9 March 2017

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Atomico Need-to-Know

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.

Lovingly put together by @twehmeier & @stephen2206

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● The profiles of buyers of European tech companies are rapidly shifting. There is increasing diversity in terms of geographic region of buyers, as well as company types. Specifically, non-tech companies and Asia companies are becoming increasingly acquisitive

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Source: Dealroom.co, https://dealroom.co/blog/wp-content/uploads/2017/02/2016-Exit-Report-FINAL.pdf

What do you need to know?

Why does it matter?

Key questions

● Venture-backed exits in Europe have been ~€30bn each year in 2014-2016 with 2016 delivering €37B/$39B in exits. For reference, this compares to ~$14B invested into European tech per year.

● In recent years, the key driver of aggregate exit value has shifted from IPOs to M&A, with M&A accounting for €31B out of the €37B

● Looking at mix of deal value by geo, buyer geos have also shifted towards Asia, equal to US in 2016. By volume, i.e. # of deals, Europe buyers accounted for ~64% of M&A transactions in 2016

● Total tech exit value in 2016 (i.e. including non-venture-backed companies) totalled >€140B (SoftBank/ARM & Qualcomm/NXP)

● Who are the most important groups of future buyers? Will large European industrial make big ticket acquisitions?

● Will VC-backed IPOs come back in force this year in Europe?

● Will PE become a more important buyer category?

M&A drives €37B in VC-backed exit value in Europe in 2016

$534B in buyout dry powder

19% higher median MOIC in software

Buyout funds amass record dry power; software in focus

4Source: Bain & Company, http://go.bain.com/rs/545-OFW-044/images/BAIN_REPORT_Global_Private_Equity_Report_2017.pdf

What do you need to know?

Why does it matter?

Key questions

● Buyout funds have amassed dry powder of $534B, reaching an all-time record, according to Bain’s 2017 Private Equity Report

● In the US, buyout funds have been paying record multiples (10.9x EBITDA in 3Q16) as prices have been pushed higher

● Looking at Top 5 deals in software/non-tech, the average price-to-EBITDA multiple for software deals was 18.1 vs. 10.2 for the non-tech deals, reflecting in part very different asset profiles being acquired, primarily in terms of growth and profitability

● Software deals have outperformed non-software deals over a 10-year period in terms of both MOIC and loss ratios

● Will increased dry powder impact pricing of growth deals?

● Will software continue its outperformance for buyout funds?

● Will the boundaries between continue to blur between private equity asset classes? Will more classic PE houses set up dedicated growth equity vehicles?

● Combination of record dry powder and strong performance on historical software deals to drive increased buyout activity

● PE funds increasingly prepared to do deals with different profile to typical buyouts, e.g. acquiring as yet unprofitable companies

● At the same time, traditional buyout firms increasingly moving into ‘growth’ investing (KKR, Apax) with dedicated tech-focused funds

3.7x better loss ratio in software

It’s still a very long climb to get back to historical highs of ~300x

Post-Trump tech bull run continues: S&P Tech Index hits 5-year high P/E ratio at 30x normalised earnings per share

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What do you need to know?

Why does it matter?

Key questions

● Tech companies have been a driving force behind the ‘Trump Bump”, which saw Dow Jones break 21,000 last week for first time

● S&P Tech P/E ratios are now trading at highest level seen since 2007 prior to the financial crisis thanks to confidence that tech will benefit from Trump-driven CAPEX investments into tech, regulatory shifts, corporate tax cuts and changes to cash repatriation laws

● Corporate confidence is seen as a trigger for accelerated investment into enterprise software to drive transformation initiatives within traditional industries, e.g. investment into cloud, automation, etc.

● While P/E ratios are high in recent context, it’s important to anchor today’s levels in the right historical context: at ~30x, today’s P/E ratio is trading at roughly 10% of the levels seen during the peak of the bubble (~300x in the early part of the noughties)

● Will tech stocks continue their bull run or will there be a pull-back driven by fears of lofty valuations?

● Will there be a longer-term backlash if a promise of jobs coming home is actually met with greater corporate investment into automation?

