Finding the right Path to Liquidity

Raphaëlle d'Ornano
9 min readAug 30, 2023
Vek Labs (Unsplash)

Whether your calendar marks Labor Day in U.S. or the rentrée in France, the summer holidays are ending, and everyone will be back to work. So, this seems like a good time to take the pulse of liquidity markets for high-growth tech companies as they try to decrypt the mood of investors.

We are 18 months into a down cycle that has chased many of the largest private market investors out of the market — burned by big markdowns in private valuations — and left startups and VCs facing the consequences of macroeconomic headwinds for the first time in more than a decade. This has forced an oftentimes painful recalibration of expectations, particularly for startups in Europe’s younger, less mature ecosystem.

The good news is that the U.S. economy is holding steady at the moment, so far avoiding a recession as inflation cools. The U.S. Federal Reserve has signaled that it will continue to fight inflation but will be cautious about raising borrowing rates after a series of rate hikes last year unnerved stock markets and sent the tech-heavy Nasdaq plunging by almost one-third in 2022. In particular we saw unprofitable tech company valuations collapse, with an average net return of -30% for the 2020/2021 cohorts per J.P. Morgan research. This then rippled out to private startups and spooked startups.

So far this year, the Nasdaq is up 31%, but that hasn’t reassured investors enough to re-open their purses in a meaningful way. In part, that’s because this has been a rally primarily driven by hype around GenAI that has mostly benefited the “Magnificent 7.” Late-stage VC funding has continued to decline and is projected to decrease 41% year-over-year per CB Insights data. As investors retrieve, valuations continue to fall at the later stages.

This has created an uncertain and complex environment as founders explore their options for taking their companies to the next stage of their growth journey. That growth remains hard because of the broader climate, which in turn makes it tough to convince investors at all stages. According to Coatue, growth in net new ARR is down 20% year-over-year as of June. We are seeing a similar trend in our firm’s private index.

Given the pressures, it’s no surprise that the path to liquidity is the №1 preoccupation for founders and investors in this funding crunch. Companies have pivoted from “growth at all costs” to “profitable growth.” However, this new mantra is often misinterpreted to mean that a company can reduce its rate of growth as it seeks to reach profitability. Not true. Investors want to see both.

In addition, companies need to be investing in GenAI within their core business. The companies that do that will be the ones that thrive over the next decade. The rise of Generative AI is not a bubble, but a transformational shift in Technology.

But the reality remains that some of these companies are running out of cash and at risk of failing, a position that would have been unthinkable for many of them just a few months ago. Zume Pizza raised $500 million — including $375 million from SoftBank — for its pizza-making robots but shut down in June. Fintech startup Plastiq raised $142 million and was valued at $940 million in 2022 but ran out of cash and filed for bankruptcy earlier this year. And I can give you many more examples..

The implications of this funding roadblock can’t be understated. High-growth tech companies are no longer niche economic curiosities. As of July 2023, there are more than 1,200 unicorns, including 700 + in the U.S. This represents an influential part of the global economy. Their fate has broad implications for the economy.

Helping chart a financial path forward for some of these companies has kept us busier than ever. Many stand at a crossroads, looking at their limited options for an IPO, M&A, or raising another round of venture capital.

Which is the right one? Let’s break them down.

IPO markets

IPOs have been few and far between in 2023, especially in the Tech sector. We have just seen a number of bright spots with the recent prospectus filed by ARM, which should be the year’s largest tech IPO, as well as those of Instacart and Klaviyo.

Will this open the IPO window for others? If so, it won’t be wide open. Any company trying to slip through is going to have to meet some tough criteria:

o Profitability: All three companies mentioned above have in common that they are actually profitable, even if this is recent;

o Growth: Achieving this at scale continues to be the #1 criteria. For example, Klaviyo displays +57% LTM revenue growth [See our S1 — teardown in next week’s newsletter]. Profitability must not come at the expense of high-growth, a subtle nuance;

o Revenue: Likely IPO candidates must have more than $500m in revenue, a very high bar.

o Capital efficiency: For SaaS companies, this can be measured through Bessemer’s Cash Conversion Score (a company’s ARR divided by the total equity and debt capital raised to date net of current cash). The best companies, those yielding IRR of more than 100% have a CCS score greater than 1.

Looking at the bigger picture here, what must be understood is that not all fundraising is created equal. Investors understand that companies must raise a lot of cash when creating new categories. The truly exceptional ones — the ones that have a shot at the IPO brass ring — use that money to fuel revenue growth. That’s the only story investors want to hear.

Other companies that appear to be checking all these boxes include Databricks and Stripe. If IPOs restart, these are the likeliest candidates to jump into the public markets. But let’s first see how the three above fare out.


This has been frozen for a long-time due to skyrocketing valuations, with unicorn companies hit the hardest. But of the three liquidity categories we’re covering here, startups will likely find this to be the most viable option.

We are seeing a boom in strategic M&A as valuations of private companies slip and align more closely with those of public tech companies. The string of down rounds on highly visible companies such as Stripe, Klarna, and Snyk has helped establish more reasonable valuations for companies in a position to make acquisitions.

