25 July 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 & @stephen2206This issue also guest starring @adragic6 & Ross Caton

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● What’s the best way to position ‘scout’ schemes to different stakeholders? What guidelines should VCs provide to their ‘scouts’ in terms of how to communicate with founders?

● What’s the next step in the evolution of ‘scout’ programmes? Will we see more differentiated programmes emerge that seek to organise around a specific set of expertise?

● In a world where there are competing ‘scout’ programmes, what does this mean in terms of how to engage with potential ‘scouts’? Should there be exclusivity? If not, what terms should exist where ‘scouts’ can invest on behalf of multiple LPs?

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What do you need to know?

Why does it matter?

Key questions

● Following the announcement of two recent ‘scout programmes’ by Flybridge Capital Partners (XFactor.Ventures) and First Round Capital (Product Co-Op), the WSJ took a deep dive into the prevalence of similar programmes run by VCs in SV.

● While A16Z and Sequoia received attention back in 2014 for their activity in this regard, it’s apparent that programmes have become more commonplace. Firms identified by the WSJ that have active programmes in place include: Accel Partners, CRV, Founders Fund, Index Ventures, Lightspeed Venture Partners, Sequoia, Social Capital and Spark Capital.

WSJ identifies 10 active ‘scout’ programmes in SV

Source: https://www.wsj.com/articles/scout-programs-spread-in-silicon-valley-1500377402https://hunterwalk.com/2017/07/19/three-questions-founders-should-ask-scouts-before-taking-an-investment/

Funds identified in WSJ article as operatingvariants of so-called ‘scout programmes’

● Accel Partners● CRV● First Round Capital● Flybridge Capital● Founders Fund● Index Ventures● Lightspeed ● Sequoia Capital● Social+Capital● Spark Capital

● Scout programmes have emerged as an increasingly frequent means by which top VCs build bridges with the angel community to dealflow, but also, importantly, to create strong, engaged networks/communities with some of the most influential entrepreneurs/operators in their localities, which can be valuable to e.g. stay close to potential future founders or, for example, as a pipeline for future VC talent

● As these programmes have grown in popularity, questions have started to be raised (captured neatly by Hunter Walk at Homebrew) about how founders should approach dealings with ‘scouts’. While there are clearly legitimate question marks (e.g. knowing who is the source of capital, information rights), the seeding of new potential angels that may have have limited access to capital is generally viewed as a boost to local ecosystems

● As these schemes proliferate in number, models are emerging that aim to be differentiated in their approach. The First Round Capital ‘Product Co-Op’ is a good example: it’s a group that is composed solely of ‘Product’ experts (e.g. Slack, Google) that work collectively to support founders to build their product & achieve product-market fit. They’re explicitly matching capital with expertise at the earliest stage.

1. Are you a scout? 2. Are you a Scout for multiple funds? Do I have the

option of taking money from just you, or will you only invest from the Scout pool?

3. What information about this investment do you share with the sponsoring VC?

● Will the largest Asian player - who have already been active in e.g. South-East Asia - look to become active in western markets?

● How will the role of banks change in the payments space as fintech providers scale larger and take on more of the processes traditionally done by banks? Will they become more acquisitive?

● Where is there white space in the payments landscape (e.g. in-vehicle payments, VR payments?)

● Recent spike in M&A reflects continued trend of move from cards-and-cash to digital and other forms of payments, as well as decreasing importance of banks in the payment sphere

● Payments industry is consolidating while a number of small, very specialized players are also emerging

● Likely to see more fintech start-ups given amount of interest in space and size of market opportunity

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What do you need to know?

Why does it matter?

Key questions

● Five recent major deals in the payments processing space are in process/have taken place including both strategic and financial buyers:

○ Blackstone and CVC bid £3.8bn for Paysafe○ Nordic Capital sale of Bambora to Ingenico for €1.5bn○ Vantiv acquisition of WorldPay for £7.7bn○ Worldline has agreed to buy Digital River World Payments○ Permira, Nordic Capital, and others contemplating take-private

of Nets A/S (Danish payments services provider)● Notable fundraises have also been occurring:

○ Visa and Permira investments in Klarna○ Revolut Series B raise○ Early stage fundraises: Curve (London, $10mm, Series A),

Form3 (London, $5mm, Series A)

Payments landscape seeing fresh wave of $15B+ M&A

Sources: https://www.wsj.com/articles/payments-business-gets-a-10-billion-jolt-1499272304, https://www.ft.com/content/860958de-6d33-11e7-bfeb-33fe0c5b7eaa https://www.wsj.com/articles/blackstone-cvc-join-payments-sector-deal-frenzy-with-3-8-billion-paysafe-bid-1500637450

June Deal July Deals

● What impact is SoftBank having on valuations at the late-stage? To what extent is Softbank pushing out competitors in these deals?

