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Atomico Need-to-Know 17 September 2018

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The latest collection of things we (Atomico) found interesting and important in tech and VC land, but that didn’t necessarily get the attention they deserve. We think of them as our hidden little gems. We’ll add to the collection over time, so bookmark the page and keep coming back for updates or to dig into the archive.

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Atomico Need-to-Know 17 September 2018

  1. 1. 17 September 2018 1 Atomico Need-to-Know
  2. 2. This is a regularly-updated collection of things we (@atomico) found interesting and important in tech and VC land, but that didn’t necessarily get the attention they deserve. We think of them as our hidden little gems. We’ll add to the collection over time, so bookmark the page and keep coming back for updates or to dig into the archive. 2
  3. 3. Top 3 Key Points ● Kleiner’s break-up highlights challenges of succession-planning and sustaining brand over multiple fund cycles: One of the most storied SV funds, but has struggled in recent years (Ellen Pao case, Cleantech) as others brands have powered past them. Succession planning in a post- John Doerr era is a key issue for the firm. At one time, they considered ‘acquiring’ Social Capital, before eventually succeeding in recruiting Mamoon Hamid. ● Getting multi-stage approach right is hard: Kleiner’s decision to break up and for its early-stage and growth funds to go separate ways reflects challenge of harmonious relationship between two distinct teams. But as Kleiner’s Growth fund disappears, others are doubling down (Sequoia, Index) or are looking to set-up separate funds for the first time (A16Z, Lakestar (?)). ● High profile people changes: Aside from the big fund changes, there have been several high profile people moves in US VC. Brian O’Malley left Accel for Forerunner, Sarah Tavel left Greylock for Benchmark, Ilya Fushman left Index for Kleiner, Mamoon Hamid left Social Capital for Kleiner. 3 Kleiner disbanding Growth team amid other US VC changes The Takeaway VC landscape has changed dramatically over the past 10 years with transformation of pre-Series A landscape, the inflow of capital, globalization and an era of big brands. As VCs seek to adapt to the new environment, we’re seeing big changes take place. Points of Debate / Next Steps ● What further lessons can we learn? ● What is best practice in approaching early-stage + growth? Recent updates from US VCs KPCB Growth fund disbanding. Meeker leaving with multiple other partners (Mood Rowghani, Noah Knauf and Juliet de Baubigny) to set up their own fund. KPCB will back it, per reports. KP’s early-stage fund to continue as is under Ted Schlein & Mamoon Hamid A16Z Having raised dedicated Bio ($400m) & Crypto ($300m) funds, said to be raising separate early- stage and growth funds, rather than a single $1.5b fund, a departure from its fund strategy to date Sequoia Capital Now closed an $8b Growth fund with the ability to allocate up to $1b per company. Did not want Softbank to have sole kingmaking ability. Never lost a deal to SVF. Has written $400m cheques 2x. Social Capital In disarray following departure of two co-founders and dozens of employees. Closed hedge fund, growth fund and now doubling-down on CaaS. SV Angel Decided not to raise another fund, part due to founders wanting to revert to pure angel investing and part in response to change in competitive dynamic at seed. Foundry Group Raised $750m fund to invest in early-stage, ‘early growth’ and $150m+ into FoF opportunities. Can lead from Seed to Series C with B+C seen as ‘early growth’ Benchmark Amidst all the huge fundraises, sticking to its tried and tested strategy of leading Series As with fund of $425m.
  4. 4. Kicking off our top-down sector review 4 Input: Analysis of S&P Global 1,200 to identify industries that may be ripe for change Source: Atomico analysis of CapitalIQ data Underlying Data S&P Global 1,200 has worldwide coverage of 1,200 companies (obviously!) worth $46 TRILLION across 148 industries, generating $28 trillion in revenue. It is, therefore, a great indicator of where value has been created and where opportunities for tech-enabled change may exist.
  5. 5. Which industries are old, huge & poor growth prospects? 5 Sectors with $500b+ in aggregate market cap only Source: Atomico analysis of CapitalIQ data Horizontal axis: Median age of companies in sector Vertical axis: EV/Revenue (TTM) multiple of sector Bubble size: Aggregate market cap of companies in sector Younger industries with higher valuation multiples, implying investors see strong future prospects for the cohort Older industries with lower valuation multiples, implying investors see less future upside for these industry cohorts This bubble size represents ~$500b+ of aggregate market cap within this industry cohort Sectors that ‘leap out’ on first review include: banks, insurance, industrial machinery, construction, food, energy, auto, healthcare, pharma, CPG. There are many others!
