8 Sep 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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● How will the IPO fare? Will investors buy the story?

● Will late-stage private tech companies be enticed to take money from Social Capital Hedosophia?

● What other talent will be enticed to join the vehicle to act as operational expertise within the portfolio?

● How will other investors, both private- and public-market focused, respond to the signs of an emergence of new players with large ambitions to change how companies are funded and scaled, such as SoftBank and Social Capital Hedosophia?

● As technology companies play a bigger and bigger role in the global economy, we’ve not just seen a huge expansion in the amount of capital invested into tech, but increasingly new models seeking to change the way capital is allocated to companies in both private and public markets

● Social Capital Hedosopia joins SoftBank, Alphabet, KKR, Tencent, the ICO model, Rocket Internet-style company builders (e.g. Yello Mobile) as examples as interesting new options for companies seeking to raise capital on the path to building large-scale, fast-growing tech companies

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What do you need to know?

Why does it matter?

Key questions

● SV-based VC Social Capital ($1.8B AUM) is partnering with Hedosophia, a London-based venture growth fund founded by Ian Osborne with $1B AUM to launch a publicly-listed holding company (Social Capital Hedosophia) that they are seeking to build into a “Berkshire Hathaway of tech”.

● The Holding company is seeking to raise $500M in an IPO to fulfil its mission to: “create an alternative path to a traditional IPO for disruptive and agile technology companies to achieve their long-term objectives and overcome key deterrents to becoming public”

● The thesis is predicated on a view that the public markets and the current venture model are ‘broken” and that there is demand for a ‘new way’

Social Capital Hedosophia targets ‘blank cheque company’

Source:https://www.cnbc.com/2017/08/23/chamath-palihapitiya-mimics-buffett-with-social-capital-hedosophia.html https://www.recode.net/2017/8/23/16194374/social-capital-investment-firm-banks-ipo-publichttps://www.sec.gov/Archives/edgar/data/1706946/000114420417044783/v473766_s1.htm

“The traditional technology company IPO process, which has been largely unchanged for decades, has

also acted as a driving force to deter private company management teams and their pre-IPO stakeholders from pursuing IPOs. We believe management distraction, a sub-optimal price

discovery mechanism and the resultant longer-term aftermarket impact have discouraged private technology companies from pursuing IPOs.”

4Source: https://www.sec.gov/Archives/edgar/data/1706946/000114420417044783/v473766_s1.htm

SCH view on why the current IPO process is broken

What benefits does SCH believe it can deliver to targets

What types of companies are SCH looking to acquire?

How will acquisitions be structured?

● Targets must have fair market value equal to at least 80% of net assets held in trust

● Targeting 100% ownership of target business● Minimum of 50%+ ownership of voting rights● First “initial business combination” must be completed

within 24 months from closing of offering

What does the S-1 filing tells us about SCH?

● National health systems in many countries are struggling to cope financially with the burden of structural inefficiency together with increased demands for medical services. Many see AI as a potential force that could be very by which to break the ‘iron triangle’ of healthcare, by enabling better outcomes, for more people at lower costs

● Access to data will be critical to enabling this path, but there are currently huge constraints that stand in the path of widespread use of patient data at scale, including privacy, security, fragmentation, commercial models, etc.

● How quickly can regulatory frameworks be amended to speed a path to “capture the value” from applying AI to publicly-controlled datasets?

● Will we see protectionist measures emerge to protect national interests?

● Will health AI emerge as another area for jurisdictional competition?

● Which other public sectors hold the most promise to deliver potential returns to national treasuries through the commercialisation of large-scale datasets? Transportation? Education? Identity? Welfare? Defence? 5

What do you need to know?

Why does it matter?

Key questions

● A industrial review of the life sciences industry commissioned by UK Government was published by Sir John Bell, an Oxford University Professor of Medicine.

● The review included a recommendation for a “very urgent” review of how data generated and collected by the NHS is made available to companies to “ensure that patients and UK taxpayers - not just tech companies - gain from commercial applications of NHS data”.

● In recognition of the commercial potential of this dataset, the review also called for a new regulatory framework to be established in order to “capture for the UK the value in algorithms generated using NHS data”.