The M&A thaw is also being driven by a flurry of GenAI related deals by large public companies with deep pockets who see this as a strategic way to hire talent. In June, Salesforce doubled the funds it had earmarked for AI start-ups to $500m. That same month, Databricks acquired Mosaic ML in a deal valued at $1.3bn. At the other end of the spectrum, there are a frenzy of smaller and less visible but still exciting deals, such as AMD’s purchase of French start-up Mipsology announced in late August for an undisclosed sum. [No surprise to us: We had previously done due diligence on Mipsology in 2018 and were impressed.]

We foresee deals continuing to accelerate on a strong wave of consolidation that is almost certain to come. This will be a major part of the Tech financing scene of H2 2023 and 2024, and not just in GenAI, but across SaaS and Cloud business models in general as more established companies pursue their digital transformation (across insurance, education, legal services, etc.).

Acquirers of high-growth tech companies are looking at the following criteria:

o Quality of revenue: This is assessed through an exhaustive review of the customer base to measure quality and diversification of client portfolio, and factors like diversified income streams and recurring revenue streams. Who are your clients? Are they major, well-known brands? Is there a mix of clients who could potentially fail? Is revenue diversified across different segments? Are there different revenue streams, and if so, which ones are profitable? What are the unit economics per customer segment?

o Quality of margins: This starts with gross margins. This helps measure the quality of the technology: the higher the GM the better the tech, with the exception of AI-first businesses which usually command lower gross margins that vanilla SaaS ones. Hence a company with robust tech will have higher margins than a company that’s more reliant on revenue from services. We can spot this also by analyzing the various spending buckets (S&M, R&D and G&A). Companies serious about GenAI should have relatively large R&D budgets. Understanding the quality of tech is one of the most critical factors, especially for companies following the GenAI playbook. This helps acquirers cut through the hype to see if there is any there.

o Quality of growth: This refers to the pace and sustainability of growth. What does it take for the company to add $1 in new ARR? How much cash does that require?

Of course to gain the best possible understanding of the asset at stake when assessing a high-growth tech company this framework should be declined per each tech foundational model: what is high-quality growth in vertical SaaS? what is high-quality margins in DTC brands? Etc.

VC funding

In this new environment, VCs are being extremely selective about which companies they continue to support.

At the early stage, we are seeing VCs doubling down on innovation across the GenAI trend, from foundational models to applications. As a result, they are also funding SaaS companies that are investing in GenAI efforts to transform their model. Again, that can’t be just hype. Founders must show a very clear product roadmap on how GenAI is — or will be — incorporated, or investors won’t buy their pitch.

VCs are also looking for companies that can help build the GenAI stack. [See our deep-dive series: What every investor should know about the GenAI tech stack; Understanding the GenAI Tech Stack — Part 1: MLops] These companies are developing foundation models, ML ops, AI, ML vertical, and horizontal applications. This also includes traditional SaaS companies that are embedding Gen AI in their product roadmap. This is where most of the VC funding will be going in the coming quarters.

The criteria for VC investments:

o Clear innovation advantage

o Execution is critical

o Growth remains paramount, with rates above 40% for late-stage startups being ideal

o ARR per FTE, even breaking that down by different Opex buckets (R&D FTE, G&A FTEs, S&M FTEs, etc.)

o Capital efficiency (see the Bessemer CSS above).

For online internet models, such as direct-to-consumer or marketplaces or DTC brands, fundraising will remain much harder because the unit economics do not reflect the growth efficiency that VCs want to see. In our view, only the best will raise, and there are some great companies out there. Startups getting funded show high repeat business with their existing customers and can increase revenue on that customer base. Performing monthly cohort analysis to assess both revenue growth and CAC payback is a good way to validate whether the business is a high-quality one or not.

Finally, there is an area of concern that spans all three liquidity options: Deeptech. We remain big believers that we are living in extraordinarily innovative times. There is massive investment potential in the Deeptech companies that are building the economy of 2030. But these companies have only long-term revenue generation prospects and high capex needs in the short and medium terms to reach that potential. Supporting this sector is more urgent than ever, particularly companies battling climate change.

But in terms of attracting the liquidity they need, they don’t meet most of the criteria for VC, M&A or IPO. And if you’re building electric vehicles or hydrogen batteries or climate tech, you can’t just cut costs because the bulk of that money is likely going into R&D and infrastructure. As such, founders are depleting their cash runways and running out of options, reinforced by the difficulties of getting debt capital since the SVB failure.

So there needs to be a new way of looking at these companies to understand their value and to finance them. Governments have a key role to play in supporting this sector (which is already happening in France). And traditional banks can step in. But overall, the traditional financing systems are going to have to evolve or there will be mass casualties across Deeptech companies that otherwise have the potential to transform our world for the better.


While we are seeing a surge in cash-strapped businesses, many still have liquidity options which is a positive sign. IPOs remain a pipe dream for most, VC funding will remain difficult, and so M&A is likely the way forward for most companies. This assumes a realistic valuation and a realistic outlook. The longer a startup waits to pursue M&A, the lower its cash will be and the more desperate its status. That translates into a weak negotiating position, probably close to zero leverage.

This moment calls for putting ego and pride aside and facing reality. The options for exits are there, but only for companies with the right metrics and founders bold enough to seize the moment and who are not scared to pivot their strategy.



Raphaëlle d'Ornano

Managing Partner + Founder D’Ornano + Co. A pioneer in Hybrid Growth Diligence. Paris - NY. Young Leader French American Foundation 2022. Marathon runner.