By Armelle de Tinguy & Gabriel Levy.
What are the next hot topics as an investor? This multi-billion dollar question is on everybody’s lips. Our crystal ball at Elaia is no more accurate than others. But our analysis has highlighted 5 sectors which we believe will keep growing — even thrive, during and after the crisis. Cloud Infrastructure, Digital Transformation, RetailTech, FinTech and Digital Life Science are compelling investment opportunities due to their transformative potential for businesses and consumers.
After having focused on Cloud Infrastructure, let’s now tackle why we invest in Digital Transformation.
Digital transformation: Do or Die
Digital Transformation is not new. It is a long-lasting process that has started decades ago and that is consistently and regularly moved up and down in the corporates’ priority stacks. Yet, in their quest to adapt to meet fast changing business and market requirements, it is now clear that digital transformation has, more than ever, become a top priority for all sized businesses, and is now one of the hottest topics: how come?
We believe that integrating a high-stakes digital transformation has become a “Do or Die” issue for most companies: they don’t have the choice anymore, digital Transformation is a passport for survival.
Global corporate spending on digital transformation will exceed $2 trillion by 2023. Whether they seek to enhance operational excellence, build new products & culture or to connect more efficiently with their customers, they are investing more than ever on talents, processes & support functions. On the tech side, competition has taken the form of an arms race. How to prioritize these investments (and how to make the best out of them) is a key challenge in all sectors.
Our perspective is that focusing on the transformation of corporate operations, and not only on their core business, offers huge potential for many ambitious startups. Their mission is precisely to help their clients build a competitive edge by digitizing their HR, marketing, communication, legal, workspace, supply chain, etc. And to naturally become their key transformation partners over time.
At Elaia we have been analyzing this tidal wave for twenty years and are happy to share a few insights about: How we believe “non-core” transverse functions are an essential backbone to every competitive, leading and performing company. How startups are key vectors in this digital transformation process. And what it takes to succeed — or die?.
“Non-core” turns strategic
Transverse functions such as HR, legal, marketing, communication, etc are commonly seen as “support” or “non-core” functions, and therefore costs centers, as opposed to the core business of the company and what the company does for a living.
But at Elaia, we like to see support functions as the beating heart of any organization. They are the vital organs providing key resources to the business, such as recruiting, collecting cash, promoting the product/service and resolving internal queries. And more, from the dynamism of a company’s transverse functions will depend on most of its processes and a large part of its culture, or in other words, the basis on which the company will draw its agility when facing all the business challenges that will inevitably arise. So whatever dynamics a business is facing, transverse functions have a direct influence on its resilience, efficiency, and flexibility, i.e. overall performance. It is no surprise that, based on a Workday’s survey, sales (77%), finance (72%) & HR (65%) come as top priority for digital transformation leaders.
Non-core functions and processes may also play a key role in the core business itself: top performing businesses use them as a model for customer-facing units — and leverage them to accelerate their transformation. And investment follows. A company like L’Oréal recruits 5 000 talents and receives over 1 million resumes each year. Considering the scale of HR operations (88 000 employees), the competition for talents, diversity requirements, and the simple fact that a substantial portion of these candidates are also clients, it is crucial for the company to offer the best overall experience to its employees and candidates. Over the years, L’Oreal has bet on multiple HR techs at a global scale, such as AI-powered recruitment assistants & chatbots, career management tools, etc.
Startups are the fuel to the transformation engine
Leveraging tech to optimize processes and/or enable new ones is a great way to trigger deeper transformations in business, at a much faster pace than usual for traditional corporates.
This is where startups have a role to play, by bringing speed, agility, technology and innovation to the traditional way of doing things — whether they develop horizontal solutions focused on transforming transverse processes, vertical tools dedicated to a specific business, or “killer features’’ dedicated to a specific pain.
As for transverse processes, it can be striking to see how much value there is in unlocking automation across the company, never replacing the human, but giving the workforce tools to ease/speed up their workloads, freeing ‘brain bandwidth’ for creative tasks. This is the purpose of RPA (Robotic Process Automation): tackling imperfect processes, sometimes even unknown, and bringing tremendous value to their customers. The scale of this added value explains the 10x growth of the RPA market between 2016 and 2021 with key vendors such as UiPath, Automation Anywhere, Blue Prism. Going further, the next frontier for RPA is led by Process Mining tools such as Celonis, to help you find and discover hidden, high-latency processes inside your workflow.
