daphni Investment thesis

VC investment thesis: Daphni

Daphni have provided a thesis which explains what they do and how they execute rather than being more thematic in focus. So it’s more along the lines of ‘we invest in good stuff from Europe.’ However, their investment thesis was written for Medium, so it broken up into a series of blogs. I’ll share the core bits and you can link through to what you might find interesting if you want additional reading.

About Daphni

Daphni is a venture capital fund investing in user-oriented, early stage startups with the European DNA and strong international ambition. They were founded in Apr 2015 by Marie Ekeland, Mathieu Daix, Pierre-Eric Leibovici, Pierre-Yves Meerschman and Willy Braun.

Daphni is the first VC as a platform. We invest in user-oriented startups with European DNA and strong international ambition. The company is supported by daphnipolis, a closely-knit community of 200+ entrepreneurs, executives, academics, artists and advisors, and a digital platform to ensure both efficiency and full transparency.

Having raised €170M, they’ve invested in 17 companies to date and lead 7 of those deals.

Blog describing their main thesis

Each component of our investment strategy has been described in our series daphni investment thesis. Prefered business models, sectors, amount of money, geographical scope: you will learn a lot about our analysis grid, so you can prepare yourself to apply under the best conditions possible.

Our vision falls into a context in which the rules that apply to startups are not specific to local markets such as the European one but are part of international economic and social macro-trends.

When you are committed to give the proper means to an ambitious startup, you need to have a well-thought-out investment strategy, backed and reinforced by the experience of the daphni members. If the concerned companies want to have the means to their ambition, great discipline with regards to a well-thought-out investment strategy is necessary.

Our investment criteria

Different lines of force are noteworthy for daphni purple (the name of our first investment fund), and constitute our investment criteria:

1. EUROPEAN DNA. daphni will aim to support projects primarily carried out by European founders regarding significant subjects sustained by European-based DNA. More pragmatically, daphni will prioritise the accompaniment of European entrepreneurs wherever they are located whether in Europe or outside Europe with a specific attention to the United States.

2. GLOBAL. the targeted companies should have proven international ambitions consistent with their strategy. We are looking for companies planning to launch in several countries within their first two years.

3. CONSUMER OR PROSUMER. The fund aims at investing primarily in companies addressing market-oriented users: B2User, User2User B2B2User, for personal or professional use. We believe that technology should be and stay invisible for the users. Our primary focus is social needs, usages and customer experiences, from anyone and not solely tech-enthusiast adopters.

4. SECTOR AGNOSTIC. We believe technology is not the end but the means to develop great success stories. Disruptions are moving and deals with different sectors and industries along time. That’s the reason why we have no dogma regarding our targeted topics of interests.

The Five Pillars of our Investment Strategy

1. we play an active role in round-table discussions . We also provide potential co-investors, either through our own investors or with outside investors that we know well, in Europe or in the US.

2. we get involved in the strategic and operational development of the company, through an inside sponsor in

pitch deck

  daphni team and with our ecosystem around us, daphnipolis

3. we invest primarily in unproven companies (only partially proven product-market fit), with an European DNA, a great founding team, a large enough addressable market, an international strategy and a disruptive experience, through a ticket size between €100.000 & €5.000.000

4. we will also invest some tickets in seed stage companies (between €300.000 and €1.000.000)

5. we mainly target shareholdings of 12–25%

6. we only invest in companies that can reach a 500m€+ valuation in 7–8 years.

Providing you with enough resources to reach your ambitious goals

In our sweet spot (unproven companies), the initial amounts invested by daphni purple and any of its co-investors will be able to provide sufficient means for entrepreneurs to be able to carry out their business plan for 2 years and not lose energy and attention on the early research into the next round of funding.

The nature of these two years allows entrepreneurs the ability to execute their strategy:

  • without the constraint of short-term refinancing,
  • enabling them to make the necessary iterations for the proper development of a disruptive business,
  • while able to recruit high-level talent.

In turn, the daphni team will be very cautious regarding reinvestments in companies that have not implemented their development plans or not found new investors after said 2 years.

Our relationships with other investors

We are really committed to be involved in the development of the company, so we will lead the roundtable discussions and set the terms with the founding team.

Yet we will also promote the integration of co-investors, local or foreign, in order to maximize the resources for the founding teams. For the teams planning to establish a rapid internationalization and that will need significant funding, we are especially in favour of the early integration of at least one foreign co-investor.

The fund model also provides the opportunity for our LPs to co-invest (via dedicated vehicles managed by daphni) in companies that they love. This makes them all the more willing to the success of the startup and enable more capital to be deployed in the round.

Here is our investment strategy:

Leverage The European DNA (Digital Natural Advantages)

We presented in our previous article the identikit of the European unicorns: the key takeaway? Europe is a fertile ground for digital champions! Below we go deeper in our analysis, extracting the European DNA structuring the next generation of europeans leaders.

