Introducing Hybrid Growth Diligence, a 3.0 approach for assessing disruption
Amid rapidly evolving economic conditions, a new form of due diligence is needed to help investors identify Growth Assets and fully understand their risks and opportunities. Leveraging the lessons learned from years of advising some of the world’s most influential investors, D’Ornano + Co. is announcing today a new service: Hybrid Growth Diligence.
HGD is our most sophisticated due diligence yet. It is designed specifically to measure the potential of a company to disrupt a sector and create a durable, resilient business. These are the types of businesses that will thrive and dominate over the long run.
In my previous latter (link), I spelled out the rationale for why an approach like HGD is urgently needed. Let me just briefly recap.
Despite the current economic uncertainty, three megatrends continue to reshape private investment: Digitization, Sustainability, and Decarbonization. Growth Assets are companies across all sectors of the economy that are leveraging these megatrends with strong economic fundamentals and resilient business models. These companies can be either new Disruptors or Agile Incumbents, and so the concept of Growth Assets goes well beyond Technology assets.
HGD is tailor-made to accurately measure the economic fundamentals and resiliency of Growth Assets. This new due diligence draws on a wider range of data as well as legal, financial, and extra-financial inputs to provide unparalleled insight into these growth-oriented business models. The analysis is rich and complex, but the goal is simple. By identifying and answering the right questions, HGD helps the investor decide whether to make this deal as well as developing the critical value creation plan that will serve as the post-investment playbook.
How it works
HGD builds on our classic due diligence by adding two important aspects: multi-dimensional and multi-timescale assessments.
Our multi-dimensional analysis is based on 12 pillars of financial, extra financial, and legal pain points:
Each of those pillars consists of sub-pillars that address the key matters from a cross-vertical and vertical-specific perspective. For instance, the Growth pillar includes customer economics, bookings and retention, and products. Climate measures carbon emissions, physical climate risk, and transition climate risk.
This rich analysis is then combined with a multi-timescale approach to highlight both the short-term implications of a key issue through its impact in the financial statements and the longer-term implications influencing the company’s value at exit. For Growth Assets, investors must understand the real-time performance, but they also must judge the asset over a longer term that looks past short-term fluctuations.
Once we have the results of these assessments, we rank each pillar on a scale from one (worst) to three (best in class). These are displayed in a matrix that makes it easy to digest the big takeaways and compare across other assets before digging into the underlying details.
The impact of the HGD continues well after the deal is closed. It also serves as a value creation plan so investors can continue to follow as they work with the asset to realize its potential and overcome any obstacles that arise.
HGD in action
We recently put HGD to the test in a major investment deal involving Sézane, the online circular economy fashion brand founded in 2013 by Morgane Sézalory. We represented Téthys Invest, the investment vehicle for the Bettencourt-Meyer family.
Other fashion brands have been buffeted by the pandemic and the supply chain chaos. But through HGD, we were able to provide a confident breakdown of the company’s business model. Sézane had previously attracted investors such as General Atlantic and its revenues passed €250m in 2021. Téthys, which focuses on health and education, was attracted to the company’s circular economy model.
Among the many factors we considered, our report highlighted Sézane’s strong annual growth and the strength of its online sales model (over 80% of Group sales) and international expansion. The U.S. is now its second-largest market.
Just as critical in our analysis, we highlighted the company’s status as a B Corp which means it adheres to strict social, environmental and transparency standards, and has a broad base of suppliers key to the business, a key factor of resilience.
While the size of the investment and the valuation have not been disclosed publicly, it stands as one of the deals we are the most proud of. Given the circumstances and reticence of large investors in this climate, we see it as a strong validation of our HGD approach, in the end an approach allowing for a full understanding of a business.
We’re ready now to harness the power of HGD for other investors. We believe this is the right due diligence tool for the right time for investors who want to rise above the economic uncertainty and place big bets on tomorrow’s winners.