Logpickr, innovates in Process Mining field, by its patented solution which combines AI & Process Mining to solve all process excellence problems. It enables corporates to reduce the analysis of their complex processes to few seconds, by processing more types and volumes of data and enabling rapid productivity gains (+30% on average).
Now, if we take a more precise look at vertical tools dedicated to specific business, the playground is huge: HR, legal, procurement, legal, remote work, marketing, etc with each department that has plenty of issues to tackle and processes to optimize.
Take the supply chain, one of the most complex process to digitize due to:
- The multiple steps involved: transforming the supply chain requires tackling the automation of physical operations in factories and distribution centers, as well as transport optimization. But also to work on preventive maintenance, and automating admin processes such as order management, etc.,
- The many parties & expertises involved: procurement, supply, logistics, transportation, etc.,
- IT legacy that is often really strong, and most of the time outdated or with multiple manual tasks along the way,
- An ever-expanding offer in technologies to pick from, from IoT to advanced analytics, IA, robotics, blockchain, AR/VR, etc. Prioritization isn’t easy.
Let’s take an example.
Thanks to Fretlink, clients have completely digitized their supply chain process and optimized the organization of road freight. They have been able to standardize the carriers-shipper exchanges and have gained time, money and efficiency by avoiding the pre-existing layer of intermediaries. The digital transformation secures their transport operations, improves their performance as well as their operation excellence. But it goes way beyond. Fretlink paves the way to further transformation by uncovering insights and potential optimization areas that were disseminated through the complex supply chain. Ultimately it strongly contributes to the development of high-quality overall transport strategy on a European level. Reducing costs to the bare minimum, achieving an irreproachable level of service and controlling environmental footprint is no longer a matter of compromise.
Time to act!
We believe 2020 and its lot of unexpected developments have been an accelerator for startups and corporates alike in terms of digital transformation.
Covid context means a fast-paced transformation of HR, legal, facility management & workplace that have become absolutely necessary for corporates. It’s now or never for many of them. The good news is many amazing SaaS solutions are available, which are fairly easy to adopt & roll-out, and have proven their value.
On the flip side: budget cuts are real, including in startup collaboration programs. Bain & Company assesses that over 40% of POCs were postponed or canceled this year in France alone.
This raises the bar for startups. In short, tech investments are justified only if they can bring deep transformation, effective and at scale, and most importantly: ROI is king. There’s never been a better time for startups to prove their value.
Clearing the ground for success
Elaia has been following the digital transformation of the corporation with interest and passion over the years and witnessed first hand how startups may play a decisive part in the process. But also what it takes to succeed. “At Elaia, we love tech products that generate the deepest leverages for transformation. But for this to work, we also need to make sure they bring more than technology to the corporate: a great product is just the first step”, says Armelle de Tinguy, Investment Director at Elaia.
First, change is about people
If 20 years of investing taught us one thing, it’s that change management is absolutely key to success.
Startup cemeteries are filled with great products that failed to impact at scale because of:
- Our very human aversion to change (daily tasks, processes, teams, etc.)
- Our fear of being replaced by tools & technology
- Projects that seem to add new layers of complexity instead of simplifying
- Timing — their market isn’t ripe for change yet, or the product is not a priority!
So if product is king, let’s not forget about building strong partnerships with clients: shared goals and value positioning are the issue here. This is why we strongly advise our startups to deeply focus on added value, on empowering talents to work in new ways, on consolidating ROI for the teams beyond mere productivity gains.
Hyperlex is a great example to follow: as a solution for legal teams, they work with one of the least digital-savvy departments in organizations. Experience in software integration isn’t common, neither is the revision of processes that often goes with it. Anticipation is key, claims founder Alexandre Grux: “Transforming the legal workflow not only requires new tools, but also revising processes — and most (new) clients only realize that when they start working with us.”
The startup has learnt along the way to offer as much support as possible for the transition to run smoothly. This includes training, and making sure the customer success teams are available from day 1 : “The client knows they must transform, but doesn’t know where to start. Spending time with the teams, helping them understand what they are going through, and why, is crucial.”
How does Hyperlex anticipate resistance to change? ”Implementing a new contract management solution means a lot of different teams are involved: it impacts the legal department, sales, buyers, top management… you’re going to face resistance to change somewhere.” Beyond training and preparation, Alexandre believes his best answer is the solution itself: “If the benefits of using the solution are immediately visible to the teams, they will adopt it faster.” In other words, making transformation obvious for all departments involved.
