VC investment thesis: Alven

This is the Alven investment thesis.

In 17 years Alven has invested in over 100 companies across 5 funds. As of 2017 Alven has over 500M€ in funds under management.

Alven was founded by Guillaume Aubin and Charles Letourneur in 1999. Since inception, the firm has focused on technology startups with ambitious prospects in the software and IT industries. During the first Internet boom, we helped launch successful e-commerce, media and high technology companies.

In the following years, we quickly identified SaaS as a promising field for technology startups. We then added mobile, analytics, Big data, and more recently machine learning and VR to our areas of investment as the markets for these technologies are proving to be promising and in expansion.

Alven invest in a relatively broad category of startups, however, for each of their 3 categories they drill down a little. Their investment thesis is spelled out in a great amount of detail. Arguably too much, but it is good reading.

Alven investment thesis

Alven invests in digital technology startups. We believe adoption of digital technologies will continue to rise in 2017 and beyond, as more businesses take their operations online to meet demands from consumers and pressure from the competition to perform and adapt. This demand creates many opportunities for fast-growing companies to start up and reach a global scale.

1. SaaS and subscription models
2. Big data and high-technology digital services
3. Consumer digital services

1. SaaS and subscription models

We invest in 3 layers of the SaaS market:

1. Enterprise subscriptions
2. “Picks and shovels” digital enablers
3. SMB and prosumers

Enterprise

Most businesses transitioned from on-premise software to cloud-hosted SaaS solutions over the last few years. Their small recurring usage fees make SaaS products less risky for companies to adopt, as the setup costs are lower and they don’t incur maintenance costs of multi-year licenses and on-premise installations.

This flexibility offered by the SaaS model drove its fast and wide adoption for most IT products for their workforce. From CRM and ERP to marketing and sales tools (Salesforce, Adobe Marketing Cloud and Marketo replacing Oracle databases and SAP instances), productivity suites (Office 365, Google for Work…), business intelligence (bime, Tableau, Birst, GoodData, Looker…) collaboration platforms (Slack, Evernote, Atlassian, Asana…), document edition and storage (Box, Dropbox, Google Drive…) finance and administration, (Quickbooks, PeopleDoc, Concord…), software development (New Relic…), design (Adobe Creative Cloud), customer support (IAdvize, Zendesk…) and more, all enterprise software is gradually becoming SaaS. Consumerization of IT products also helps SaaS products spread as free consumer tools while being backed up by a B2B business model (see Evernote, Box, Slack, or B2C2B models like MeilleursAgents, Linkedin…).

From the provider’s standpoint, the costs of running SaaS products increase only marginally as their adoption grows. Once a SaaS company has invested in building a product and found its fit with the market, it can quickly make significant profits. Once the initial cost amortized it can start reinvesting in pure scaling infrastructure then marketing and sales. The recurring nature of the profits enables an easy forecasting and piloting of the company’s earnings, and can lead to exponential growth.

Competitive pressure and the synergies and performance gains from digitized operations all constitute strong drivers for more adoption of SaaS products in the enterprise. The winners of the first wave of enterprise SaaS like Salesforce or Adobe have now become systems of records at enough companies to start acting as de-facto platforms for newer services to provide specialized services on top of their databases, further cementing the bright future of the SaaS enterprise market.

“Picks and shovels” digital enablers

Overall commoditization and packaging of the building blocks of software allow the creation of products and services that become technically or economically feasible only now and were unthinkable even a few years ago. Many businesses offering such “picks and shovels” specialize in a specific task on the digital assets and processes of their B2B customers and are able to offer a value that cannot be matched by developing it internally, all for only a fraction of the costs and complexity. At the business level they include payment processing platforms (Stripe, Wynd…), recommendation engines (tinyclues…), ecommerce tools (Akeneo, Izberg…), connectors between IT processes (EntropySoft…), syndication and affiliation services (Lengow…), integrated customer support interfaces (iAdvize…) user authentication, basic analytics, specialized APIs like search (Algolia)… Almost all parts of the value chain with strategic importance may be the niche for new enablers to specialize in.

