Hi there,
Welcome to the 110th edition of Heartcore Insights. Curated with 🖤 by the Heartcore Team.
If you missed the past newsletters, you can catch up here. Now, let’s dive in!
What Does Good Look like? - Yinon Ravid
Great companies piece together three core pillars: growth, engagement and profitability. None of which are mutually exclusive, but often times require leaders to make tradeoffs.
A high growth rate in most cases come at the expense of profitability and expenses. The pursuit of aggressive growth would normally entail lower intent customers coming in (at the expense of engagement) and in most cases, bar viral or network effects driven growth also a higher marketing burn at the expense of the pursuit of profitability.
“For the prior five years, we hadn't built a great business; we had only built a fast growing one. Cheap capital clouded judgment, convincing operators and investors that companies could be worth 30 times revenue, that gross profit margin and cash flow margin should not affect valuation, that it's sensible to spend 40% of revenue on people, and more.” - Yinon Ravid
Over indexing on growth can only work as long as capital markets are lax and access to capital is easy. In higher interest rate environments, where capital once again turns into a scarce commodity, the growth oriented playbook breaks and the pendulum turns to a point where you again realize the importance of controlling your own destiny (i.e., not at the mercy of capital providers)
To shift the focus of Albert, leadership defined a set of five key financial metrics to optimize for. Having defined KPIs to reposition the company, a definition of what “good” looks like followed, Albert identified a publicly traded north star benchmark with similar business model characteristics, albeit operating in a different space.
Under the assumption that public market scrutiny is harsher for sustainable businesses (in the sense of companies that can sustain themselves standalone) than that of the private markets, modeling Albert after a best in class public market peer, became a useful starting point to understand where they excelled and where there was improvements to be had.
“Duolingo's valuation multiple, already higher than other consumer companies, expanded. The company coupled a product customers love with a rare financial trifecta: high growth, high margins, and free cash flow. The more time spent analyzing Duolingo, the stronger our conviction to match Duolingo's financial metrics.”
While a tall order, an otherwise unsustainable situation prompted the leadership team to set objectives for themselves to: i) continue growing top line while slashing marketing spend; ii) drive down the variable costs to improve gross margin by surgically scrutinizing the variable cost base of the company, and; iii) drive down fixed costs in a one off measure with the objective of keeping it flat beyond that point
All things considered with capital becoming more scarce and investors are growing more diligent in their assessment of where a startup sits in the risk-reward tradeoff curve of startups. All else being equal, the startup that successfully manages to balance the tradeoffs between growth, profitability and engagement, will also be the one that best can control its destiny in a post ZIRP world.
Airbnb’s Algorithmic Odyssey Balancing - Gad Allon
Platform businesses that facilitate transactions between suppliers and buyers lack the end control / full ownership of service delivery expose themselves to “tail risk” in terms of low frequency / high impact events with outsized negative ramifications for the overall perception of the platform. Using Airbnb as an example:
“[...]markets usually don’t do a good job when it comes to “long tail risk,” which in the context of platform governance refers to the infrequent yet potentially high-impact events or anomalies that can severely impact a platform’s reputation and user trust. While these events may be outliers, occurring far less frequently than regular, smooth transactions, their negative implications can be disproportionate.”
While users generally appreciate getting access to the promised shelter they’ve signed up for on Airbnb, on the off chance that the machinery is not working as planned, Airbnb is exposed to tail risk.
“In the absence of clear guidelines, hosts and guests alike resort to their own strategies or “hacks” to navigate the platform. For instance, a host might capitalize on the system’s flexibility by setting a low initial price, only to add fees later. Conversely, a guest might develop strategies to circumvent or challenge these fees based on past experiences with other hosts. Such self-devised strategies fill the vacuum left by a lack of comprehensive processes, creating a landscape where inconsistencies abound.” [...] “Consider the intricacies of their pricing structure. Guests frequently encounter additional charges such as service and cleaning fees. Yet, paradoxically, despite being levied a cleaning fee, they might still be tasked with chores like doing the laundry or tidying up before departure. This dichotomy isn’t merely a hiccup in communication; it reveals a broader ambiguity in the platform’s processes.”
While the widely known concept of product-market-fit remains an important first order gauge of a platform's ability to deliver products or services that people want, Gad Allon suggests an enriched framework of product-market & process-fit to allow the platform to scale while downside protecting against second order reputational risks .
“As a company evolves, its growth invariably means interacting with a broader, more diverse customer base, each with their own set of expectations and needs. Thus, while achieving Product Market Fit is paramount, maintaining and adapting it during scaling becomes equally crucial.”
Product and Process Market fit is thus defined as a combination of:
Product Fit: This is the traditional Product-Market Fit. The product itself — its features, benefits, and design — addresses a pressing need or desire in the market.
