While talking with a close friend, I realized that he didn’t really understand how our investment model works or why it works. He saw our model as relying on Lady Luck, who occasionally smiles upon investors, when in reality the model relies on a chain of processes and business logic. If my friends don’t understand, then it’s probably time I re-explained ☺
The sales of Rue de la Paye in France and OtoSense in California were mentioned both on our blog and in specialized media.
For us, these sales represent the long-term validation of our investment strategy, and also of our customer acquisition strategy. But these sales may be even more remarkable.
Without divulging too many figures, I can say that our strategies for transforming services into assets has generated, in terms of added value, more than two times the amount invested since 2012.
At the same time, the Pentalabbs-Pentalog Ventures fund still has a large volume of unrealized capital gains.
However, luck doesn’t have much to do with it: we have an investment strategy that differs quite a bit from that of other funds. I’ll try to explain.
This strategy has come about due to the convergence of several objectives: added value (of course), sales relationships, and decreasing acquisition costs. Here’s an explanation in five points.
1. First and foremost, we don’t go chasing unicorns and we make our services more accessible
In other words, we don’t necessarily go for the latest rocket about to take off (of course, we won’t say no to one either). However, we also aren’t going to waste a lot of energy on identifying a star that may never shine.
We have another, more sustainable job to do: identifying startups that are addressing a real need in technology and establishing a sustainable cycle. We identify a good client for the company. And the miracle is that someone who wants to move quickly in the tech world, but who also has the ability to project their future needs, is often quite close to maturity. If all goes well, we will bring in more revenue from services down the line (from marketing, dev, recruitment, etc.), but also from exiting the startup.
When we help our startups quickly put together their tech teams, they often move up to two times faster than their competitors.
2. Reduce the dilution of our customers’ capital
Contrary to what certain detractors of our model often say, the IT for Equity program of a business structure like Pentalabbs reduces technical risks, reduces the time it takes to put together technical teams, accelerates progress on technical roadmaps, decreases time-to-market, and favors post-MVP/V1 scale-up and quality.
By accelerating the entire cycle, the company will automatically decrease its financing needs. Several of our ventures have clearly demonstrated this.
Less dilution means greater leeway for the future and greater opportunities for exits, both in terms of quantity and quality. Accelerating the go-to-market of successive versions also means reducing the risks that come with using bridge financing (raising of capital not initially planned, outside of favorable momentum).
3. Decrease our acquisition costs compared to other business models
Marketing, consulting, recruitment: all of our business models are designed for and loved by startups. The capital raising process is a key period in the life of a startup. Pentalabbs allows us to highlight all of our offerings as our startups seek out capital. Pentalabbs is often where startups turn to first. That contact doesn’t necessarily result in a financial investment, but it often nevertheless produces a service contract. As such, Pentalabbs makes a big contribution to the sales performance of the Pentalog platform. It’s a virtuous cycle.
4. Also find startups with greater maturity to decrease risks
Pentalog clients don’t necessarily need funds, which means that they are financially independent when they decide to come to us. As such, they are more mature than the average startup and their business model is starting to demonstrate its potential.
The day they decide to go further and they need to raise capital again, we will already be there and the investment will be largely de-risked. At that point in the game, startups are looking for more security and they want more strategic investors and partners. It’s an opportunity that we don’t want to miss out on and that keeps us visible in the market.
Pentalog’s Pentalabbs is a true business partner.
5. Add value to our network through partnerships and exits. Pentalog is like air traffic control!
With around 1,000 clients since its initial beginnings, and tens of thousands of prospects in numerous countries… We have more exit opportunities than most investment banks and funds. More specifically, to date, we have found 50% of the buyers for our startups. In this way, we have helped streamline exits and we decrease the risks of failure at the end of the cycle.
Two exits to companies listed on the Nasdaq and two to companies listed on the Euronext exchange.
That said, what some people have too often ignored is the fact that the IT for Equity system can only work in a sufficiently robust environment.
Certain very well-intentioned people have tried to jump into this system without paying enough attention to the financial constraints of the model, condemning themselves to failure and taking their startup clients down with them.
I have seen small teams of a dozen developers attempt it without considering the time for return on investment of projects.
You can only use the IT for Equity model with very solid cash flow as a basis and representing a maximum of 30% of their margin and 7% of their technical payroll. Beyond that, the risks become too significant and the system will gradually fall apart. To put it more plainly, to be successful with the model, you need at least 150 employees, in my opinion. Or even more.
The second key factor is structuring a management team dedicated to IT for Equity. You can’t just do a one-off IT for Equity operation, or even two. To attempt this is to ignore the likelihood of success inherent in any startup. Any less than seven or eight live operations and you’re wasting your time.
At Pentalabbs, we have done 4.5 IT for Equity operations per year since the launch of the program. Also, to do this, you need a team of analysts and teams to support operations (finance, legal, project management). We have all of that.
Don’t go with a partner that doesn’t have a VC team.
Then, we take all of this very particular machinery within our company and we connect it with all of our contacts spread throughout the world. The bread and butter of a startup is found in the quality of execution and great contacts. And that’s also where we come in.
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Analog Devices Acquires OtoSense
Arnaud MaréchalJuly 5, 2018 at 2:34 pm EDT
It reminds me a journalist interviewing an athlete after he finished first of the 400 metres hurdles Olympic race :
– Journalist: one of your strongest competitor fell after the 2nd hurdle, the other pretender get stucked in the peloton. You’ve been pretty lucky today, isn’t it?
– Athlete: it’s very strange you know… the more I work hard, the more I’m lucky…