  6. 6. Top 3 Key Points ● Median age of companies is 77 years: Only 91 companies were founded in the past 20 years. 772 companies are 50+ years old and 421 (more than one-third) are 100 years old or greater. There are about as many companies founded from the first half of 1800s (53) generating as much revenue ($1.3t) as those founded since 2000 (63 cos with $1.3t revenue) ● Approx one quarter of companies valued less than their revenue: The median EV / revenue (TTM) multiple is 2.1 for companies on the index. Only 116 companies have a multiple of 7x or higher, while 788 have a multiple of 3x or less. ● Next step is to think, why now?: Large, old companies with low growth and fat profits are an appealing target for tech-enabled startups, but in and of itself is not enough reason to pinpoint opportunity for disruption. Not least because their age implies remarkable longevity. So the next question to ask is ‘why now?’, i.e. what’s changing to increase their vulnerability? 6 So what, and what next? Source: Atomico analysis of CapitalIQ data The Takeaway The S&P Global 1,200 accounts for $46 trillion in aggregate market cap and $27.5 trillion in total revenue and $2.6 trillion in annualised profits (net income). It therefore offers clues for where to look for where the next large opportunities might reside as technology continues to transform all sectors. Points of Debate / Next Steps ● What are additional lenses we can apply to this analysis? ● Who wants to help flesh out this work further? Why now? Primary Industry Primary Sector # of cos Market Cap ($b) Median Age EV / Rev Diversified Banks Financials 63 4,090 148 2.9 Integrated Oil and Gas Energy 19 2,000 70 0.9 Aerospace and Defense Industrials 23 971 84 1.7 Integrated Telecom Services Telecom Services 17 959 66 1.3 Life and Health Insurance Financials 23 774 99 0.9 Packaged Foods and Meats Consumer Staples 25 756 112 1.9 Automobile Manufacturers Consumer Discret 16 730 102 0.4 Electricity Utilities Utilities 31 697 72 1.2 Apparel, Accessories & Luxury Goods Consumer Discret 18 639 69 2.6 Industrial Conglomerates Industrials 10 580 89 1.4 Diversified Metals and Mining Materials 11 545 94 1.2 Railroads Industrials 13 456 96 3.0 Industrial Machinery Industrials 26 444 110 1.8 Multi-line Insurance Financials 12 386 151 0.7 Specialty Chemicals Materials 20 380 124 2.1 Multi-Utilities Utilities 19 377 109 1.0 Asset Mgmt & Custody Banks Financials 16 373 82 2.5 Property and Casualty Insurance Financials 14 317 84 1.0 Trading Companies/Distributors Industrials 14 260 95 0.6 Oil & Gas Storage & Transportation Energy 10 247 73 2.2 Food Retail Consumer Staples 11 226 99 0.4 Airlines Industrials 12 206 76 0.8 Building Products Industrials 11 187 95 1.2 Auto Parts and Equipment Consumer Discret 10 182 84 0.6 Commodity Chemicals Materials 10 178 82 1.2 Construction and Engineering Industrials 14 177 107 0.6 Table below is just one subset of industries with >10 companies within the cohort, median age of cohort of >50 years & EV / rev multiple of <3x
  7. 7. Top Key Points ● When users pay through their iPhone or iPad’s in-app purchasing system, Apple receives 30% of a user’s first year subscription and 15% for subsequent years. However, if users go to an external website to pay, all proceeds go directly to the app provider. ● Netflix confirmed that it began testing the new payment method in June to bypass the App Store. Netflix have already made Google Play billing unavailable, so users must renew their subscriptions directly through Netflix. ● Fortnite developer Epic Games has decided to work around Google Play by not making the game available on the Google Play Store in the first place. Instead, users who want to play Fortnite will have to go to Epic Games’ website and download it directly from there. ● During Dapper diligence, Rovio flagged that one of the reasons why they were keen to work with Dapper is the opportunity to bypass app store fees by building directly on a blockchain 7 Companies attempting to bypass the Apple App/Google Play Store Source: https://www.wired.co.uk/article/fortnite-android-release-date-google-play https://www.fastcompany.com/3031369/app-store-outlaws-10-developers-who-fought-apple-and-lost The Takeaway Netflix's decision to redirect payments is clever, but it won't cripple the App Store model. Apple faces pressure to lower its fees, but most developers cannot afford to pull their apps off iOS. Big bucks at risk... Backlash against the Apple App Store could cost the company up to $16 billion annually” - Macquarie Research Analyst, Ben Schachter. The Story Points of Debate / Next Steps ● Are ways in which we can help portfolio companies to work around paying Apple/Google once they get to sufficient scale?