S&P Tech Index P/E ratio - last 20 years

S&P Tech Index P/E ratio - last 5 years

Source: S&P Global Market Intelligence, http://uk.reuters.com/article/us-usa-stocks-weekahead-idUKKBN16A2JT

Bull run pushing P/E ratio to 30x

Mobile World Congress 2017

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Momentum towards 5G continues to build● ITU shared 5G specs: up to 20Gbps D/L, 1ms latency, 1M devices/per SqKM● Next: turn draft spec into real tech. ‘True’ 5G not expected to roll-out until 2020 ● Largest obstacle likely to be telco ability to invest CAPEX in new radio network

Fragmentation of IoT Network tech● 7 competing IoT network techs now have live/trial deployments up & running● LTE-M is emerging as strongest candidate & has widest industry backing ● Low-power, wide-area networks are critical for IoT service innovation

Smartphone innovation stagnant?

Wearable tech stagnant?

● Previous MWCs saw explosion of new wearables (e.g. watches) on display ● Est. vendors unveiled very few new products at MWC17, e.g. Huawei Watch 2● Of course, many lesser-known vendors had interesting products on offer

● A remodelled version of the classic Nokia 3310 stole the show● Advances in smartphone tech limited to some incremental improvements● Costs of key tech falling, e.g. fingerprint readers in $100 phone, 360° cameras

FCC signal pull back on net neutrality

● Trump-appointed FCC Chairman (Ajit Pai) signals intent to roll back NN regs● Pai shared view is that NN reg is anachronistic (“1930s-style regulation”)● Removal of reg intended to incentivise BB providers to invest in next-gen tech

Telco service innovation focus shifts to enterprise

● Telcos increasingly looking towards B2B models to drive revenue growth● For the most part, telcos ambitions in consumer services based on partnering● Telcos looking to become key enabler of e.g. Industrial IoT, autonomous cars

Mobile World Congress 2017 What do you need to know?

Why does it matter?

Key questions

● MWC is largest telco trade show event of year (108k attendees)

● Event is key indicator of key upcoming themes in telco world

● Connectivity and end-user devices (smartphones) are critical technology enablers so important to stay on top of what’s happening

● Fragmentation of IoT network tech could slow progress in IoT adoption, both through uncertainty (which tech should I support?) but also potentially higher costs (fragmentation can impede economies of scale)

● 5G connectivity expected to be an important enabler for range of mobility-dependent initiatives, e.g. mobile AR/VR, AVs, apps dependent on cloud-processed (not edge) AI

● How quickly will ‘5G’ progress from draft specs to commercially-available, standards-compliant deployments?

● Will LTE-M emerge as the de facto standard for low-power, wide-area networks? How quickly can pricing for modules drop?

● What impact, if any, will a roll back of net neutrality regulation have on US market?

● Will the expected use cases for 5G actually pan out as hoped by the telco industry, e.g. will cars really rely on having network coverage for critical use cases, or will most processing happen in the car?

1. Connectivity - building world-class digital infrastructure for the UK

2. Skills and inclusion - giving everyone access to the digital skills they need

3. The digital sectors - making the UK the best place to start and grow a digital business

4. The wider economy - helping every British business become a digital business

5. Cyberspace - making the UK the safest place in the world to live and work online

6. Digital government - maintaining the UK government as a world leader in serving its citizens online

7. The data economy - unlocking the power of data in the UK economy and improving public confidence in its use

UK Government sheds light on post-Brexit digital strategy

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Source: UK Government, https://www.gov.uk/government/publications/uk-digital-strategy

Seven key pillars of UK Government Digital Strategy

UK Government sheds light on post-Brexit digital strategy

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Source: https://www.gov.uk/government/publications/uk-digital-strategy

What do you need to know?

Why does it matter?

Key questions

● The paper reaffirms the central role of technology in its post-Brexit vision and gives further clarity to the key pillar of Government strategy

● What the document omits is arguably more significant: while pre-Brexit drafts included ideas like e-residency and easier access to talent, its final form completely fails to acknowledge businesses’ worries around Brexit, specifically: International and EU talent, instead focusing on growing homegrown talent

● What’s the government’s strategy for non-homegrown talent?