Nailing the pricing/ROI equation
Beyond productivity, we look for game-changers who can have a measurable impact on operations. Optimizing processes is nice, but a visible effect of P&L is even better.
The more corporates will be able to identify strong returns for their money, the more they will spend significant budgets on a tech. This means startups need to muscle their game with regards to ROI. Starting by helping corporates identify the right KPIs is essential, both qualitative and quantitative, and keeping in mind that financial ROI matters most (i.e. mastering the ROI/pricing equation, and impact on P&L of the solution).
Tinyclues are masters at this game. The solution empowers marketers to dramatically over perform at their job (with more and better targeted campaigns), all while spending more time on higher value tasks. The impact on P&L is straightforward. “Marketers won’t take any decision without anticipating the impact on business, claims founder David Bessis, so it’s important to show positive ROI in dollars and euros first. Once this is stated, we can move on to the main benefits of the solution for the user: impact on NPS, and empowering teams to take control of their marketing action.”
Tinyclues approach to ROI is as direct as it gets: each and every deal they sign includes a success-plan, starting from the pilot phase. “The client has no time to lose, and neither do we”, says David Bessis. “For optimized results, we start by setting a clear action plan and performance objectives. In the first weeks, the client will rely on this success protocol to effectively measure the performance increase.” What to measure, and where to set the value eventually depends on each client and their sector.
Setting early goals and adapting them along the way is the startup’s growth strategy. “Transformation doesn’t just happen all at once, warns David Bessis. Taking example from his experience with Accor: we started small, with ROI targets that were reachable within a matter of weeks. It allowed us to prove the value of our solution on a determined product and zone. And to move on to the next step.” Within 24 months, Tinyclues was rolled out globally by Accor, whose marketing teams use the solution to manage thousands of loyalty campaigns each year.
Building the tools that transform at scale
Killer features are great kickstarters
We love killer features — the natural playing field of startups. They are low-hanging fruits for corporates to leverage and accelerate their transformation.
They perform so well for many reasons:
- They focus their energy/expertise on a specific pain and audience.
- The value proposition is crystal clear for clients to understand.
- SaaS mode is (relatively) easy to implement.
- So is their pricing model, which allows efficient investments by delivering quick value.
- They can demonstrate quick ROI on a limited perimeter before expanding allowing a rationalised approach to cost optimisation.
- They embed techs which allow them to perform new tasks and reach perimeters previously unattainable with legacy solutions.
Talent.io is a selective recruitment platform dedicated to tech profiles & developers, plain and simple. It serves over 5 000 corporates and tech companies in Europe. For the recruiter, the platform selects and qualifies the best tech profiles. It is faster than job boards, cheaper than recruitment agencies, and more efficient than both.
What clients love about it: it resolves a precise pain point, implementation is easy, and it offers an alternative at scale of what works best for those talents (linkedin scrolling, word of mouth & network). More importantly, it has become a key asset for recruiters in a context of strong competition for the best digital talents.
Dimpl (ex- Moment) is an invoice protection platform for SMBs — allowing them to get paid on time and manage their cash more easily. In case their client has trouble recovering their money in due time, Dimpl pays them 90% of the invoice under 48h, before following-up on the debtor. The product was co-developed with Euler-Hermes.
What clients love about it: it resolves a very precise and difficult pain for many small businesses, it takes 3 minutes to deploy, no engagement, and the ROI is crystal clear for the user. A true killer feature.
But killer features might not be enough
Our vision, however, is that most techs and tools are destined to be consolidated in the long run. We believe the natural course of history (and the best course of action) for startups is to widen their product vision and increase their value proposition as much as possible.
Innovations come in waves. After the first phases of excitement (and abundance) comes a time for rationalisation. Corporates engage in periodic nice-to-have/must-have selection phases of their tools, which leads to necessary consolidation.
Taking a closer look at their typical tech stack, it also appears that more and more corporates are overwhelmed with SaaS. Some companies even have a SaaS product to keep track of their SaaS!). As shown in a recent study by SaaS management platform Blissfully, American firms with over 250 employees use close to 100 different applications, and businesses with no more than 50 employees use around 25 to 50 of them. In other words, corporates need killer features, but they also need to keep an eye on ever expanding solutions and billing. Finding the right combination of tools matters.
Another element to take into account is the wide gap (a glass ceiling) that separates employees from corporate plans. Multiple tools are used on small perimeters (often at low pricing) and face difficulties scaling across their client’s departments business units. Selling SaaS to targeted professionals is one thing. Convincing corporate buyers to roll out the product on large perimeters and across teams is another kind of challenge.
