October by D’Ornano + Co.: assessing resilience in light of ESG criteria in the era of greenwashing, fresh US crypto rules, the new macroeconomic and energy paradigms and the VC market downturn?
This is our monthly newsletter dedicated to Tech x Investments.
Dear all,
I would like to express a positive note in this month’s newsletter. Clearly caution is widespread as the macroeconomic and geopolitical landscapes continue to be ever more challenging: inflation has just hit record highs both in the US and in Europe, with the first ever reading of double inflation in the latter (+10% y.o.y. in consumer prices) partly due to the energy crisis, and we are facing an escalating energy war following the Nord Stream sabotage.
But despite these concerns, we see many opportunities for “bold” investors to invest in Tech, green businesses and impact (i.e. the three megatrends in Private Markets we have often talked about here).
Let’s start with Tech. Yes Tech is being hard hit since the beginning of the year, and this correction is affecting all companies, not just those unprofitable Tech companies that have received massive funding notably in last year’s funding frenzy. The Tech focused Nasdaq composite was down 32% at September, and majors are being hit severely as well with Alphabet and Microsoft down 30% over the same period. Earnings presentations of the 3rd week of October wiped off almost $800b in valuations!
Then ESG. ESG concerns remain important, despite the resurgence in Texan fossil fuel investments and the general caution on greenwashing that I had the honor to address at the Greenwich Economic Forum last month in Greenwich, CT, with participation from leading institutional investors, with a discussion that went well beyond greenwashing to address a new approach to assessing an asset’s resiliency and that is featured in this month’s analysis.
In Tech, there are still many opportunities, beginning with the Climate Tech vertical. As a reminder the Inflation Reduction Act is a game changer that will create investment opportunities in covering climate change with Tech, a $370B market opportunity per analysts, keeping in mind that c.35% of technology needs still need to be covered to reach Net Zero goals. As such, investing in Decarbonization, at the intersection of Tech and ESG, is a once in a generation opportunity.
Last, Impact. Investing in Impact goes beyond taking into account ESG in investment decisions. It is a positive act of investing in those companies that seek social and environmental welfare. Impact themes (i.e. ageing of the population) are often uncorrelated to other market factors, and are by essence non-discretionary.
For sure, this confidence in finding the right assets to invest in and transforming portfolio companies to capture these opportunities is not widespread, but it is here to stay and we share it at the firm. Due diligence is no longer about ticking boxes, but about understanding the intrinsic value and the resilience of disruptive and high-growth businesses. This is precisely our mission at the firm.
Moving from playing defense to offence: The case for integrating “E”, “S” and “G” in investiment grids
Environmental, Social and Governance, know commonly as “ESG” has become an increasingly hot topic in investment circles despite the lack of clarity still surrounding the definition of these terms and their translation into clear financial implications. This has left the door open to political backlash, especially in the US, and to a slow - or worst, wrong - adoption of the concept by many investors. I was recently invited at the Greenwich Economic Forum on a panel on “How to detect Greenwashing in the era of ESG”. The conversation went well beyond and led to a new holistic approach of risk and understanding of an asset’s resiliency that some bold investors are starting to embrace.
The US inches toward crypto regulation. On September 16, the Biden White House released its first-ever framework on what crypto regulation in the U.S. should look like. In its statement, the White House detailed its priorities for Central Bank Digital Currency (CBDC) and crypto-asset regulation.
This governmental action plan aims to oversee the development of this asset class (whose definition remains tricky at this point given the variety of different items that it comprises) to exploit its benefits, in particular its underlying technology, while developing a regulatory framework to address the risks it entails.
This plan is based on 6 priorities which we highlight here:
Consumer and investor protection: the U.S. administration wants federal agencies to strengthen their efforts on prevention and consumer financial education, as well as their repressive actions against illegal practices in this asset class;
Promote digital assets that enable the development of reliable and affordable financial services for everyone, such as instant payment technologies;
Financial Stability: as digital assets and the traditional financial system become increasingly intertwined - as evidenced by the May 2022 crash of the stablecoin TerraUSD wiping out nearly $600 billion - the Biden administration is proposing to strengthen regulations to address the risks of instability;
Foster responsible innovation by supporting cutting-edge research projects, as well as helping companies compete globally and mitigate the energy and climate impacts of crypto assets;
Strengthen U.S. leadership in the global financial system by helping countries developing their digital asset ecosystems to respect core values such as data privacy, financial stability, and human rights as well as by conveying its values in international organizations;
Last but not least, fight against the use of crypto assets for illicit purposes against money laundering, cybercrime and terrorist financing.
If regulation is welcome as the Crypto vertical is expanding, with important innovations in the field of Defi which has become a hot topic for VC investors in particular, it remains a tricky issue as it must not kill innovation.
Tech Is Getting Boring. That’s a Good Thing | The Wall Street Journal
This articles explores how the current bear market may actually be an opportunity for Tech companies, whether VC or PE backed, for those who are able to focus on what innovations really matter for people and companies, and with solid economic fundamentals. The era of innovation for innovation is over, with the imperative of true value.
Will the energy crisis crush European industry? | Financial Times
Turning down the thermostat is no longer a simple question of savings to preserve profitability, but a question of survival for some of Europe’s industrial companies. This articles explores the potential devastating effects on the economy of the energy crisis.
A new macroeconomic era is emerging: what will it look like? | The Economist
This article points out that we have entered into a new macroeconomic era. The ructions in the markets are of a magnitude not seen for a generation (i.e. inflation, interest rates, etc.), and this might not just be a bear market and a coming recession. Perhaps there is more to that.
The VC Market feels the Burn of the Downturn | Institutional Investor
Per the recent Q3 2022 Pitchbook * NVCA monitor, despite new records in VC fundraising in the US (VC funds have raised a total of $150.9 billion as of the third quarter 2022), Q3 marked the lowest deal count since Q4 2020, and estimated deal count fell around 20% from the first quarter’s record high. However, despite the challenges facing this asset class, early-stage, median-size deals are going strong and remain at their 2021 levels, reflecting the attractivity of the asset class amongst LPs, even in a downturn.
Homa Games
D’Ornano + Co. has assisted Quadrille Capital and Headline as lead investors in mobile gaming developer Homa Games's €100m Series B funding round. This financing will help the company scale its business through investments in technology, data, talent and strategic acquisitions.
Regate
D’Ornano + Co. has advised Valar Ventures on their $20m investement in Regate, a company providing automated financial solutions with their cutting-edge SaaS platform.
Kaliti
D’Ornano + Co. has supported Meanings Capital Partners on their majority share acquisition of Kaliti, a project management software company transforming the real estate construction space to improve customer experience and digital efficiency.
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