● Where does Fortress play in this picture? Will we see SoftBank evolve into a one-stop investment shop across asset classes, more akin to a KKR or Carlyle?

● SoftBank has become a major player in late-stage private tech investment and has already moved quickly to deploy significant sums, for example putting $5B into Didi, up to $1B into Grab, and $500M into Improbable. It has already become a force to be reckoned with in doing so.

● Under Son, SoftBank has an impressive investment track record. On its investments, SoftBank’s internal rate of return is 44 percent overall and would still be 42 percent without Alibaba, according to the company

● Of note, is how SoftBank looks to be developing into a “Berkshire Hathaway of tech”, becoming something akin to an umbrella organisation that manages tech-related investments across a wide range of investment types, including minority VC-like investments, large-scale growth equity, majority-stake buyouts resembling a PE model, as well as public market investments

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What do you need to know?

Why does it matter?

Key questions

● SoftBank’s Vision Fund has ramped its investment activity quickly, announcing major ($100M+) deals for Grab, Plenty, Brain, Nauto in the space just a few days. The breadth of his investments from indoor farms to smart robotics has raised questions about its overall investment strategy.

● Masa Son used a SoftBank event to share more details on his vision for the $93B SVF, explaining: “The Vision Fund is not about taking on the world with one specific technology, business model or brand. It’s about people sharing the same vision coming together to start a revolution”, i.e. building a portfolio of groundbreaking entrepreneurs

● As a mission, Softbank wants to become “the company that contributes most to humankind by driving the Information Revolution”. The key areas of interest for SVF are: AI, IoT, Robotics, particularly when applied to areas that serve to improve the human lot, e.g. healthcare, agriculture, accidental death (e.g. in cars).

Masa Son outlines vision for the Vision Fund/SoftBank

Source: https://www.bloomberg.com/news/articles/2017-07-20/softbank-s-son-finally-explains-how-all-those-deals-fit-togetherhttps://www.softbank.jp/en/corp/irinfo/presentations/

SoftBank increasingly becoming an asset manager that combines deep tech and financial expertise to

underpin deals that span a variety of deal structures

Overview of known SVF investments to date

+Grab+Nauto

● How can VCs better work together to share best practices around decision making?

● How can VCs work to help entrepreneurs better understand internal decision making processes and organizational structure?

● Valuation and product are viewed as more important to larger firms and more successful funds, as they are able to win deals when with lower valuation term sheets given their reputation

● The decision making process of VCs is still viewed as a “black box” to many entrepreneurs and LPs

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What do you need to know?

Why does it matter?

Key questions

● Report out of Chicago Booth looked at how VCs make decisions around the entire investment process from sourcing to exits and the internal organization of firms

○ Study was based on survey data from 900+ VCs ranging from early to late stage primarily focused on IT/software with some healthcare focus across different geographies

● Early stage firms focus heavily on team and consider ability, industry experience, and passion to be the most important characteristics

● Interesting, later stage firms on average offer +50% more term sheets per closed deal, indicating greater competition and less proprietary deals

Survey of 900 VCs analyses how funds make decisions

Source: https://medium.com/pnr-paper/venture-capital-decision-making-c3258bc1b09c

Chicago Booth VC survey, cont...

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Source: https://medium.com/pnr-paper/venture-capital-decision-making-c3258bc1b09c

● Will the promise of dramatically lower operating costs hold true? If so, will lower cost sea transport impact other forms of freight transportation? Yara claims one seaborne trip in Norway could save the equivalent of 40,000 truck journeys. If these types of numbers prove correct, it could drive change how certain goods are shipped.

