November by D’Ornano + Co.: where do we stand in terms of European Unicorns at the end of a tumultuous 2022, lessons on Autonomous Cars from the Mobileye IPO, and why Tech seems to be collapsing?
This is our monthly newsletter dedicated to Tech x Investments.
Dear all,
A lot has happened in the Tech world since last month’s newsletter where I expressed a positive note as regards to the many opportunities for “bold” investors to invest in companies enabling Digitalization, Decarbonization and Sustainability. While I wish to stay on this note as we approach the end of 2022, I would like not to nuance the message, but to express caution within it.
The FTX implosion that unraveled last month will have long-lasting impacts in my view, that go well beyond the Cryptocurrency + Blockchain vertical. What FTX has taught us so far is that the valuation of a company ($32B in the case of FTX per its latest fundraising in January 22) is in no way an indicator of a company’s maturity: though it had attracted well established non-traditional investors, accustomed to financing pre-IPO deals, FTX was clearly still an Early-stage company with a lack of controls and governance, which I think we all agree on at this point. Yes, investing in high-growth and disruptive companies requires a different framework of assessment as the risks on a company that has leaped from one financing round to another are demultiplied. There are certainly other FTXs to come, though not with the same magnitude, and caution needs to be widespread, which does not go against the thesis of investing in high-growth companies as a whole, but forces to take a different approach.
First, FTX has put due diligence front and center of investors mind. If in some cases it is just needed as it had disappeared (..), the more complex question is that of what kind of a diligence is needed on those high-growth companies. To put it simply: investors don’t just need due diligence: they need the right due diligence, one that is able to assess the robustness of a company’s growth engine, through a focus on the fundamental financial and operational KPIs of a given business model/vertical, and spot relevant material legal and ESG risks that are dealbreakers if not resolved pre-transaction. This is a new category of diligence, one that is specific to high-growth and disruptive businesses. We call it Hybrid Growth Diligence at the firm and are proud to pioneer this approach.
Second, while agreeing that valuing these high-growth and disruptive businesses is a challenge, its appears necessary to reset the valuation methodology by linking it to economic fundamentals. Notably by their ability to foster “efficient growth”.
So with (much) more caution and solid fundamentals, let’s embrace the opportunities and challenges we will face going into 2023 as this might be the best time to continue to invest in Tech and drive disruptive innovation.
European Unicorns: where do we stand now?
European Tech has undergone a highly challenging year in sharp contrast to 2021. 2022 has been a year of unprecedented change, with a brutal awakening for Tech companies which started at the beginning of the year with the fall in valuations of unprofitable publicly-listed companies, across all verticals, and which has continued all year-round in a context of adverse macro-economic conditions – of which predominantly the rise in interest rates – and geopolitical uncertainty. It has taken almost a year for the translation of these events into late-stage financing and the effects are being seen with increasing clarity. We dive into more detail building on Pitchbook’s latest European Venture Capital Q3 figures.
This month’s spotlight is on Mobileye
On 26 October, 2022 Mobileye (the “Company”) returned to public trading with an initial public offering of 41m shares at $21 per share, thus raising $861m translating to a $17bn market valuation, c.11% higher than the equity value paid by Intel for its acquisition by tender offer on the NYSE in 2017 at $15.3bn - the biggest acquisition of an Israeli tech company to date.
Within hours, market valuation leaped to $22bn, however considerably lower than the Company’s initial ambitions of raising $50bn through the IPO (in the first part of the year), which had been reviewed down to $30bn then $16bn a few days prior to the operation, in the context of curtailed tech valuations. Here are some insights on the Company and considerations on its business model in relation to the newsworthy vertical of Autonomous cars.
Founded two decades ago, the Company develops and deploys technology which they claim will pave the way to an autonomous driving future, specializing, as the name suggests, in camera and sensing technology for anti-collision and hands-free Advanced Driver Assistance Systems (ADAS), with a portfolio of different solutions.
The partnership and subsequent acquisition by Intel allowed the Company to enhance its deployment capabilities to design-in with automotive customers, through synergies with the giant’s engineering capabilities and to build on a strong intangible asset base.
In 2022 to date (with only a few weeks to go), the autonomous car vertical has raised $12.5bn in capital, a c.70% drop as compared to FY21 despite a higher number of deals, with VC funding in the space divided by 3 in particular. Indeed, the Company’s IPO occurred in a troubled context for the vertical amidst the US Criminal Justice Department’s probe into Tesla’s ‘Autopilot’ functionality over accidents; Ford’s announcement of the winding down of Argo AI (one of the Company’s main competitors. Alongside GM’s Cruise, these are some of the few players having put driverless cars on actual roads to date, in the form of robotaxis. The Company hopes to power robotaxis themselves in the future, as evidenced by their acquisition of Moovit a mobility-as-a-service (MaaS) solutions company for $900m in 2020.