At daphni, we are looking for startups that take advantage of European forces, marked by a specific cultural DNA. This DNA is based on 3 pillars and it influences the entrepreneurs’ perspectives, values and concerns.

The three pillars of the European DNA

Europe is distinguished by specific DNA based around 3 structural dynamics: collective, quality of life and inventive.

3 pillars European DNA

This cultural DNA is shaped and influences social structures & economic activities.

DNA, economic activities and social structures

Social structures can be seen as “institutions”, which are stable, valued, recurring patterns of behavior. They are the very core of social contracts and there isn’t a day that goes by without talking about any of them (and we all have beliefs and opinions about them). Some examples ? Educational institutions, social welfare, health care institutions, law and legal system, academia, the media, etc.

Economic activities are grounded in the industrial traditions that translate into expertise throughout the value chain, from the design stage to the distribution, and resonates through a high-level training system in these sectors and more recently in the appearance of iconic startups.

Let’s dig deeper into each pillar of the European DNA.

1. Collective

Europe is characterized by nations with strong social pacts, especially Western and Northern Europe. This strong willingness to live together is revealed by four key elements, in particular:

1.1 Collective & social structures

The quality of infrastructure (transport, electricity, telephone, etc.)

The World Economic Forum compiled The Global Competitiveness Report 2014–2015 ranking to measure and classify 144 countries according to their competitiveness factors.

Based on the criterion of infrastructure, 6 European countries feature in the top 10, the United States comes in 12th place.

Quality and access to health and primary education

Quality and access to health and primary education are also an important indicator of the willingness to live together and to enable everyone to live in good conditions.

26 European countries come ahead of the United States regarding quality and access to health and primary education. 6 European countries are in the top 10

The use of sharing economy services

While the most iconic sharing economy companies (AirBnB, Etsy, Zipcar, Upwork, etc.) are American, three significant facts are representative of the European DNA:

  • Europeans are mass users of these services:
  • > 58% of the AirBnB platform accommodation is located in Europe and Paris is the city that has the most apartments. In the top 10, seven are European cities (source)
    > 26% of French people are active users of Leboncoin (17m French peopleout of 66,030,000 inhabitants) compared to 19% of Americans on craigslist (60m US citizens out of 318.9 million inhabitants (2014))
    > 9% of French people are members of BlaBlaCar
  • Some of the most success full American companies in that space are founded by Europeans (LendingClub, eBay, etc.)
  • The new exemplary global companies that are undergoing large growth are European (BlaBlaCar, Transferwise, etc.)
  • European competitors are emerging to face their US counterparts (Drivy, Wimdu, etc.).

The inequality rates

The rate of inequality is a representative indicator of the level of social pact of a nation. This rate is determined by the GINI coefficient which measures income inequality: the higher the rate, the more equally the income is distributed. The ranking of countries with respect to this factor, carried out by the CIA, establishes:

> a top 10 comprised solely of European companies
> only one non-European company in the top 19
> the United States comes in 41st place

1.2. The European collective dimension comes from economic legacy and leaders

This strong European willingness to live together has a direct impact on four economic sectors that are particularly interesting in Europe:

Global Needs for 2030, with 8.3 billion people (National Intelligence Council)
> 50% more energy
> 40% more water
> 35% more food

  • smart cities, here again, which combine with the growing urbanization of societies. Some of the leaders of the old economy: SiemensAlstom, etc. Some of the leaders of the new economy: SigfoxLuceor, etc.

In 1800, 2% of the population lived in cities, today this figure has reached 50%, and the UN Department of Economic and Social Affairs has predicted a 72% increase in urbanization by 2050.

> 3% of global education spending on digital compared to 35% in the content industry
> very strong growth in Europe: 22% CAGR between 2012 and 2017
> undercapitalized: 8% of capital in e-learning comes from the private sector

2. Quality of life

European DNA also stands out for its search for it’s quality of life, in professional spheres as well as personal ones. This well-being can be seen by:

2.1. Quality of life & social structures

Social protection systems

Social protection systems (old age, survivors, disability, health, family, unemployment, housing, etc.) play an important role in the well-being experienced in a country. They can both reduce anxiety vis-à-vis the future and ensure a decent standard of living for the population in a precarious situation.

Public social spending represents 22% of GDP on average in the OECD area, with 14 European countries in the top of the ranking.

These figures are corroborated by the ranking of the best health systems in the world according to the WHO, in which 7 of the top 10 countries are European.

A balanced private and professional life, combined with strong productivity 

Since 1950, annual working hours have declined in all developed countries. In 2007, the annual working time was 1,570 hours in France and on average 1,555 hours in six other European countries (Germany, Italy, Netherlands, Spain, Sweden and the UK).

