Venture capital (VC) investment in the technology sector is a complex and exciting journey. For investors, it’s about navigating various technological opportunities, each with its own challenges and promises. This article looks at the perspective of a VC investor, TCD Capital, highlighting the distinction between the most common business models and the different stages of development for tech startups. We interview the team responsible for this sector at TCD Capital.

Jean-Louis Vanhouwe, as a serial entrepreneur and sector expert for TCD Capital, can you tell us about the evolution of the sector and the growing appeal of technology?

After 30 years in the tech sector, I’ve seen it evolve greatly. At IBM and Alcatel, I observed the shift from one-time hardware sales to recurring service sales. Today, most tech companies adopt “as a Service” models: Software as a Service (SaaS), Platform as a Service (PaaS), and many others. These models generate revenue over several years and allow clients to benefit from continuous innovation from software providers. Monizze, the Belgian Fintech for electronic social vouchers that I founded in 2011, successfully adopted this “SaaS” sales model. For an investor, these models are highly replicable and offer significant margins. Once companies transition from startup to scale-up, they focus on the scalability of their product. In the best scale-ups, this replication happens at marginal costs. The limitless possibilities of software and the shift to recurring revenue models provide undeniable advantages in terms of speed and growth scale, making the tech sector particularly attractive to both entrepreneurs and investors.

Xavier de Villepin, as an investment director at TCD Capital, what is your view on business models in the tech world, and what do you prioritize?

The multitude of business models requires investors to have an understanding and agility in valuation methods. The choice of valuation method must align with that of the acquirer: how the acquirer will value the company during acquisition and what the risks are in the meantime. This assessment is made when we invest but also when we guide all our portfolio companies on what we call the “Road to Exit.” Understanding the ecosystem in which the company operates, especially internationally, and the acquisition dynamics of consolidators allows companies to stay or adjust course on the strengths they need to demonstrate to remain attractive.

In our tech investment sector, the most common models are “as a Service” licenses, commission-based models on sales (Marketplace) or transactions (FinTech), consumption-based models, and also ad-hoc services. In all these models, the degree of recurrence or renewal makes them particularly appealing. The investment world has become especially comfortable with recurring “as a Service” models, where valuation methods can be more homogeneous. However, all models have their merits, and the quality of the founders, innovation, the sector, and the market usually make the difference.

At TCD Capital, we favor B2B (Business to Business) companies that sell to other companies, which tend to remain more loyal customers, invest in their operations, and value the savings or growth drivers offered by the proposed technologies. For example, in our portfolio, Inpulse.ai helps restaurant chains better predict their consumption of perishable products using artificial intelligence; FLYX.cloud helps restaurant and retail chains retain, digitize, and aggregate their sales channels to increase revenue; and Sortlist helps digital service providers improve their prospecting by facilitating the search and selection of service providers by SMEs.

Service revenues, often in addition to recurring revenues, are not overlooked at TCD Capital. While it can be tricky to find and maintain the right balance between recurring and service revenues, the latter generally generate an interesting contributory margin that increases the short-term liquidity of these companies.

Edouard de Becker Remy, you complete the trio managing the day-to-day governance of portfolio companies. What stage of business development do you target, and with what alliance objectives?

We look for entrepreneurs who have already proven the value of their product in the market. These are often companies with 20-40 employees seeking to double or triple their workforce in the coming years, with the goal of significantly increasing their revenues. The companies we invest in are looking for partners to support their growth, in addition to capital injection. We act as “sparring partners” to facilitate healthy and sustainable growth. This takes into account the fact that the founder’s role changes frequently as the company grows and passes milestones. Even at the scale-up stage, the skills they need to demonstrate evolve.

We aim to provide strategic influence, and we put our services at the disposal of our associated entrepreneurs to help them with various processes that facilitate strategic decision-making, alignment of interests, and value creation. Supported by complementary governance members, we back the key moments of a scale-up. For example, one topic that is close to my heart is the importance of equipping teams and key stakeholders with data (financial, operational, and external) to guide decisions, strategy, and execution. What we call D3A (“Data as an Asset”) is the process of consolidating and processing this data so that it can be analyzed and visualized by the company’s various stakeholders. When this task is particularly burdensome, we can call on our portfolio company dFakto, which does this for multinationals and governments.

CONCLUSION
For the VC investor, the world of technology is a mosaic of opportunities and risks. The different business models and stages of development require a deep understanding and a well-defined investment strategy. Ultimately, investors are looking for innovations that not only transform industries but also generate significant returns. The art of venture capital investment lies in the ability to identify these opportunities at every stage of their evolution.