| Hi there, Welcome to the 117th 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!
In recent years, the venture capital landscape has witnessed a surge of interest in more innovative approaches to merging technology with traditional industries. This trend is primarily driven by the need to unlock value in sectors that have remained relatively unchanged by modern technology. The concept of Growth Buyouts (GBOs) and tech-enabled vertical roll-ups are gaining traction, where software companies acquire operational businesses to directly integrate proprietary technology, thereby transforming the target companies’ economics and increasing their competitive advantage. Yoni Rechtman of Slow Ventures recently published an investment thesis that highlights the necessity for founders of vertical-specific software companies to consider merging with incumbents to fully capture the value their innovations can bring. He argues that the era of easy wins for Vertical SaaS (vSaaS) is over, and further progress will require new go-to-market strategies and capital structures. Rechtman introduces the concept of GBOs, where a software company doesn’t just sell its product to an industry player but rather buys out the company. By doing so, the software company can modernise the incumbent’s operations and extract greater value post-acquisition. This approach enables the acquiring company to become the best buyer in the category by ensuring the largest, most consistent improvements following the acquisition. On a similar note, Tidemark, in a paper published on July 12th, explores the intricacies of tech-enabled vertical roll-ups. The paper outlines that while roll-ups often focus on financial engineering and cost-cutting, tech-enabled roll-ups differ by leveraging technology to drive significant improvements in pro forma free cash flow. This strategy involves buying fundamentally strong companies—those with stable, high-margin, and recurring revenue—and then implementing tech-driven enhancements to unlock additional value. Tidemark emphasises that while traditional vSaaS models capture value across numerous merchants, tech-enabled roll-ups maximise value by focusing on a few acquired businesses. The integration of technology, often powered by AI, creates operational efficiencies that are fully realised by the acquiring entity, making it a potent tool for scaling and aggregating within a vertical. Martin Mignot from Index Ventures expands on this theme by discussing the rise of Private Reverse Mergers (PReMs), where smaller, high-growth tech companies acquire larger, profitable incumbents. Mignot cites several examples from 2024, including sennder’s acquisition of C.H. Robinson’s European Surface Transportation operations, which is expected to double the company’s revenue and solidify its position among Europe’s top logistics firms. Similarly, Metropolis Technologies’ acquisition of SP+ has made it the largest parking network operator in North America, demonstrating the power of combining tech innovation with traditional business scale. These mergers allow scale-ups to accelerate their growth trajectories, achieve liquidity faster, and de-risk their businesses by reducing future dilution and improving debt terms due to the profitability of the acquired operations. This underscores a broader shift in venture capital strategy. Investors and founders are increasingly recognising the potential of combining tech innovation with established business models through creative M&A strategies. Whether through GBOs, tech-enabled roll-ups, or PReMs, the goal is to create value not just by selling technology, but by fully integrating it within traditional businesses to drive unprecedented levels of efficiency and profitability. As private markets remain tight and IPO opportunities scarce, these strategies offer a promising path for scale-ups to achieve growth, liquidity, and market leadership.
Ben Thompson argues that the evolving dynamics of the smartphone industry, particularly with the integration of AI, reflect a broader pattern in tech history where general-purpose products increasingly replace specialised ones—a process he terms “obsoletion.” He revisits the early predictions that Apple’s iPhone would decline due to Android’s modular approach, but instead, Apple’s focus on integration has solidified its dominance. Integration, which smooths over the complexities of modularisation, has been crucial in providing a superior user experience, a key reason why the iPhone has remained a market leader, even as competitors like Samsung adopt some level of integration themselves. Thompson notes that despite Google’s efforts to integrate its offerings through the Pixel, the device has captured only 1% of the global market. However, the rise of AI presents a significant opportunity for Google. By embedding AI deeply into Android, Google has the potential to disrupt the current app-centric paradigm of smartphones, leveraging its control over the AI stack—from models to data. Thompson contrasts Google’s approach with Apple’s, highlighting that while Google could have made its AI assistant exclusive to Pixel, it instead chose to integrate it across Android. This decision reflects a bet that owning the information stack (AI and cloud services) will be more critical than controlling the tech stack (hardware). However, this strategy is not without risks, including the potential alienation of OEM partners and the significant financial investment required to compete with established giants like Apple.
Gradient Labs, a UK-based AI-customer service startup, raises £2.8M with LocalGlobe - link Userland, a UK-based AI-powered startup automating the creation of branded marketing campaigns in seconds, raises €4.6M with LocalGlobe - link Roger, a Germany-based health-tech startup automating dental practice, raises €7M with Google Ventures (GV)/Partech - link RootGlobal, a Germany-based startup helping f&b companies decarbonise, raises €8M with Point Nine - link Flower, a Sweden-based energy grid startup integrating battery energy storage systems into the grid, raises €25M with Northzone - link Black Forest Labs, a Germany-based a generative AI research community offering performance image generation, raises €28M with a16z - link
Bandana, an online job platform for hourly workers, raises $8.5M with General Catalyst - link Hedra, an AI video creation platform, raises $10M with Index Ventures/a16z - link MemGPT, an AI startup boosting memory for LLMs, raises $10M with Felicis Ventures - link Trunk Tools, a startup that provides automation solutions for construction documentation, raises $20M with Redpoint - link Ema, an AI agent startup aiming to build universal AI employees for enterprises, raises $36M with Accel - link Defcon AI, a startup streamlining logistics and mobility operations for the US military, raises $44M with Bessemer - link
Healx, a UK-based AI-enabled drug discovery platform for rare diseases, raises $47M with Atomico - link Mechanical Orchard, a cloud ops-as-a-service, raises $50M with GV - link Story, a blockchain platform that allows creators to tokenise their IP, raises $80M with a16z - link Fortera, a startup making low-carbon cement, raises $85M with Khosla Ventures - link Flo, a health app that provides menstrual cycle and ovulation tracking, raises $200M from General Atlantic - link Anduril, a defence technology company that specialises in autonomous systems, raises $1.5B with Founders Fund - link
Thank you for being a loyal subscriber of our monthly Insights - please feel free to share this newsletter with anyone you’d think would appreciate it! Share Heartcore Insights | |
No comments:
Post a Comment