March by D’Ornano + Co.: Navigating the IPO route in 2024, Quality Rather Than Bargains: a New Playbook for PE and is there a Tech Extinction Event to come?
This is our monthly newsletter dedicated to Tech x Investments.
Dear readers,
Another intense month is about to finish, and as we continue to chart our way through 2024 it feels that we are entering a period of “normality”. I had the honor to speak last week at the Greenwich Economic Forum Miami on the topic of Valuation Reset in the Venture Capital and Private Equity segments, and shared my views on how that was playing off in the world of (high-growth) disruptive technology companies.
Not only are valuations resetting – though the final line is yet to be reached – but the macroeconomic environment seems to be settling. Though inflation is stickier than anticipated, the Fed is still on track to deliver as much as three rate cuts this year. Both combined offer hope for an IPO window reopening, easing pressure in the VC world. I want to shift the focus of this month’s introduction on IPOs.
The pandemic and macroeconomic context created a perfect environment for high-growth disruptive technology companies to develop in the private markets. Free money allowed to fuel growth with little control on the money spent birthing a generation of zero interest-rate babies (ZIRBs). As of February, the 600+ US unicorns with billion-dollar-plus valuations represented the equivalent of c.7% of the U.S gross domestic product.
Then came 2022 and unprecedented rate hikes which put brakes on growth and put path to profitability central stage. Many investors new to the asset class retrieved from Venture Capital which suddenly appeared risky, and valuations were questioned as public stocks of unprofitable tech companies eroded. As a result, exits have stalled for almost two years, and ZIRBs face intense pressure to fix their sometimes broken business model, for those that are still alive.
Things may now finally be changing allowing for cautious optimism.
But the IPO window reopening expected in the next months raises unprecedented challenges due to the amount of private companies seeking to enter the public markets. First, not all companies will be able to list. For those who manage to, delivering correct returns to investors will be critical to avoid the painful vintages of 2020/2021.
So how can entrepreneurs and investors anticipate the IPO window reopening and navigate the long-awaited IPO route?
This first starts by understanding what is the right valuation metric that will apply to the company. Though this is relatively straightforward for many companies in SaaS for example – where valuation is based on Annual Recurring Revenue (ARR) – things get tricky in businesses for which the valuation aggregate is not obvious. For example, Fintech companies will not necessarily be valued per recurring revenue multiples if investors judge that the company is not a technological asset but a tech-enabled "material world" company (i.e., a bank) with resulting aggregates. This is what happened to WeWork no matter how much times the word “tech” was sprinkled in the S1. What will make the difference here is to what extent entrepreneurs can prove the degree of both the recurring and technological aspect of their revenue.
The next question is that of the multiple itself applied to that suitable aggregate. Valuation of high-growth disruptive technology companies show a direct correlation to growth. Growth wins over profitability as a result of its compounding effect. Thus growth, and more high-growth (the degree to which will depend on the stage), justifies a premium. For this, investors will have to believe that growth is durable and the result of a solid economic engine, rather than the result of favorable macroeconomic conditions or mere sector tailwinds. For entrepreneurs, this is a fantastic opportunity to take the time to do an introspection exercise and to understand one’s specific “growth equation”: what are my two or three critical growth levers that when actioned produce outsized results? This will allow to prioritize spend on those levers only in a world of expensive capital – but also to set-up the right tracking to ensure that they are on track with their growth plan.
Efficient growth that will result from understanding this equation, i.e. one which requires the minimum level of spend per new dollar of ARR, can and should be evidenced to those pre-IPO investors who will invest in the coming months in pre-IPO rounds and guarantee through their presence a part of the IPO success.
Confidence in high-growth disruptive technology companies has been strongly eroded in the past months. But the good news is that liquidity is abundant for best-in-class startups. For late-stage entrepreneurs, now is the right time to build a compelling exit story evidencing the critical growth levers. This will unlock high returns at investor level at IPO while allowing for long-term value creation at company level.
Thank you for reading! And Happy Birthday to the whole team at D’Ornano + Co. as we enter our 9th year!
New Private Equity Playbook: Quality Rather Than Bargains
This new normal that we are entering as we move on in 2024 is also happening in the world of Private Equity. For nearly a decade leading up to 2022, managers consistently sold assets into a higher multiple environment than that in which they had bought those assets, providing a substantial performance tailwind for the industry. Approximately two-thirds of buyout returns on assets entered after 2010 and sold prior to 2022 were the result of financial leverage and multiple expansion. As the macroeconomic environment is expected to remain challenging, private equity investors need to resort to operational leverage, with genAI transformation as a way to unlock value, amongst other levers, which I dig into in my latest Medium article.
Is There A Tech Extinction Event Coming?
High-growth tech companies are now at an inflection point where their future is far from assured as they face harsher funding conditions. A New Tech Extinction Event is perhaps to come.
I expose in my latest Forbes OpEd the foundation of a new methodology of analysis, Advanced Growth Intelligence (AGI), for looking at assets, especially those with higher technological and capex intensities. By returning to investment first principles, AGI can help investors pressure test assets under real conditions to validate uncertain businesses' intrinsic value and resilience. Most importantly, it can help identify the right questions investors need to ask of disruptive assets to create a clearer picture of risk. Though volatility and uncertainty cannot be reduced, it can be understood.
Goldman Sachs’s Chief Economist Has Nailed Big Calls. Here’s His Next One | The Wall Street Journal
As macroeconomic previsions are more important than ever in this period of reset, I am sharing an interesting article from the WSJ on Jan Hatzius, Goldman Sach’s chief economist that highlights why Hatzius is one of the most closely followed economists on Wall Street and in Washington. He appears upbeat about the economy this year, which sounds as a relief.
Social media firm Reddit filed for IPO late February in 2024’s first big test for VC-backed tech IPOs. But Reddit is still largely unprofitable so its IPO fate will be all the more interesting in the current environment. Stay tuned for our S1 teardown of Reddit coming next month.
Regate
D’Ornano + Co. has supported Qonto on the acquisition of Regate, a SaaS offering accounting automation solution. With this acquisition, the FinTech Unicorn Qonto is enhancing its accounting automation functions and widening its customer portfolio.
Planity
D’Ornano + Co. has advised InfraVia Capital Partners in leading the $50m Series C of Planity, a Vertical SaaS platform that digitalize booking services for the beauty industry. The platform acts as the daily European operational system for beauty professionals, from reservations, payments and inventory management.
Vibe
D’Ornano + Co. has supported Singular in leading the $23m Series A of Vibe, a Chicago-based advertising platform that offers SMBs access to a wide range of applications and TV channels to place ads.
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