (i.e. 10,000 more job cuts to come) going on in one of Tech’s largest companies so as to reach efficient growth in 2023. From prioritizing projects to important layoffs to come, Zuckerberg is putting (at least in words) an end to a period of exuberance. And putting emphasis on profitability after years in which growth was the sole priority.
DataDome
D’Ornano + Co. has advised InfraVia Growth Equity, Elephant Ventures Capital and historical investors on their $40M investment in Datadome, developer of a cybersecurity network management platform designed to protect websites from bot traffic. With this Series C fundraising, the SaaS company seeks to strengthen its R&D, consolidate its position as European leader and strengthen its presence in the United States.
Celsius Online
D'Ornano + Co. has advised Plug-In-Digital* and its financial sponsor Bridgepoint in the recent acquisition of Celsius Online, developer of free-to-play games designed to be played on smartphones and web browsers. With this acquisition, the video game publisher accelerates its development through external growth, and strengthens its presence in the mobile market, which is strategic to improving its commercial position towards mobile distribution platform.
*The D’Ornano + Co. team performed a legal, tax, and ESG assistance through our Hybrid Growth Diligence Private Equity Add-On product.
Tinyclues
We are pleased to have supported #SaaS predictive marketing company Tinyclues in its acquisition by Splio. This acquisition positions Splio as a leading provider of AI-powered CRM in Europe, thanks to Tinyclues' advanced technology, which automates the processing of large volumes of first-party data for precise customer behavior prediction. By integrating Tinyclues' offerings with Splio's innovative Individuation® marketing software, Splio will strengthen its ability to provide superior customer insights and marketing solutions.
Glopal
D’Ornano + Co. has advised Hi Inov, Crédit Mutuel Innovation and historical investors on the €20m Series A funding round of Glopal, developer of a SaaS marketing portal designed to generate incremental sales. Glopal's cross-border sales solution helps brands and retailers tap into high-growth markets. The funding will help the company to further expand its footprint in Europe, the UK and the US by attracting new strategic talent and investing in technology to strengthen its competitive advantage.
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