  8. 8. 8 Source: The Takeaway As the global games market continues to grow and capture more consumer time and money. both Chinese and European bodies have taken regulatory steps against publishers Points of Debate / Next Steps ● How should our games portfolio ensure it is well prepared for changes in the regulatory landscape? ● What other monetisation models become attractive with these changes? Approvals for new games titles on hold “At this point we don’t know when the approval will start. We do believe it’s not a matter of whether these games will be approved for monetization, it’s a matter of when” - Martin Lau, President, Tencent The Story Regulatory bodies look to games companies Top 2 Key Points ● In China, following concerns from the gov’t on the impact of games on children’s health, Tencent created measures to limit game time for minors for certain titles. Approvals required for monetisation of new titles are also being delayed. Brokers estimate minors contribute ~10% of Tencent revenues. Announcements from Chinese gov’t and Tencent together took nearly 10% off Tencent’s share price ● Meanwhile in European markets, more governments are looking to regulate the random prize ‘loot box’ model, where users can pay for the chance to win items etc. The similarities to gambling have raised concerns. This follows the Apple’s Dec-17 App Store change which required developers to display the odds for loot boxes
  9. 9. Top 3 Key Points ● The UK Business Angels Association (UKBAA) recently found that women were far more likely to financially back other women – a crucial finding in the male-dominated angel investment market (85% of angels are men). ● More women are entering the executive suite; however, men are still more likely than women to hold the CEO and CTO titles. Women, comparatively, are more likely to be COO. ● Female founders thrive outside Silicon Valley. Compared to men, there is a greater share of female founders in New York and Los Angeles than in other US cities. 9 Investors invest less capital with female founders Source: https://technation.io/news/gender-gap-in-tech/ https://qz.com/work/1372843/quartz-analyzed-the-top-female-founders-to-understand-why- their-companies-are-worth-just-20-of-mens/ The Takeaway Women tend to run more profitable businesses, burn less money and deliver higher returns to investors. However, in terms of valuation and fundraising, female startup founders still lag behind their male counterparts, live in different cities and hold different exec positions Points of Debate / Next Steps ● Do we need to have an over index on women for our angel programme? ● Do we need do DD around if women are asking for enough capital/are underestimating their business? ● In terms of talent, do we need to do more to encourage more when to go into CEO/CTO roles? Women founders raise £200k less than male founders on average & there’s a consistent differential in capital raised over the past decade Women ask for less... “Business angels, both male and female, report that many women founders who do come forward to seek angel investment do not ask for as much money as their male counterparts. They tend to be reluctant to ask for all the money they need to grow their business to the next level.” - Jenny Tooth, CEO, The UK Business Angels Association (UKBAA)
  10. 10. In case you missed it 10 Footnotes Companies What happened? Farfetch Farfetch to IPO on the NYSE. Priced at $3.8-4.6B range. As of December 31, 2017, the company had nearly 1M active consumers and revenue of $386M, $909M of GMV. For H1 2018 Farfetch made an operating profit of $136.9 million. Alibaba Jack Ma will step down as executive chairman of Alibaba Group in 2019, handing the reins to Daniel Zhang, who became CEO three years ago. Zhang’s known as more of a financial mind than a technology visionary in Ma’s mold. Uber Uber plans to ban passengers in Australia and New Zealand from using its ride-sharing services if they are awarded low passenger ratings by drivers. Passengers who fall below a minimum average rating — typically four stars out of five — will lose access to the Uber app for six months. Amazon Amazon has hit a $1tn market capitalisation, capping an extraordinary surge that has seen the ecommerce group’s stock more than double in 12 months. Toyota Toyota is investing $500m in Uber as the two companies strike a new kind of collaboration around autonomous vehicles. Given Toyota’s commitment to safety and its renowned manufacturing prowess, it should help further improve Uber’s image, particularly in the wake of the fatal self-driving vehicle accident in March. Pilot-scale deployments will begin on the Uber ride-sharing network in 2021. Monzo Monzo is set to be valued as high as $1.5bn, more than quadruple the £280m ($356m) valuation in its last fundraising in November 2017. In April, Revolut announced a $250m fundraising that valued the UK-based digital payments company at $1.7bn, more than five times the level of its last round of investment in 2017. YC Y Combinator is expanding to China after it announced the hiring of former Microsoft and Baidu executive Qi Lu who will develop a standalone startup program that runs on Chinese soil. Airware Drone operating system startup Airware has shutdown. Airware had previously raised $118 million from Andreessen Horowitz, GV, and Kleiner Perkins. Airware had ran out of money after trying to manufacture its own hardware that couldn’t compete with drone giants like China’s DJI.
