November by D’Ornano + Co.: what are the implications of mega rounds led by Non Traditional Investors for founders, why Udemy is succeeding, and new challenges for Modern Private Investors?
This is issue number 3 of our monthly newsletter dedicated to Tech x Investments.
That's it, French Tech has just exceeded 10 billion euros raised! Twice as much as in 2020. Europe is gradually catching up with China and the United States, where VC investment volumes are much higher. We are proud to have been at the forefront of these operations and to see what increasingly brings Modern Investors together today, whether they are traditional or not: beyond the balance sheet and the redefinition of valuations and metrics, the appeal for social and environmental impact seems inescapable. What used to be a concern for VCs, who by definition are reputation-centric, must become an essential assessment criteria for everyone. As of now, assessing a fast-growing company and securing its investment project requires an environmental assessment approach, done in the most rigorous and rapid way possible as median time between rounds is falling across all stages.
The Race To A $100 Billion European Scale-up
The invasion of non-traditional investors such as Private Equity Firms and Asset Managers into the late-stage startup funding scene has scrambled the rules about valuation and metrics that Venture Capitalists and entrepreneurs had spent decades refining.
Forget the €1 billion valuation. These non-traditional investors are fueling a race to create €100 billion scale-ups, and some European (and French) scale-ups are on track for this journey.
Non Traditional Investors are giving founders the financial resources to pursue that goal, creating a staggering opportunity to become global champions. Less obvious are the risks that come with accepting those checks. Reaching that lofty valuation requires grasping new metrics and new due diligence. Above all, it means being prepared to relentlessly pursue growth and scale at a breakneck pace.
This month’s spotlight is on the Udemy IPO
The Udemy IPO is the last of a long list of EdTech IPOs in 2021, including that of Coursera in March, but keeping in mind that EdTech IPOs were practically inexistent until this year. Here are some quick thoughts on the company and considerations on its business model and financial/legal risk factors;
Udemy Inc. (the “Company”) operates a marketplace platform at the center of a vibrant knowledge network. The platform provides over 44 million learners with access to over 183,000 courses in 75 languages and over 180 countries. Founded in 2010, the Company was valued $3,44bn in its initial public offering on the Nasdaq Stock Exchange on October 29, 2021. The Company had recently raised $50 million of Series F venture funding in a deal led by Tencent Holdings on November 18, 2020;
In a context where traditional education and training methods may seem outdated, Udemy’s platform addresses the need for a new model of learning and teaching skills through online learning fueled by the COVID-19 pandemic. Management estimates the addressable online market opportunity to be of c.$200B (source: Aritzon);
The Company operates a two-sided marketplace where its instructors (65K+ in total) develop content to meet learner demand. Courses can be accessed through its direct-to-consumer or Udemy Business, or UB, offerings. The Company leverages AI and Machine Learning in order to provide learners with the right courses;
As such, the Company goes against the traditional publisher model which involves a lengthy, centralized, and expensive “top-down” development process by multiple levels of editors and reviewers. Instead, through a marketplace model, course development is made easier, though the necessary quality checkpoints must be in place;
In contrast with FY20 performance fueled by the COVID-19 pandemic (+55% growth y.o.y.), the Company has not incurred stellar growth from the six months ended June 30, 2020 to the six months ended June 30, 2021: its revenue grew 24.5% to $250.6m, which includes c.80% growth in UB revenue (with an UB ARR of $182m at Q2 2021), although it managed to reduce its losses from $52.5m in YTD20 to $29.4m in YTD21. The Company seems to be on the path to profitability, which it shall confirm going forward;
As a marketplace, the Company’s growth depends on its capacity to attract new learners, instructors and organizations, and to retain them. Per the S-1, the Company’s growth strategy is three-fold:
First, it aims at accelerating the growth of its enterprise business through a land-and-expand strategy within its customer base, characteristic of SaaS growth, and through integrating its UB offering with employees workflow. Of course the Company must start by acquiring new subscribers, and has built a conversion roadmap from free learners to buyers to do so;
Second, the Company seeks to increase learner retention through its numerous personalization efforts. Understanding usage metrics is key here in validating the Company’s growth, both through i) engagement growth (201M+ course enrollments in 2020, 2.8B minutes watched during Q2 2021) and ii) user experience (NPS of 49);
Last, the Company is seeking to expand its international footprint, both through organic or external growth. For example, in August 2021, Udemy announced its acquisition of CUX (d/b/a CorpU), or CorpU, an online leadership development platform.
As many marketplaces, the Company is exposed to the risk on depending on a limited number of instructors, who create a large part of the most popular content on its platform. For example, 5% of its instructors generated 71% and 70% of its paid marketplace enrollments during 2020 and the first half of 2021, respectively. Though hypothetical, the loss of these instructors could adversely affect the business;
Last, even if not subject to legal challenge, the perception of concerns relating to privacy, data protection across multiple countries, or cybersecurity, whether or not valid, may harm its reputation, and must be an area of focus.
Family offices, among many other non-traditional investors in the tech landscape, choose to challenge traditional start-up’s funders and behave like patient owners, as they will significantly scale-up their investments in start-ups.
Through a change in their fund structure, Sequoia addresses the question of how can VCs assist start-ups in their multi-decade creation value, with a 10-year horizon investment? Sequoia has decided to break the paradoxal mindset status quo in the innovation’s funders industry, through a new structure: the Sequoia Fund, an open-ended liquid portfolio made up of public positions in a selection of enduring companies. The purpose : guide selected companies through their unique and long-term value-creation paths, while capturing a bigger financial return. Has Sequoia redefined VC investment ?
Which verticals are heating up the most in terms of valuation growth ? According to PitchBook data, crypto/blockchain is the winner with the largest valuation step-up so far in 2021. The second most prominent out of all major verticals is cybersecurity as investments in cybersecurity have exploded amid a spate of high-profile cyberattacks, producing a string of deals with noteworthy valuation lifts.
EOS Corrugated
D'Ornano + Co. is proud to have accompanied Sagard in its buyout operation with EOS CORRUGATED, a technical consumables producer with international and external growth ambitions!
Packhelp
D'Ornano + Co. provided legal and financial support to advise InfraVia Capital Partners in its late-stage €30M VC round in the leading European packaging marketplace Packhelp. Our team, led by Raphaëlle d'Ornano, Grégoire Longou, Thomas Priolet, Marc-Olivier Longpré and Bruno du Breuil, was delighted to work on this growth-fueling deal!
Move over, Ebitda; time for new metrics
See in the latest edition of Private Equity News magazine why EBITDA is dead – an op-ed by our founder Raphaëlle d'Ornano and Jérôme Hervé, entrepreneur and investor at JH Next 👇
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