Upsell isn’t always an option. This is why so many killer features fail to scale, despite having found their market fit and signing-up successful clients.
The pathways to scaling
We push our startups to expand their horizons, and to position themselves as key partners in the digital transformation of their clients. In order to do so, they need to strengthen their value proposal as much as possible, and to become a pillar in their client’s transformation strategy. It is the best pathway to scale and widen business opportunities. What we have observed is that product vision is key.
Let’s start off with the HRTech space. The first asset of a company is its talents. Initially a video interviewing solution, EASYRECRUE is now a single HR suite that manages the entire talent lifecycle (from job application to career development) for organisations. Through both product development & build-up strategy, the startup succeeded to extend their value proposition: from killer feature to a complete suite with a core set of features, and a clear product vision, EASYRECRUE is now a major player in the recruitment landscape, and a pillar in its clients’ strategy to transform their HR processes.
In the legaltech space, another example is Hyperlex, which started as a killer feature before extending its product offering. Its core product moved from an AI-based analytics technology (that automatically reads contracts and extracts data), to an extended solution that enables full contract management, of both existing contracts and contract workflow. It is now an all-in-one solution to draft, negotiate, validate, sign, track and analyse contracts. And the value proposal expands dramatically as well: Hyperlex is not only providing a productivity tool to legal professionals, they provide a way to embed their processes and expertise into the entire organization beyond the legal department.
What we love about them both is how they always push the product vision further, and they have understood that a tool turns mainstream by permeating as many processes & teams as possible.
However, product enrichment is not the only pathway to scale, especially with the explosion of the numbers of tools and the constant need to rationalise them. An alternative route consists in building a platform vision, with interoperability as core DNA. It consists in aggregating all kinds of external tools or services to the core product, in order to expand the value proposition. While still being the central player of its ecosystem and the number 1 tool that clients use every day: the perfect spot.
This is the vision that we were delighted to see when we met Holded, an ERP dedicated to small businesses to streamline their financial and operational processes. When we invested in Holded in late 2020, it was not because they cracked one specific pain point (even if they did a hell of a job on accounting), but because they deeply understood the value of being the central player and have all the means to achieve it. They help SMBs manage their entire business operations (invoicing, accounting, sales, project management, inventory management and HR) in one place. As a result, they already have 80,000 businesses as users (and us as investors)!
“We knew the idea of centralising all your business in one place was very powerful and the only reason why nobody did it before was because it’s extremely hard to design an intuitive self-serve ERP for Small Businesses, but I guess because of our passion for product design and development we managed to do it. We’ve changed the whole product and the whole experience of buying an ERP and tailored it for small businesses.” says co-founder, Javi Fondevila.
Now that’s digital transformation!
Deeper transformation = high valuation
Making sure the startups we finance actively contribute to their client’s digital transformation is our own guarantee for success.
From a VC investor standpoint, both the killer feature and the transverse tool strategies are valid. We believe — based on our experience — they can both lead to great businesses, efficient digital transformation… and great exits.
Here are only a few examples from the past 18 months:
But great exits also happen on this side of the ocean! iCIMS, the Talent Cloud company, recently announced the acquisition of EASYRECRUE. iCIMS’ customers will benefit from EASYRECRUE’s large product features and this acquisition widens the market opportunity by tripling the duo’s global footprint and extending the capabilities of their solutions. Learn more here!
Killer features are our natural playing field. They allow fast digital transformation in their ecosystems — and some once-in-a-lifetime exit opportunities. Notion, Zoom & Livestorm, Hopin… are just a couple of examples from the endless list of successful examples. But we also love startups that manage to rise across their value chain and transform on deeper levels, to reach another kind of leadership. Docusign started as a killer feature (the absolute best in its field) before extending its product reach to workflows and agreements lifecycle management. Their last known valuation — around $35bn — speaks for itself.
We have been analyzing digital transformation for the last twenty years, watching startups succeed — or fail — in becoming leaders in their fields. We have identified and analyzed many key drivers for success and observed many killing mistakes to dodge. As digital transformation is an ever-ending process fueled by generations of startups, we will continue to leverage our expertise in detecting the best startups in their fields and play an active part in this process.
“Digital transformation has been a mounting wave for the past decades, that it is now becoming a tsunami. More than ever, it is a matter of survival for companies of any size: the question is not to surf the wave anymore, but to be the first on the beach. » reminds Armelle de Tinguy.