October by D’Ornano + Co.: why I am a “cautious techno-optimist”, exploring AI + ML Applications and why LBOs are expected to return in 2024
This is our monthly newsletter dedicated to Tech x Investments.
Dear readers,
The Tech community went buzzing in October with Marc Andreessen's "techno-optimist" manifesto, a 5,000-word essay in which the founder of A16Z calls for the development of technology – in particular AI – which should not just be allowed to continue without constraint but should be accelerated. One year after the public release of ChatGPT, which marked a tipping point in generative AI development, this manifesto constitutes a perfect moment to observe a pause and reflect on where we are going and mostly where we want to go.
I am not for pausing the development of AI – if even possible – but I think that having “blind” faith in technology could be dangerous for two reasons (Please find my complete response here).
First, it is dangerous for us as humans as technology can cause vast amounts of harm, from devastating effects on mental health to making bias worse and creating representational harm. Tech does not always make a positive impact on the world. We have to start by acknowledging this to move forward.
Second, it is dangerous for investors themselves. Before the current generative AI wave, history has shown that investing in new technologies is a high-risk business. Those who do not have specialist knowledge of what they are buying need to display particular caution at such times: investing in generative AI will require a thorough understanding of the impact it will have and the patience to watch events unfold. Given the pace of its development, the wait time could be shorter than expected!
Let's consider valuation first. At this stage of generative AI's development, there is, in my view, an entanglement between seeing generative AI – even at the Applications level – as more of a Deep Tech investment - in which a core part of the value does not lie in future earnings but in the quality of the technology itself at first - or viewing the company as an effective SaaS company in which valuation can effectively rest on an ARR multiple. In that case, Midjourney could be valued at $10B (with an implied 50X ARR multiple given its reported $200M ARR), while one could challenge Stability AI's $1B valuation (reportedly generating modest revenue). My goal is not to give any judgment on valuation here but to set the ground for debate.
Then, on to resilience. Technology companies are not immune to the numerous global shocks and pressures, including macroeconomic stresses, geopolitical risks that have risen as a result of the Israel-Hamas war, physical and transition climate risks, and last but not least, the resilience to new technologies themselves, starting with generative AI itself. When considering a Tech investment today, it is critical to ensure that the business is protected from these shocks to preserve value. As such, blind faith is not an option, and a careful and "scientific" approach is needed to assess the intrinsic value and resilience of new technology companies.
Danger put aside, the failure of Wework and the FTX fall have shown us if needed, that Technology companies cannot be left alone to accelerate ad infinitum. We must introduce guardrails to preserve confidence in technology.
Guardrails start with effective regulation. Building trust is an essential foundation for future AI development, which is why I'm pleased to see news of the latest executive order on AI calling for transparency and the discussions that took place at the UK's AI Safety Summit last week in Bletchley Park around AI safety.
Guardrails are also about looking adequately at financial and operational figures, not at the very early stages of a company, but as soon as they set in to ensure that these numbers effectively demonstrate effective growth and on-track execution. Winning companies have measurable growth and margin characteristics. Despite the hype, let's remember that.
So, I encourage you to be an optimist, too, and to embrace the colossal potential brought by generative AI. I also encourage you to look beyond generative AI and consider the breakthroughs brought by Deep Tech companies where Europe is currently gaining strong momentum from Climate Tech to Space Exploration. Yes, I encourage you to be a Tech optimist, but one with the right level of caution. Have a great read!
Our Response to Marc Andreessen: Innovation Needs Guardrails for Growth
As mentioned in the introduction of this newsletter, the recent publication of Marc Andreessen’s manifesto has the entire global tech ecosystem buzzing. Given his stature, influence, and history as an innovator and investor, his views carry substantial weight.
But what may feel like a provocation to many is also an invitation to reflect on one’s own motivations and values. Like Andreessen, I am a “techno-optimist.” I am a strong believer in technology. I am a strong believer in growth. I tell you why and how here.
Understanding the GenAI Tech Stack : Part 4 — Application Models
Although tech stocks have seen recent volatility following a low earnings season, generative artificial intelligence (GenAI) continues to inspire investors, with Sequoia calling it “our generation’s space race.” As part of our series on understanding GenAI, this month, we’re discussing the final model in the tech stack: Application Models. (See more about Foundation Models here and MLops Models here).
Pitchbook provides us with an insightful interview with Lotfi Karoui, Chief Credit Strategist at Goldman Sachs, on perspectives for the LBO market in 2024. We share his vision that winning textbooks will be those in which Private Equity Investors can improve margins over the holding period, with levers both at revenue and cost levels. And all that while figuring out the fundamental changes brought to the underlying asset by GenAI.
Sam Altman Is the Oppenheimer of Our Age | New York Intelligencer
In this article, we get to dive into the personality of Sam Altman, the 38-year-old CEO of OpenAI, and explore his vision of the future. Great read on who is described as “the Oppenheimer of our Age.”
Will generative AI transform business? | The Financial Times
Generative AI again. The FT provides a well-documented article on how generative AI will effectively transform businesses and allow incumbents to emerge (or at least remain in place). However, a clear and realistic strategy is needed to ensure positive outcomes from implementing the technology.
Semantiweb
D'Ornano + Co. has advised European Digital Group and its financial sponsor Montefiore Investment on the acquisition of Semantiweb, a company structuring data and the strategic analysis of web conversations with data mining, text mining and sentiment analysis services.
Koesio
D’Ornano + Co. has supported Montefiore Investment on its Growth investment in Koesio, a company offering fixed and mobile telephony, dematerialization of processes, and business intelligence.
Ecomundo
D’Ornano + Co. has advised Lisam Systems and its financial sponsor Keensight Capital on the acquisition of EcoMundo, developer of compliance and regulatory software for the cosmetics, biocides and healthcare industries.
Collective Thinking
D’Ornano + Co. has supported PSIH and its financial sponsor Lauxera Capital on the acquisition of Collective Thinking, a company specialized in Artificial Intelligence and Natural Language Processing applied to medical data analysis.
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