Latent assets, the invisible portfolio of the venture

There is, in the venture, a permanent quarrel which resembles bad staging. On the one hand, the story of victory: unicorns, oversubscribed rounds, photos of delighted family offices and hurried founders (right Arthur). On the other, the story of downgrading: unreal valuations, surveys that solved nothing, burn that became shameful, boards experienced like weekly tribunals.

With Adrien Chaltiel we take stock of a venture that is working neither as well as investors like to say and nor as badly as some entrepreneurs feel. It’s worth watching on DECODE VC or listening on all the good podcast platforms.

As you will have understood, between the two extremes, there is a massive blind spot with companies which are viable but which are stuck in portfolios, these companies which are neither “power law” successes nor shipwrecks, but immobilized assets, stuck between paper value and real liquidity.

An industry of stories, a shortage of transparency

“opacity is very strong in our ecosystem, already because it is unlisted, it is non-public. » and then culturally: “we based successes and performances a lot on storytelling”, by promoting signals which are not proof of performance: “successes based on lifting, based on unicorns, invitations to the Elysée or Bercy, the perlinpinpin prizes”.

Beyond ego inflation, it is a collective disorientation: “sometimes you have the vision of success which is not really success because people do not say with authenticity what they are experiencing. » And this staging ends up hitting the wall of reality: “LPs, investors want return on investment… and entrepreneurs want more transparency too”. In other words, the market is not changing because it has become moral. It changes because its financiers demand liquidity, and its operators demand more honest reading rules.

When liquidity becomes detached from valuations

We of course addressed the nerve-racking question: “At what point did investment funds lose the link between real liquidity and valuations?” » the acceleration is located on a known sequence, the famous pre-Covid / Covid period, after which everything accelerated very strongly. “the money was almost free… with the interest rates very low, which attracted a lot of people and a lot of new entrants into VC”.

Adrien takes care to grant a benefit to the cycle: the euphoria has also structured a country, with a “pro-entrepreneurship” dynamic: “we have democratized the business”, “also structured incubators”, “education too”, with “entrepreneurial chairs”. This passage avoids the nostalgia that claims there was nothing to save in 2017–2022.

That being said, “we paid a lot of money for deals that are not actionable at all in terms of outputs and return on investment. » It’s not that the companies had no product, nor that the markets were fictitious; is that the output equation did not hold. And during this period, a dogma established itself as the norm: “we replicated this American model of winner’s take all… the dogma of power law”. Consequence: “Anything that is not a future 10X will be perceived as something not interesting, when in fact yes, that is a bit where we went wrong. »

This “where” is the pivotal point of the episode because the area of ​​“non-10X” companies is not marginal, and has become the silent majority of portfolios.

“Latent assets”, neither dead nor removable

“sleeping beauty”, or “latent assets”, “it is not a failed startup, it is a company which creates value, but which is no longer aligned with the classic VC model into which it entered. »

“They have a real product or service that works. They have customers, sometimes they even have Ebitda, they are profitable… a differentiating technology.” The problems are nevertheless there: first, the trajectory: “they are no longer in this power law trajectory”, then, the legacy of the cycle: “they have a valuation which is inherited from another cycle”, that of “excessive valuations”. Finally, a human factor, rarely treated as a financial variable but omnipresent in reality: “they have founding teams who are often tired”. Adrien Chaltiel says it without pathos: “now we ask them to be profitable, and it’s much more difficult” than managing growth on steroids

In the end “They are neither dead nor removable in the standard model in which we put them, and yet they have a certain value. » In short, a value, but no suitable exit door for the VC model.

Financial engineering, or the end of the “write-off or unicorn” reflex

“There are quite few funds that really know how to do M&A… build-up… restructuring… secondary. » And this is precisely where he places his main idea: importing into venture a repertoire that “private equity has been doing for 30 or 40 years”, but that “European venture is only beginning to approach”.

He lists options which, taken end to end, outline a less ideological and more “optional” venture: “partial exits”, “consolidation or build-ups”, “refinancing”, “LBOs”, “secondary”. The objective is not to transform VC into private equity, but to create escape routes for these companies that neither “die” nor “exit” from portfolios.

A two-speed market: capable funds, poor funds

According to Adrien Chaltiel, sophisticated instruments (continuation, secondary, hybrid vehicles) remain more accessible to experienced players, but he also sees the emergence of new specialized entrants, structured from the start to deal with these situations.

For example, with a “financial” logic, “a very recent fund… Rockby”, which wants to do “secondary” by taking over investments “to put them back in a slightly different swimming line”, or more “entrepreneurial” with “HEXA Scale”, which aims to support companies with “a core team”. The move upmarket of “hybrid tech funds” like Isai is another example.

The board, from the registration chamber to the arbitration body

“boards are experienced much more as recording chambers… than real tools… for exploring risks, for exploring exit options. »

“a board is really a decision-making and strategy body that serves the social interest of the company. » He insists on the mission: “it defines the main strategic orientations and it arbitrates… growth, pivot, M&A, exit”. And he explains what has been forgotten, the alignment of interests, moving over time, between investors and founders, reminding us that a participation can last ten years, with lives changing.

One remedy is to open up the board and professionalize its operation. He defends the presence of “at least one independent director” “without a hidden agenda”, capable of “helping to arbitrate” and putting the company and not the round table at the center.

On the method, he describes simple practices, but rarely followed: advance agenda, “board packs” sent beforehand, to avoid spending “an hour, an hour and a half” “unpicking” figures during a meeting. The board must reserve decisions, including those that are “annoying”: HR, departures, health of the founders. He even gives an example of a signal that he treats as a priority: “systematically, the first question… is visibility over the last ten team departures”.

This is not HR vanity, but an indicator of performance, of internal tension, which can prove enlightening.

Europe, or the error of copying and pasting without adaptation

When the discussion shifts to Europe, Adrien Chaltiel refuses fatalism. He recognizes successes, but he recalls a structural incompatibility of the European market, which does not have the same outlets, nor the same buyers, nor the same financial depth as the United States.

If certain companies have to move quickly to the United States, because their business is immediately global; others need another funding corridor, more compatible with consolidation, industrial support and progressiveness. “Putting the right boxes in the right investment lines,” he sums up, like a sorting principle that is often missing in public speeches.

Between political emergency and errors of the last cycle

Fragmentation, hardening of borders, reflexes of sovereignty, Europe reacts, sometimes through “announcement effects”. Beyond the symbolic utility, “it does not create lasting advantages”, “We should also not confuse technological independence and a race for size”. The race for size, he said, is “much more expensive for us than the US”.

The framework he proposes is more demanding: invest, yes, but taking into account European specificities, avoiding “reproducing the errors of the last cycle”, and building a model where governance, liquidity and industrial strategy are not three separate subjects.

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