The OECD Better Life Index, the OECD, determines the classification of countries according to the time spent outside of work. The US lags behind, coming 33rd out of 36 countries; France and Germany are tied (64% of the day away from work). The European DNA is strongly linked to the balance between work and life and a strong productivity.

Rankings overview:
Denmark # 1/36–67% // 2.1% working 50 hours or more a week
France # 6/36–64% of their day // 8.7% working 50 hours or more a week
Germany # 7/36–64% // 5.6% working 50 hours or more a week
UK # 24/36–62% // 12.3% working 50 hours or more a week
US # 33/36–60% // 11.4% working 50 hours or more a week

This personal / work life balance is combined with strong productivity.

According to the OECD, the GDP / hours worked ranking includes 9 European countries in the top 10.

Cities that are good places in which to live

Well-being in general is also greatly influenced by the city in which we live. According to the US consulting firm Mercer in 2015:

7 European cities featured in the top 10 of the best cities to live in

2.2. The European quality of life dimension comes from economic legacy and leaders

This European commitment to the pursuit of well-being has a direct impact on four economic sectors that are of particular interest in Europe:

  • travel

According to the ranking of International T&T Consumption (WTTC):

15 European Union countries ahead of the United States regarding the contribution to the GDP of travel & tourisme in 2014

Some of the leaders of the old economy: ClubMedBritish Airways, etc.
Some of the leaders of the new economy: BookingTrivagoSecret Escapes, etc.

  • food sector

The Oxfam Food Index places:

19 European countries in the TOP 24 of the best places in the world to eat

Some of the leaders of the old economy: DanoneNestlé, etc.
Some of the leaders of the new economy: Just EatDelivery Hero, etc.

  • security and privacy

Europe is at the forefront on issues of security and privacy, with leading players in the private sector and a great deal of public support across the country and the European Union.

Some of the leaders of the old economy: AVGThales, …
Some of the leaders of the new economy: Silent CircleScytlDocTrackrDarktrace, …

  • on-demand economy

On-demand economy improves living conditions and purchasing power with personalized services for consumers and prosumers, which sometimes coincide with the aforementioned verticals, such as Delivery Hero or Just Eat on food delivery. This tendency has been strengthened by the “megatrend individual empowerment”, of the National Intelligence Council (Global Trends 2030) and is also reflected by the increasingly prescriptive role of prosumers, integrating the applications that they use in their personal lives into their companies. Some of the leaders of the new economy: DrivyTakeaway.com, etc.

3. Inventive

The European DNA is a mix of creativity and engineering tradition that makes it extremely inventive.

3.1. Inventive & social structures

Creativity is Queen in Europe as demonstrates its leadership in the luxury or fashion industry, but this creativity is also technical with strong engineering skills & savoir-faire, and a tradition of invention.

1. Cinema: Europe has won over half of the Palmes d’Or (55%) at the Cannes Film Festival since its inception
2. Literature: 75% of Nobel Prizes in Literature have been awarded to European authors.
3. Architecture: 54% of Pritzker Prizes (the equivalent of the Nobel Prize in architecture) has been awarded to European architects
4. Museums: 7 European museums are in the top 10 most visited museums in the world

3.2. European inventive dimension comes from economic legacy and leaders

European creativity has a direct impact on five economic sectors that are of particular interest in Europe:

  • luxury

European brands occupy the entire top 10 of the most powerful luxury brands in the annual ranking by Millward Brown. Some of the leaders of the old economy: LVMHKering, etc. Some of the leaders of the new economy: DevialetOnefinestay, etc.

  • advertising

3 European groups are in the top 10 of the biggest advertising groups: WPP #1 (London), Publicis #3 (Paris), Havas #3 (Paris). Some of the leaders of the new economy as well: CriteoTeads.tv, etc.

  • music

Europe, with the label Universal Music Group held by Vivendi, is the world leader in the music industry (39% of music production sales).

Some of the leaders of the old economy: FNAC, Universal Music, …
Some of the leaders of the new economy: DeezerShazamSoundcloudSpotify, …

  • fashion

European textile includes the world’s largest group in the industry, H&M, followed by Inditex, the 3rd largest group in the world (ranking by Interbrand, best retail brand 2014)

Some of the leaders of the old economy: BenettonH&M, LacosteZara, etc. Some of the leaders of the new economy: AsosFarfetchMenlookShowroomprivéZalando, etc.

  • publishing and media

2 European groups are among the 10 biggest media groups in the world.

Some of the leaders of the old economy: Axel SpringerSky TV, etc. Some of the leaders of the new economy: Aufeminin.comDailymotionWebedia, etc.

