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the tech play

the tech play

#178

Dragos Novac
December 03, 2023

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In-depth intel you won’t find elsewhere

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Top intel

Deal highlights from this week

🇫🇷 Cryptonext Security, developing post quantum cryptography SAAS to manage the quantum threat and migrate IT/OT infrastructures to quantum safe, secured $11.6 million with AVP, Quantonation and Auriga Cyber Ventures.

🇬🇧 Modo Energy, doing data analytics SAAS for renewable energy assets, raised $14.4 million in Series A funding, led by MMC Ventures, joined by Triple Point Ventures, Fred Olsen, and Catalyst Capital.

🇫🇷 Karos, operating a carpooling platform in France, Denmark, Germany and Spain, raised $18 million series B co-led by Citizen Capital and Ring Capital.

🇸🇪 Lassie, selling D2C digital on-demand insurance products for pet owners, raised $23.4 million series B led by Balderton, joined by Felix Capital, Inventure, Passion Capital and Philian.

More early stage deals on tomorrow’s intel:

🇩🇪 ML for software-defined vehicles
🇬🇧 in-browser document editor for patents writing
🇮🇸 multi-factor authentication SAAS
🇬🇧 B2B insurance marketplace
🇬🇧 automated, ML-based cell production system
VC shops closing, write-offs, fresh powder (11 new funds), ppl with new VC jobs and more.

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Market signals

👀 ZIRP days are over.

The combination of the withdrawal of crossover investors and the general slowdown in late-stage investment activity is unsurprisingly reflected in a huge decline in the number of so-called mega-rounds.
In other words, ZIRP specialists stopped gambling and now everybody scrambles to figure fundamentals and actually build value if they’re to hold assets that will be valued at 1 billion in the future.
That’s from Atomico’s report tracking how VCs behave in Europe every year, the 2023 edition.

🗣️ Europe is a nice place to live but building a startup that could become a sustainable valuable business quickly is quasi impossible. We’ll always have the American market, I guess.

🇺🇸 Benchmark does Europe Four of of the six general partners at Benchmark made a trip to Helsinki this week for no business reason other than a 30 minute interview (scroll to the 3h:52 mark for their market takes). Truth is Helsinki is a nice city for first timers, something to brag about home in America.

🤔 Stride VC is not raising a new fund not because it won’t be able to but because Fred’s seemingly going through a mid-life crisis of sorts.

🤡 The post money SAFE horror story.

👓 Lux Capital letter to LPs — Q3 2023.

An entire generation has not seen a downturn, has not experienced widespread loss from leverage across sprawling interconnected systems, has not run back to safe haven occupations or embraced tomes of value investing or timeless classic warning of rampant speculation.