● How quickly can regulation be adopted to enable the movement of autonomous ships in national and international waters?

● There is currently no regulation in place for the operation of autonomous ships and none is expected until 2020, at the earliest, so it’s possible that the technology may advance faster than the regulation in this field

● According to the developers of the ship, the technology is no longer in question, but rather the business case. Will ship operators be prepared to pay the significantly higher upfront costs, but at the promise of dramatically lower operating costs? There are, of course, still other challenges, such as safety, security, tech (connectivity), etc

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What do you need to know?

Why does it matter?

Key questions

● Two Norwegian firms (Yara International ASA and Kongsberg Gruppen ASA) unveiled plans for a fully-electric, fully autonomous cargo ship that is planning to commence shipping in 2018. The ships are operated using GPS, radar, cameras and other sensors.

● This particular 100 container vessel (on the small side given ships can take up to 10,000 containers) will cost $25 million (approx. 3x. an equivalent standard, container ship), but it is claimed it can theoretically operate at 90% lower operating costs due to lower requirements in terms of fuel and operating crew

● The ship is scheduled to be in the water toward the end of 2018. The first ships will be operated at first with humans able to take control.

Norway takes global lead in autonomous cargo ships

Source: https://www.wsj.com/articles/norway-takes-lead-in-race-to-build-autonomous-cargo-ships-1500721202

“In addition to reducing fuel and labor costs, the Birkeland project (to start sailing fertilizer 37 miles down a fiord from a production facility to the port of Larvis) is being pitched as a way to cut emissions. The ship is expected to replace 40,000

truck drives a year through urban areas in southern Norway, the companies say.”

“The Birkeland will become autonomous in stages. At first, a single container will be used as a manned bridge on board. Then the bridge will be moved to shore and become a remote-operation

center. The ship will eventually run fully on its own, under supervision from shore, in 2020.”

● McKinsey recently released a report that suggests organizational culture is one of the main barriers to companies’ success in the digital age

● Functional and departmental silos, fear of risk taking, and weak customer focus are the main barriers to digital effectiveness

○ Study found clear negative correlation with these cultural barriers and negative economic performance

● Report argues that executives need to be more proactive in re-shaping organizational culture or risk falling behind as digital penetration grows

● What role can Europe’s tech ecosystem (startups, investors) play to build relationships with European corporates to help overcome some of the cultural and operational barriers to succeeding in the digital economy?

● This type of corporate cultures contributes to sluggish responses to rapidly changing customers needs, market dynamics, and technological advances

● Startups can serve catalysts for strategic investment to counteract some of the problems driven by corporate culture to successfully compete in the digital age

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What do you need to know?

Why does it matter?

Key questions

McKinsey Report on Organizational Culture in Digital Age

Source: http://www.mckinsey.com/business-functions/digital-mckinsey/our-insights/culture-for-a-digital-age

● What learnings from other VCs can Atomico take to promote and support and more female founders?

● Are female founders aware that this a priority for Atomico and the initiatives the firm is involved with?

● Only 17% of startups have a female founder based on a report by Crunchbase in Q1 ‘17 and it is flat lining

○ The statistics are even more bleak for non-white women with black women received a negligible 0.002% of VC funding

● Additionally, only 7% of partners at the top 100 venture firms are women based on Crunchbase data

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What do you need to know?

Why does it matter?

Key questions

● Coming off of the recent news around inappropriate behavior towards Female founders in Silicon Valley various funds have launched or publicized their initiatives towards female founders

○ Mangrove Capital recently launched Europe’s Female Founders, a series of meetups across various European cities

○ LocalGlobe and Accel Partners have also launched similar initiatives aimed at building community for female founders

● Multiple funds targeting female female founders have launched including: Rethink Impact, Babel Ventures, and XFactor Ventures

Female Founder Initiatives are Expanding

Sources: https://techcrunch.com/2017/07/19/mangrove-raises-170m-for-its-new-fund-to-invest-in-europe-and-israeli-startups/amp/https://techcrunch.com/2017/04/19/in-2017-only-17-of-startups-have-a-female-founder/https://www.wired.com/2016/02/its-embarrassing-how-few-black-female-founders-get-funded/

General News In Brief

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Companies What happened?