Below the layer of business-level enablers, the more technical providers are also waging a price war to commoditize IT assets. As the ROI of software and the associated workforce stays high, so is the opportunity for developer tools aimed at improving the quality and velocity of shipping software. Solutions range from software-defined networking to cloud utilities and management tools, continuous integration, test suites, devops platforms, task management for software teams, performance monitoring services, packages, frameworks and libraries.

Often blazing the trail for traditional enterprise and SMB clients, technology businesses are themselves huge consumers of these myriads of complementary technology services to power their own, so the overall market is fulfilling itself to some degree. Even more so than with traditional business SaaS products, the benefits of these tools are immediately measurable in increased profits, keeping the demand strong and the overall area rife with opportunities to scale companies fast.

SMEs and Prosumers

SME are another rising market where historically IT solutions weren’t affordable until now. SaaS lighter products are proving of great value and drive a wave of adoption slower but much wider than the enterprise market, akin to a long tail of business software. SMEs are less likely to use SaaS plugged to a major ERP platform, and will use them as standalone solutions or to augment their use of consumer platforms like social media to serve their business needs.

Vertical-specific tools help cater to specific business needs, again for a fraction of the cost of what each small business would require to build it on their own. For most SMBs from doctor’s offices to freight transporters to small retailers, adopting SaaS tools helps reaching larger audiences online, optimizing costs and streamlining processes with immediate benefits on the top and bottom line.

2. Big data and disruptive high-technology

Big data services for business

Big data isn’t a binary state of analytics that companies either “have” or “don’t get”. It is an ever-moving frontier down the continuous journey of how organizations leverage information at scale. The term was coined to describe the new paradigms needed to tackle the scale of data output by digital businesses in the early 2000’s. Leveraging more information drives more value, it was true then and has remained so today, with no slowdown in sight.

The technical aspects of capturing data get exponentially harder with the 3 Vs that make data BIG data: its Volume, Velocity and Variety. Yet mastering them faster than the competition always yields strategic advantages and has now become the “new normal” of business intelligence. This arms race of managing the information at the lower, technical level is slowly being replaced by a more recent one at the business level: Improving the Value, Veracity and Visualization aspects. These higher-level V’s are the new limiting factor in the ability of businesses to derive more value from their big data. And thus, they constitute a new competitive edge. What good is it to crunch zettabytes of fast-streaming unstructured data if a business doesn’t have the capability to visualize the insights as quickly, check its trustworthiness and tie it directly to revenue?

Some areas of opportunities include:

• Mechanisms to analyze data in-stream rather than by batches
• Managing the compliance and regulatory environment tied to the data
• Enabling the right people to be fed the right data, devoid of unnecessary noise
• Data science tools for smaller organizations that don’t require heavy tech investments

Business cases with direct applications include:

• Marketing departments automating segmentation of their audience and personalization of their content
• Risk management teams bolstering predictive algorithms and fraud detection
• Leadership teams accessing more timely and accurate business intelligence
• Sales teams using the most up-to-date information about their leads and their market
• Media technology companies streamlining their platforms to react to millions of inputs within seconds
• Exchanges and marketplaces running finer models adapted to local and large-scale trends

Machine learning

The ease of capturing meaningful information at each transaction and the democratization of the algorithms and skills enabling machine learning is creating opportunities for businesses to become smarter. Not “wiser” – as in storing knowledge from past experiences, like any business has been doing – but “smarter” – as in they learn how to learn. The promise of machine learning is to deliver better performance with supervised learning than the traditionally-designed algorithms can ever reach. It underpins the refinement of artificial intelligence.

Several applications of these principles have long passed the research stage and are now used daily. They include character and image recognition, face detection, robotics and language processing. The potential for new applications is still vastly untapped.

Disruptive software algorithms

Many specialized applications rely on custom algorithms to process data with extreme constraints (scale, speed, security…), dedicated media formats (VR, video, 3D…) or novel governance paradigm (decentralized ledgers like blockchain…). These technologies involve sharp focus and heavy technical research and may attract less attention, yet they yield significant competitive advantages once they are packaged into a product that finds a fit with its market.