Market talk

Martin says:
While at Index we’ve gone for a “scaled artisan” approach (90 employees incl a team of senior strategists), it’s true others have grown to a larger scale and have become very structured. Except this isn’t specific to the venture industry. [The VC business] It will go to a larger scale and become very structured. The PE industry went through the same process in the 80s and 90s where it went from a mom and pop industry to a proper institutional business. It isn’t a bad thing, either. Once you’ve picked the right problem to solve and built the best product to do it, having a proven playbook and support to accelerate growth can be very helpful.
The current VC industry is super fragmented, and as Martin says, scale is important and this is accentuated by the current state of the market that’s on a consolidation trajectory. The model as we know it will be harder to develop for a sustainable brand over decades, like Benchmark did, for example, unless you opt for a lifestyle business with a VC model tied to a 50-100M fund.
Businesses will either scale up the AuMs or will specialise on smaller and deeper verticals. The in-between is a no man’s land - no differentiation, dumb money, with no competitive advantages, this is where a good part of the market is now.
Sure, the fundamentals will be the same - use business instincts and mket knowledge to find teams building assets that are going to be sold at 10-100X 5-8 years down the road. But the way to execute is going to be different because there’s different resources available than there were 10-20 years ago - the use of those resources will impact the entire value chain of sourcing, selling and post-acquisition jobs. Old school folks won’t be comfortable with this.
What we are seeing now in terms of technology use is just the tip of the iceberg on the buy side - the expenses associated to be a ‘data-driven VC’ (which now mainly means a hack on top of a data API hooked to an industry-focused CRM) will transition to more sophisticated constructs that will eventually become an asset in the balance sheet of any respectable shop.
This seems abstract now but will become more evident with scaling and as the market evolves, winners will transform those tech-related costs into competitive advantages either for better sourcing, or for an enhanced value add to portcos, ultimately becoming another differentiator for raising LP money.
The VC business is a relationship business - just like banks are. In this world brands matter, particularly when founders line up the 200 leads pipeline - if you’re not top of mind, you’re just feedback fodder for a proper due diligence process. Or a proximity play at best.
So what’s your brand about and how do you get into that brand top tier for founders? Tip: it ain’t only DPIs or the number of unicorns in the portfolio, they are just internal KPIs used for selling to one side of the market - the LPs.
On the other side of the market though, good founders don’t give a shit about those, and past performance doesn’t guarantee future success. They do care about the value add - namely what you put on the table besides the cash, and that has multiple facets, beyond the good board work with undivided attention to 10+ companies per partner. I see a lot of potential here, maybe also because this is where the VCs bullshit the most in their world.
Put that also in context with the thesis that VC will gradually be managed just like the PE, with one or two investors taking whole rounds, focusing on capital efficient growth from ideally first money in, as far as possible, all the way to later stage liquidity (there’s already Euro VCs doing this).
And btw, just like in banking where there’s neo-banks stealing market share and building tech-enabled edges, the VC business will face the same challenges. How many neo-banks equivalents do you see now in Europe attacking the VC business and what moats are they building?
Probably the best metaphor is Moneyball - a small market sports team with limited budget scrambles to assemble a competitive crew by using a data approach in order to compete with top tier, deep-pocketed teams able to afford expensive assets. Sure, having money and a good nose for drafting players helps, but ultimately data and a science-driven approach will make the difference and in the end the small market team wins the championship from an under dog position.
Spoiler alert for those who didn’t read the book: the whole industry adopted this small team’s approach and it’s become pretty much standard. It’s the same with the VC business that today sits on a super rich data ecosystem, used tangentially as it makes business based on instincts, fomo, bidding wars and relations.

Mo’ Sundaying

🙃 Food for thought - 90% of B2B Y Combinator companies have 50% of their revenue coming from other Y Combinator companies. This is a very hard-to-replicate network effect.

👁️‍🗨️ Elon Musk vs the ad people No matter what you think of him, and beyond the social media memes and media clickbaits, this week’s Elon interview is very good and worth watching.

🤠 Marc Cuban sold a good part of his majority stake in Dallas Mavericks at a $3.5 billion valuation. He bought the Mavericks for $285 million in 2000.

💪 The inside story of Microsoft's partnership with OpenAI.

🇯🇵 Long Japan The Japanese index is at a 30-year high as foreign investors warm to the government’s game-changer, shareholder-friendly reforms - Japan’s stock market is forecast to have a transformational year in 2024.

⚡ The richest 1% of humanity is responsible for more carbon emissions than the poorest 66%

💰 We're in a restaurant bubble - to now the point where going out to eat doesn't even make sense anymore. Seeing this is many European cities.

🥕 Bain imagined use cases to sell to their clients about how Gen AI can be used in retail.

👭 McKinsey did a 2024 fashion industry report: the global industry will post top-line growth of 2 to 4 percent in 2024.

🎗️ Stephen Fry reads Nick Cave's stirring letter about ChatGPT and human creativity

🤔 52 things I learned in 2023.

💤 Sleep - working out more, eating better, drinking less, and fretting less.

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