● The review also called for a “moonshot” initiative to create a DARPA-like body to provide the resources (in terms of human and financial capital) to undertake R&D to commercialise products in fields, such as genomics, diagnostics, and ageing.

UK Government urged to prioritise use of health data for AI

Source: https://techcrunch.com/2017/08/31/building-health-ais-should-be-uk-ambition-says-strategy-review/ https://www.theguardian.com/science/2017/aug/30/uk-needs-to-act-urgently-to-secure-nhs-data-for-british-public-report-warnshttps://www.gov.uk/government/news/sir-john-bell-to-unveil-industry-led-proposals-to-build-uks-status-as-world-leader-in-life-sciences

“AI is likely to be used widely in healthcare and it should be the ambition for the UK to develop and test integrated AI systems

that provide real-time data better than human monitoring and prediction of a wide range

of patient outcomes in conditions such as mental

health, cancer and inflammatory disease”

“What you don’t want is somebody rocking up and using NHS data as a learning set for the generation of algorithms and then moving the algorithm

to San Francisco and selling it so all the profits come back to another jurisdiction,”

Sir John BellOxford University

Sir John Bell, in his own words on health AI...

Bell said this concern had been largely overlooked due to a widespread misconception that recent advances in AI have sprung from the development of new, sophisticated machine-learning algorithms. “People have played up the need to have great machine learning. It turns out that’s all baloney,”

he said. In fact, Bell argues, the most significant value lies in the datasets used to train algorithms on tasks ranging from speech recognition to

diagnosing diseases. “What Google’s doing in [other sectors], we’ve got an equivalent unique position in the health space,” he said. “Most of the value is

the data. The worst thing we could do is give it away for free.”

...especially those representing start-ups and small businesses

● Will Macron’s Government succeed in pushing through the reforms without being materially diluted?

● How quickly - if at all - will France’s tech ecosystem start to benefit from the reforms? Can this accelerate entrepreneurship?

● What impact will this have on France’s traditional industries? Will this steer more talent towards a new generation of companies?

● France’s tech ecosystem has enjoyed a remarkable period of growth, in particular since the start of 2016, but its rigid labour market has long been identified as a major remaining hurdle to even greater. France has unemployment of 9.5% (versus UK of 4.5% and Germany at 3.9%)

● If Macron’s government succeeds in driving through reforms. It’s possible to could help to unlock greater investment into locally tech development, either into early-stage start-ups, through large global tech firms opening subsidiaries in France, or through a more favourable attitude towards acquiring French companies

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What do you need to know?

Why does it matter?

Key questions

● French President, Emmanuel Macron, unveiled a set of proposed reforms for the country’s rigid labour market. The extensive reforms (36 measures) include: stripping back the powers of the unions by allowing company-level labour negotiations, removing the ability to block or penalize firms if they make local lay-offs if the company is profitable outside of France, implementing a set scale to cap redundancy payments, slashing red tape for companies with 50+ employees, changes to short-term contracts to allow sector-level terms to be set (rather than national-level), enaling companies with <50 employees to negotiate directly with employees on working hours, pay and overtime

● As a next step, the Government’s decrees will be reviewed by the French Constitutional Court from 28 September, which could result in amendments or even blocks to the proposed reforms..

Macron targets campaign promise to reform labour market

Source: https://www.ft.com/content/7fb85566-8e62-11e7-a352-e46f43c5825dHttp: //www.politico.eu/article/macron-labor-reform-5-key-points/

“[This is] a new state of mind, more respectful of entrepreneurs”.

Jean-Baptiste Danet, Head of Croissance Plus(trade body for start-ups

Macron pushing ahead with campaign pledges on French labour market reform, pleases business lobby,..

“[We’ve been heard] on almost all the issues we had raised. For our companies, it’s a very strong message, a message of

hope.”

Alain Griset, Head of U2P (small business owners lobby group)

● To what extent are product teams factoring their understanding of consumer behaviour into their product development plans?