Areas of strong interest currently include VR, video, cryptography and natural language processing.

3. Consumer digital services

Consumers engage with more digital services than ever to satisfy their daily needs and wants. By now we are all well-accustomed to app and IM experiences to interact with businesses and access services the way we do to connect with our own social circles. We are witnessing profound changes in our consumption of media, transportation, food, goods… We expect several huge opportunities to open for fast-moving digital-minded companies able to quickly provide consumers with services and goods they crave with the seamless ease and speed they have come to expect.

Three models concentrate large shares of these new opportunities:

Marketplaces and the sharing economy

Today these platforms have been commonly adopted to access services offered by amateurs or small-scale professionals rather than more established businesses and corporations. The core model consists in mutualizing the online exchange where offer meets demand, and lets strangers compensate each other for sharing extra assets or help. It lends itself to all types of services from food to transportation, hospitality or generic help, and virtually all categories of goods. Their scale and the wide geographical distribution of their members make these services much more flexible and accessible than the offering of traditional corporations, and their limited overhead allows affordable prices.

Moreover, the direct connection between individuals on both sides of the transaction allows to perpetuate a strong ethos of community that strikes a chord with many consumers looking for alternatives to uniform corporate experiences. On the provider side the opportunity for supplemental income attracts thousands of people with flexible schedules or shareable assets. Thus it ensures a consistent level of service at all times and in all locations, meeting demand even in markets underserved by traditional companies and unlocking untapped value there, in a three-way win for the platforms, end-users and providers.

Early pioneers in France like BlaBlaCar (long distance ride sharing), Open Classrooms (education) and recent unicorns from Silicon Valley like Uber (urban rides) or AirBnB (home sharing) paved the way for the mass adoption of crowdsourcing for all services to challenge incumbents. Drivy (car rental), Heetch (night urban rides) are now growing fast in several European cities on the back of strong demand from both the providers and end-users sides of their service.

Web brands

Web brands can range in industries from media to apparel, travel, entertainment, social connections, electronics, food… These businesses differ from their traditional counterparts in the fact that they mostly or even exclusively serve their customers online, and in the extent to which they leverage digital channels to grow large and especially loyal audiences. They often leverage fully vertically-integrated models where they design, produce and sell their own goods directly through their website. Digital communication codes and values are often baked into their DNA from the onset of the company. They build awareness with limited capital through crowdfunding, viral word-of-mouth and effective content marketing. They command higher return rates, more satisfied customers, better brand perception and higher operating margins thanks to their expertise in customer engagement, absolute dedication to their satisfaction and their attention to conforming to their expectations on digital channels. They benefit from selling directly to their target markets online by cutting the costs of middle-men and physical locations, and by controlling the entire marketing, presentation and experience of their service without seeing their brand diluted by third-party distributors.

Aquarelle (flowers delivery), Marco Vasco (luxury travel) and JolieBox/Birchbox (beauty products samples subscription) are successful examples in our portfolio who secured loyal  customer bases online with a curated catalog and their dedication to making the experience of their service at least as memorable as the very wares they are selling.

Happn (dating), Gemmyo (custom jewelry), Smallable (kids apparel), Try The World (gourmet food subscription box), Frichti (homemade meals delivery) each keep customers coming back through constant iteration on their service, and careful attention to their user experience.

B2C2B

Captain Train (train tickets), MeilleursAgents (real estate information) and Keldoc (doctors appointment) offer interesting examples of platforms aggregating services from traditionally low-tech businesses, each specializing in a given vertical, and layering on top a significant added value in the form of convenience for the end-users. Their products are free to consumers and financed by subscriptions or bulk discounts on the providers side. Technically more savvy than each of the individual providers that they feature, the platforms are dedicated to building differentiated online products focused on usability and performance at a large scale. They also have the ability to derive strategic insights from the usage data they collect, and eventually command large shares of their markets.

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