The American Digital Natural Advantages are different from those of the EU

Collective, Quality of Life, Inventive: here is the backbone of the European DNA, whereas USA’s DNA is structured around Productivity, Empowerment and Entertainment. daphni will see in a favourable light the startups that are made of these bricks, simply because Europe, historically and industrially, is better equipped to grow world leaders around these specific pillars.

Uberization? Nope, Platformization

We believe in a strong transformation of the model of the firm due to the decrease of information costs (transaction, treatment, hosting, computing, etc.). We call it platformization. Sector after sector we witness the emergence of massive networks built in the form of platforms, where supply and offer match together.

And daphni is not only a VC firm writing about platforms: it’s a new model of VC. We too are building our own digital platform to benefit from the incredible power of this kind of structure: network effects, scalability, collective intelligence and horizontal communication.

Read below why we adopted this new model of organizing performant investments in digital startups.

The platformization of the economy

What do AirBnB, BlaBlaCar, Spotify and Amazon have in common? They share the same business model: the platform model. There must be a reason.

From a sequenced value chain to a platform

Traditionally, the economy is structured around organisations whose role is to design, produce, assemble, distribute, sell or consume goods and services. In this model, the unidirectional approach is predominant: value is created by a set of sequenced actions.

Digital has allowed the elimination or merge of certain sequences as well as the incorporation of a new tool, the platform, in the value creation chain. Platforms are open intermediary interfaces through which suppliers and customers meet. They bring together an internal and external offer which can concern economic exchanges, as with Amazon, and/or social interactions as with Twitter or Instagram.

A platform is multi-facial organisation fed by its users and its suppliers

For users, ease of use and the fact that most of platforms are free of charge accelerate the inclusion of a maximum of users on the one side, which in turn is the main value offer that attracts the other side, the suppliers (for example game designers on Facebook) to use the platform.

On the supply side, this is how suppliers benefit from a market they would not otherwise have access to. The principle of externalisation was historically based on outsourcing. It is now based on what we call ‘insourcing’, in which supply is combined transparently on the platform. Take retail for example: Amazon brings together outside suppliers on its platform, who offer their goods on the site thus complete its traditional e-commerce offer, at the same time enriching the value offer delivered to its customers. Amazon can then capture part of the value emanating from the transactions generated on the Amazon site by taking a commission. PriceMinister is in the same vein, but has positioned itself as a total platform, acting simply as a trustworthy third party that puts the two sides in contact without itself selling any products.

The platform, a growth accelerator

The platform model makes it possible to widen the breadth of the markets where it is present. On the supply side, platforms favour an increase in catalogue size and the number of sellers, professionals or private individuals. On the demand side, lower prices brought on by internal competition and reduced operating costs boost demand.

This amplification of demand is further supported by the possibility of reaching a wider public due to the brand-platform and new usages it makes possible (for example, the sale and purchase of previously owned goods).

In a context like this, the network effect is essential. The more the number of contributors to the platform increases, the more the value offer is enriched. For example, the value of the service offered by BlaBlaCar increases simultaneously with the number of active members on the platform. Massive and rapid growth hinges on this virtuous dynamic.

New assets, new measures of enhancement

In a platformization economy, value moves around: the enhancement of interactions supplants the value of assets. Uber owns no vehicles, AirBnB does not possess real estate, Facebook produces no content. Assets have taken on new forms: they make it possible to channel interactions through the capture and enhancement of data with algorithms that enrich the user experience.

This new development model, freed from the problematic of financing infrastructures, has made possible a rapid jump in scale as well as rapid internationalisation. Platforms like Kickstarter, for example, are built to offer a unified service across countries, with marginal and decreasing costs. What they are betting on is their ability to pull in the greatest number of buyers and sellers.

Toward a new economy of platformization

The ‘uberisation’ of the economy is only an illustration of the in-depth change that platforms generate, in this case, in the transportation market. It would probably be more appropriate to speak of the platformization of the entire economy and perceive this movement as a new vector of value creation for suppliers and users.

Apart from sectors that have already been through upheavals (music, hospitality, distribution, travel, media, transport,…) all markets could potentially be platformized, from the most improbable like politics, to the most conservative like education, and the most established, like finance.

This movement is also making inroads into the hardware industry. Manufacturers, like Withings and its connected scale, enrich the user experience by connecting objects on platforms that offer related added-value services. This movement marks a first phase in the platformization of personal health care and hence of the healthcare market.

Platformization ≠ guaranteed success

But not all attempts at disruption will meet with success. Questions that have arisen about the models of Groupon, Flickr or Twitter are a reminder that the platform must allow all the players gravitating toward it to build a viable economic model or or to profit from an offer of durable value.

In the end, the secret of platformization rests on a change in the paradigm, which requires a considerable effort of open-mindedness and willingness to question established principles. The customer becomes the supplier. Your competition becomes your customer. Users develop commercial relations among themselves. The user becomes both the producer and the consumer.

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