● Will the Government address ambiguity over data transfer, which was largely not answered in the strategy paper?

● HM Department for Culture, Media & Sport published its forward looking plan for the sector

● There are two key focuses: a) making UK businesses across all sectors into digital leaders and b) developing the population’s digital skills and infrastructure so that “nobody is left behind”

● The paper largely reaffirms previous commitments, including lots of content that overlaps with the Industrial Strategy, but pulls ideas together more comprehensively than we’ve seen before

Drug & materials discovery: Untangling the complexity of molecular and chemical interactions leading to the discovery of new medicines and materials

Supply Chain & Logistics: Finding the optimal path across global systems of systems for ultra-efficient logistics and supply chains, such as optimizing fleet operations for deliveries during the holiday season

Financial Services: Finding new ways to model financial data and isolating key global risk factors to make better investments

Artificial Intelligence: Making facets of artificial intelligence such as machine learning much more powerful when data sets can be too big such as searching images or video

Cloud Security: Making cloud computing more secure by using the laws of quantum physics to enhance private data safety

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Source: IBM, https://www-03.ibm.com/press/us/en/pressrelease/51740.wss

IBM moves towards commercialising quantum computing

Applications for quantum computing (via IBM)

While technologies that currently run on classical computers/supercomputers can help find patterns and insights buried in vast amounts of existing data, quantum computers will deliver solutions to important problems where patterns cannot be seen because the data doesn’t exist and the possibilities that you need to explore to get to the answer are too enormous to ever be processed by classical computers.

Why quantum computing? (via IBM)

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Source: IBM, https://www-03.ibm.com/press/us/en/pressrelease/51740.wss

What do you need to know?

Why does it matter?

Key questions

● Quantum computing is taking steps to move from research & small-scale demos to within line of sight of commercialisation

● Quantum computing will be critical to help solve complex problems where the limits of traditional computing are a barrier and holds huge theoretical potential in a number of important areas

● How quickly will quantum computing evolve, given today’s state of play is seen as equivalent to ‘1940s in digital computing’?

● If view is that 500-2k qubits is minimal bar to control tech and today’s machines will take couple of years to get to 50 qubits, how quickly will power of systems progress?

● How will a broader ecosystem be developed to educate enterprise, developers/others to be able to take advantage of capabilities of quantum computers?

IBM moves towards commercialising quantum computing

● IBM taking step to moving to first availability of practical quantum machines, by making deals to enable access to their experimental quantum systems so they can learn how to build on the tech, i.e. how to write algorithms adapted to quantum computing systems

● D-Wave already has commercial quantum computers in market (e.g. with Google/NASA), but only for very narrow range of use cases

Acquiror Target Target desc. Amt. Comments

Ocean Link (PE) Qunar OTA $4.4B

Qunar will delist from NASDAQ having been taken private by Chinese PE firm, Ocean Link. Is this a sign of increase tech PE activity in China?

SoftBank OneWeb/Intelsat

Satellite companies

$1.7B (investment by Softbank)

Softbank orchestrating merger of the two companies and injecting $1.7B itself into combined entity. Latest big bold move by Masa Son & SoftBank as it seeks to strengthen position in connectivity layer

Amobee Turn Ad tech $310M

Singtel-owned Amobee acquired data management platform Turn, its latest transaction to grow the telco’s efforts in digital ad space. Singtel, like Verizon, has made multiple acquisitions to build its position in adtech space

Airbnb Tilt Crowdfunding platform $60M Tilt had raised $67M from A16Z, DCM, Felicis, etc. Airbnb

building out its group bookings capabilities with acquisition

Mozilla Pocket Content management Not disclosed Pocket had raised ~$15M from NEA, GV, Baseline

Lagardere ShopCade Fashion marketplace Not disclosed

French media conglomerate purchased ShopCade in another cross-industry deal. ShopCade had raised $4M from C4 Ventures

Mercari Zawatt Online auction site Not disclosed

Mercari, the Japanese C2C mobile marketplace for second-hand goods, acquired Japanese company Zawatt for undisclosed sum. Mercari is one of the only Japanese private companies at $1B+

Selected M&A Transactions

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