SoundCloudSoundCloud CEO Alexander Ljung says the company is not going away in the foreseeable future; SoundCloud recently announced the layoff of 40 percent of staff and the shuttering of two offices; lack of runway led to reports that the company could shut down or sell; Ljung says the changes will enable the company to remain strong and independent

DraftKings / FanDuelDraftKings and FanDuel cancel their proposed merger; regulators challenged the deal, saying the combined business would control more than 90 percent of the daily fantasy sports market; the pair agreed to the deal last November; Axios reports that merger documents indicate each company is valued at $1.2B

WeWork WeWork raises $760M Series G from undisclosed investors; Forbes and other sources indicate a $20B valuation; the coworking spaces company launched in 2010; now serves 120k customers in 156 offices across 49 cities in 15 countries; raised almost $4.5B to date

US Inc...Trump to halt entrepreneur-specific visa program, according to Axios sources; the Obama-era rule is scheduled to take effect July 17; would allow foreigners to enter the US to start companies; U.S. Citizen and Immigration Services will reportedly take measures to postpone implementation Monday

British Business Bank

The BBB released its annual report, disclosing it made 5 fund commitments during its last financial year. They were: Entrepreneur First Next Stage (£26M of £40M first close), Seraphim Space Fund (£30M of £50M, up to £50M of £83M at final close), Active PE (£24M of £40M), Accelerated Digital Ventures (£41M of£85M but up to £50M of £150M), Scottish Equity Partners (£10M to £260M fund)

The Boring CompanyElon Musk tweeted that his The Boring Company had received verbal approval from the US authorities to build a tunnel to connect the East Coast (New York, DC) via Hyperloop and enable travel in 29 minutes. Its unclear how far actual discussions or plans have actually proceeded and the viability of the proposal. Hyperloop is emerging as an interesting new form of transit to change the dynamics of intercity travel.

GoogleA report in Bloomberg claims Google is preparing to enable access to its quantum computing capabilities via the cloud (QCaaS). This follows on from a major funding round into Rigetti Computers (A16Z led), who are also pushing to build a cloud platform for developers/enterprises to access quantum computing.

Mercari The Japanese second-hand mobile marketplace is said to have applied to IPO on the TSE in Japan and could raise as much as $900M (100 billion Yen).

Bitcoin

More than 90% of Bitcoin miners have given their support to a solution called BIP 91 to introduce ‘SegWit2X’ to the blockchain in order to increase the transaction capacity, and thereby increase the ease, speed and cost of transactions on the network.. The support for BIP 91 is important as it should avoid a potential split of the cryptocurrency, known as a ‘hard fork’. SegWit will still need to implemented on the network, a process that will play out over the next couple of weeks. Bitcoin price has surged again on the news, pushing close to the ATH

MicrosoftMicrosoft unveiled further details of its core AI research initiatives that has come together under the Microsoft Research AI umbrella. All told, Microsoft is said to have up to 7,500 engineers working on AI efforts across its business units. It’s also announced a new 100-strong AI lab is said to be Microsoft’s equivalent of DeepMind and has been tasked with working on some of the most

M&A Wrap UpAcquiror Target Target desc. Amt Comments

Sizmek Rocket Fuel AI-based advertising solutions $126m

Sizmek, owned by Vector Capital, acquired public ad-tech company, Rocket Fuel, to combine technologies and improve positioning vs. leading Ad-tech platforms

Spectrum Equity bit.ly URL shortener that allows

users to share and track links $63mbit.ly sold a majority stake to growth equity firm Spectrum Equity and is planning to use the proceeds to scale the business; last raise was in 2012

Amazon Graphiq Contextually-rich data visualizations ~$50m Amazon recently announced acquisition of Graphiq closed in May

for an undisclosed amount to improve Alexa’s search function

Zeta Global Boomtrain AI powered marketing platform

N/A Zeta Global plans to incorporate Boomtrain’s AI-based technology to power their SaaS-based marketing cloud

HyTrust DataGravity Data visibility and security company N/A HyTrust made the acquisition announcement in parallel with its latest

funding announcement ($36m Series E)

Symantec Skycure Mobile threat defense N/AStrategic play for Symantec to bolster their integrated solutions for defend against sophisticated attacks across multiple endpoints, including mobile

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