Process Fit: Even if a product resonates with the market, the company’s ability to produce, deliver, and support that product at scale is equally important. This includes manufacturing, distribution, customer support, and any other process that might be crucial to satisfying and retaining customers.
Product-market and process fit:“For startups and businesses, achieving both aspects of this fit would mean having a great product, and efficient and scalable systems in place to support its growth in the market.”
A process-fit has no value in the absence of product-market fit. Unless the dogs are eating the dog food, good processes won’t do anything to help you. But it’s not enough. A truly generational company will be defined by its associated processes to be able to flourish at scale.
Risk Curves in Venture Capital - Akash Bajwa
OpenAI DevDay, Sam Altman keynote (from YouTube) from OpenAI DevDay
Further Thoughts on Sea Change - Howard Marks (Podcast version)
The Techno Optimist Manifesto - Marc Andreessen
Biotech milestones for effective fundraising - Kaleidoscope
Transparency is Hard to do Well - Sean Byrnes
Jevon’s Paradox and a world of spiraling complexity - Adam Singer
Parallel Bets, Microsoft, and AI Strategies - Matthew Ball
🇪🇺 Notable European early-stage rounds
Nūmi, a French synthetic bio company using cell culture to reproduce breast milk for mother’s who can’t breastfeed, raises €3M with Heartcore/Kima Ventures/HCVC/Kost Capital - link 🖤
Purpose Green, a Germany-based startup help to decarbonize appartments and commercial buildings, raises $3.5M with Atlantic Labs/Speedinvest - link
Kota, an Ireland-based startup making it easy for companies to roll out and manage benefits for their employees, raises $5.3M with EQT/Northzone/Frontline - link
Lanch, a Germany-based foodtech developing food delivery brands and dark kitchens for influencers, raises $6.9M with Felix/HV - link
Poppins, a France-based therapy game to cure children's neurodevelopmental disorder, raises $8.5M with Verve/Allianz/HEC/Bpifrance/Eurazeo - link
Unity.ai, a UK-based context-aware AI to detect harmful content and keep platforms safe, raises $15M with Creandum/Paladin - link
Bon Vivant, a France-based biotech producing animal-free dairy products with precision fermentation, raises $15.9M with CapTech/Sofinnova/Sparkfood/Kima/Founders Future - link
Framer, a Netherlands-based no-code website builder, raises $27M with Accel/Atomico - link
🇺🇸 Notable US early-stage rounds
Relay, a workflow automation platform, raises $3.1M with a16z - link
Class Companion, a network of highly automated service centers for EVs, raises $4M with Index - link
Eve, an AI assistant for the legal profession, raises $14M with Lightspeed/Menlo - link
Model Labs, a startup developing machine learning software to help run code in the cloud, raises $16M with Creandul/Lux/Redpoint - link
Carefull, a fintech platform aiming to help banks protect older customers from fraud, raises $16M with Fin Capital/Bessemer - link
Signos, an AI-enhanced app to bring visibility into metabolic function and guidance to drive health and weight loss, raises $20M with GV - link
Reserv, an AI-driven insurance claims processing company, raises $20M with Altai/Bain/8VC - link
Prophecy, a low-code development platform for companies to transform their data, raises $35M with Insight/SignalFire/JP - link
Fantix, a no-code network of companies working together to develop AI models, raises $1.6M with Notion/Gaingels/Founders Factory - link
🔭 Notable later stage rounds
Brite Payments, a Sweden-based provider of instant payments and payouts, raises $60M with Dawn/Headline - link
Kasa Living, a US-based hospitality company offering flexible accommodations for business and leisure travelers, raises $70M with Citi/Firstmark/Ribbit - link
Headway, a US-based companybuilding a new mental healthcare system that everyone can access, raises $125M with Spark/Accel/a16z - link
Electric Hydrogen, a US-based startup developing electrolyzer technologies to enable abundant and clean hydrogen, raises $380M with Fifth Wall/Energy Impact/Fortescue Metals/Temasek - link
🖤 Heartcore News
As mentioned above, we led the pre-seed round for Nūmi - a new alternative to breast milk for women who can't breastfeed their babies. They make the nutritional benefits of breastfeeding accessible by pioneering the development of ex vivo breast milk through cell culture.
Tobias Meisner joined us as a new principal in the Copenhagen office, focusing on our growth investing efforts . Prior to joining Heartcore, Tobias spent time at Permira, ADIA and Lazard.
Neoplants sold out of their pre-orders for the second batch of their Neo P1 bioengineered plant.
Likeminded was named as one of the top 10 early-stage startups pioneering mental health advancements in Europe.