  11. 11. In case you missed it 11 Footnotes Companies What happened? Index Ventures Index Ventures has raised $1.65bn for two new funds. A $650m fund early-stage fund and $1bn growth fund. They have said that they will invest 50% of the fund in the US and 50% in Europe. Felicis Ventures Felicis Ventures are committing 1% on top of every check the firm writes in non-dilutive capital for “founder development” in coaching and mental health. The funding case be used by Felicis' founders to cover costs such as therapy sessions, leadership coaching, development programs and peer CEO groups. Crypto Crypto’s 80% plunge since January is now worse than the dot-com crash. The market has lost more than $640 billion of value since peaking in January. Cornershop Cornershop acquired by Walmart for $225m. Cornershop is a on-demand grocery delivery service for the Latin American market the largest tech exit ever in Chile. Investors include Creandum and Accel. Apple The Apple-Shazam deal was subject to a in-depth investigation from the European commission. Apple won EU antitrust approval for its planned acquisition of Shazam. This is the first time the European commission have investigated a deal for data access purposes. Elastic Elastic, the provider of subscription-based data search software, has now filed for their IPO. Benchmark largest shareholder with 17.8%. Benchmark led their A ($10M round). Index led B ($24M round) and has 10.5%. NEA led C and has 10.2% ($70m round). Social Capital The mass exodus at Social Capital continues. Mike Ghaffary is the latest departure, following the likes of Ashley Mayer and Mamoon Hamid in leaving. Kleiner Perkins Kleiner Perkins is splitting up, with its digital Growth Fund to form a new, independent firm. The breaking point came as the team had to decide whether to raise another later-stage fund under the Kleiner banner or under a new one. Those leaving Kleiner include investment partners Mary Meeker, Mood Rowghani and Noah Knauf.
  12. 12. Material news related to Atomico portfolio companies 12 Footnotes Portfolio Company What happened? MasterClass MasterClass announced a $80 million Series D round of funding led by IVP, with participation from Atomico, NEA, Javelin Ventures, Advancit Capital, and Evolution Media. The company offers 39 classes (think of them like courses) and plans to add 11 more by the end of the year. 80% of revenue now comes from users paying a $180/year all-access subscription. Knewton Knewton has raised $25 million in capital. TriplePoint Capital led the round with a debt facility of $20 million while Knewton’s previous backers, which include Accel, Atomico, Bessemer Venture Partners, FirstMark Capital, First Round Capital, Founders Fund and Sofina, invested an additional $5 million. Lime The city of Santa Monica’s Shared Mobility Device Selection Committee officially awarded Lime permits to operate both electric scooters and/or bikes in the city as part of its 16-month pilot program beginning September 17. Bird, Lyft and JUMP were also awarded the same permits. Farmdrop Farmdrop has seen significant improvements in driver behaviour and fuel/energy use. The company’s electric vans monitor electric energy use and fuel engagement among drivers. In just a few months, Farmdrop has seen a 33% reduction in incidents of poor driving per mile and a 27% reduction in the kW/mile needed for its last mile deliveries in London, Bristol and Bath. MessageBird Messagebird unveiled a new product that aims to make it easier for enterprises to communicate with customers in the form of a single API that unifies customer interactions across multiple channels into a single conversation thread. Out of the box these include WhatsApp, WeChat, Facebook Messenger, Line, Telegram, SMS and voice interactions.
  13. 13. Material news related to Atomico portfolio companies 13 Footnotes Portfolio Company What happened? Hinge Health Hinge Health has raised $26 million in Series B funding led by Insight Venture Partners. Hinge Health now has 40 enterprise customers in the U.S. and has partnered with 10 of the largest health plans. Scandit Scandit has raised a $30 million Series B in a round led by GV and NGP Capital. This latest round will go toward growing the company globally and introducing its technology across various mobile platforms. Klarna Klarna buys Close Brothers Retail Finance, CBRF, from the Close Brothers banking group. The CBRF business had a loan book of £66 million on 31st of July 2018. The acquisition will significantly strengthen Klaren's presence in the UK and will provide opportunities for increased growth and expansion of the consumer offering. The value of the deal was not disclosed. Mapillary Mapillary is now working with Amazon, and specifically its Rekognition API, to detect and read text in Mapillary’s database of 350 million images. Mapillary will now use Rekognition’s text-in-image feature to scan parking sign data on a large scale. SmartNews After Apple’s acquisition of Texture, Apple are rumored to be building a subscription service for news, integrated into the company’s popular News app.
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