However, for the time being, substantially all the Company’s revenues are achieved through ADAS commercialization to automakers and automaker suppliers, i.e. not fully-autonomous driving solutions, however deployed on 800+ vehicle models and 117M+ vehicles. Latest Q3 figures released this week show continued revenue growth (+ 38% year over year to $450 million in Q3 22), and growth in future business backlog, with design wins achieved in YTD2022 projected to generate future volume of 54 million systems by 2030 (vs. 24 million systems delivered in YTD22).
If the S-1 estimates current TAM (over ADAS opportunities only) at $16bn, it must be noted top 3 clients (ZF, Valeo and Aptiv) represent 71% of total $1.4bn 2021 revenues, which points at high concentration risks. Aptiv has created a joint venture Company with Hyundai which raised €3.6bn to develop its own driverless mobility solution (Motional), demonstrating the intense competition for pole position and high entry barriers in the AV vertical.
The value chain is further overshadowed by even higher supplier concentration as the Company sources from one main European supplier (STMicroelectronics).
Although the Company shows gross margin ranging between 39% and 48% over the last three years, achieved over ADAS solution commercialization, which is strong for a company deploying both hardware and software, massive investments in R&D, (which represents 39% to 46% of revenue over the last three years and 80% of the current 3,100 employees) drive negative EBITDA margins.
These financials echo the criticism leveled at autonomous vehicles: losses stack up too high as compared to actual value added in the truly autonomous driving vertical - a fascinatingly challenging application of AI to real world situations. Despite a cumulated $100bn invested into the vertical worldwide, detractors allege autonomous vehicles are yet to safely navigate the contentious ‘unprotected left turn’, which humans can achieve almost mindlessly.
Should the financial market continue backing autonomous driving - a vertical likely to generate continued partnerships and concentration - the vertical offers a high level of hope for major societal and environmental issues. In particular, autonomous vehicles could lead to higher road safety, improved social inclusion for the elderly and people with disabilities as well as reductions in vehicles per capita, traffic congestion and land used for parking.
Co-written by Raphaëlle d’Ornano and Lauren Goodenough
Why Everything in Tech Seems To Be Collapsing at Once | The Atlantic
In this great piece, Derek Thompson explores some of the reasons of the current Tech crisis, with bad news coming from everywhere: massive layoffs, drop in public Tech stocks and the implosion of FTX coupled with the Twitter ongoing chaos. While part of the explanation lies in macroeconomic reasons – inflation hurts Tech stocks the most as their value creation is formed in the future, there is another one more difficult to prove: the industry is going through a mid-life crisis.
Let’s dive into a “geeky” part of Tech here, yet fundamental to understand for non-Tech specialists in our view. Something big has happened in Tech this week: OpenAI, a late-stage VC backed company founded in 2015 by Elon Musk, has released a new generative ML chat bot, ChatGPT. This new conversational system, based on Generative AI, can produce a whole lot of different things such as answer follow-up questions, admit its mistakes, challenge incorrect premises, and reject inappropriate requests. But more than ChatGPT itself, what is really interesting here is how Generative AI is becoming real and could generalize. Asides from the large business implications of such an innovation across Business Services in particular, the release raises here again the question of Tech * Ethics which is at the core of the deployment of the Artificial Intelligence + Machine Learning vertical.
DealBook Summit – Larry Fink on the future of Venture Capital | The New York Times
A lot of things happened last week at the New York Times DealBook Summit: besides the first public intervention of SBF since the company collapsed, Larry Fink, CEO of BlackRock, held an interesting discussion on the future of Venture Capital (VC) firms expecting them to rethink how they invest. He suggests that due diligence will be stronger – which we largely welcome and support - and that investors will move on from investing in applications, and perhaps “hype”, to investing in more “deep” tech, with clear scientific proof points, amongst which Climate Tech.
Malt
D’Ornano + Co. has advised Bpifrance in its €60m funding of Malt, an online recruitment marketplace for self-employed workers. Building on last spring’s €80 million raise, led by Goldman Sachs and Eurazeo, this new funding will help Malt continue its external growth strategy and finance its acquisition of German Comatch.
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