● Should we assume that all categories will tend towards the consumption patterns seen in the most advanced ones, such as retail

● The study provides a series of insights into what’s driving changes in how users interact with digital products and services that have significant relevance for any company seeking to target users via mobile devices

● More than anything, the study serves as an objective reminder of how difficult it is to acquire users, retain them, generate significant usage and, ultimately, monitise them. Given these dynamics, app developers can’t afford to ignore lessons that may help them

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What do you need to know?

Why does it matter?

Key questions

● ComScore released its 2017 US Mobile App Report and with it shared important insights into the state of digital media consumption in the US.

● The survey is one of the largest-scale and most detailed studies of consumer behaviour in terms of consumption on smartphones, tablets and PCs.

Taking stock of US digital media consumption trends

Source: ComScore 2017 US Mobile App Report

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Source: ComScore 2017 US Mobile App Report

Usage is VERY concentrated...

If you’re not in Top 10, you’re competing for <5 mins

...most users access <20 apps per month

Usage migration to app-centric model varies significantly...

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Source: ComScore 2017 US Mobile App Report

Many key app discovery channels seemingly less effective...

It’s not easy to convert users to paying users

“Size matters”

>50% of users download 0 apps per month

General News In Brief

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Footnotes

Companies What happened?

Norway SWF

The $1 trillion Norwegian sovereign wealth fund has ruled out expanding into new asset classes beyond its three focus areas of public equities, bonds and real estate, driven by the fact that it believes allocations to new areas such as private equity or VC simply wouldn’t move the needle.. Per the fund’s CEO, ““Today we’re close to $1 trillion. Realistically speaking, whether we should invest in infrastructure, private equity or the likes isn’t a very important question for the fund. It would be such a small proportion, and the duration of implementation would be so long, that if it were to have an impact on returns, it would in reality be if the fund was going down in size”

German government

Germany’s Federal Ministry of Transport and Digital Infrastructure has announced (and plans to implement) guidelines to address the ethical question of how self-driving cars should respond in situations that could endanger human life. The guidelines propose that protection of human life should always have priority (over e.g. animals and property). The cars, however, should not make decisions over who to save and cannot make decisions based on age, sex, race, disabilities, etc. Black box-like technology must also be installed to record the steps taken in the event of an accident.

Amazon

The patent on Amazon’s “one-click to buy” technology expires this month. Amazon has fiercely protected this patent, licensing the technology to only one other company (Apple). The expiry of the patent opens the door to all other online retailers to implement the same one-click process to enable a user to move from a product page to order confirmation with no intervening steps for the user.

Acquiror Target Target desc. Amt Comments

Micro Focus HPE Software division of Hewlett Packard Enterprise $8.8B Formal completion of a transaction first announced in Sep 2016. Micro Focus now becomes

the largest UK-listed tech company (ca. $14B TEV)

Apax Partners Matches Fashion Online and offline luxury fashion retailer $1B Transaction valued at £800M. Husband and wife founders

Ele.me Waimai Baidu’s food delivery business $800M Alibaba-backed Ele.me (raised $3.3B) has acquired Baidu’s food delivery business as consolidation comes to the category in China.

Cisco Spingpath Hyperconverged infrastructure software $320M Springpath had raised $34M prior to exit, including from NEA. The acquisition is targeted to boost Cisco’s competitive positioning versus players such as Nutanix and Dell EMC.

Juniper Cyphort Network security (threat intelligence) n/a Cyphort had raised $54M prior to exit. Cyphort’s technology will be integrated into Juniper’s existing network security stack to help round out its product suite for enterprise customers

Sequoia Capital (India)

Faces Cosmetics

Cosmetics company with online and offline presence in India $40M

Sequoia Capital India sponsored a management buyout of the company for approx. $40M, including an injection of $10M of new capital into the business. Sequoia will own 98% of the business. The company will be run by the current management team.

THQ Nordic Black Forest Games Games developer n/a

THQ Nordic, a Swedish publicly-listed games company, continues a trend emerging in Europe of consolidation of small- to mid-size games studios. Stillfront is another Swedish company that has been pursuing this strategy.

Siemens Tass Software for self-driving vehicles n/aDutch company Tass International had €27M in revenue and ca. 200 employees. Solutions aimed primarily at autonomous driving, integrated safety, advanced driver assistance systems, and tyre modeling.

Signet Jewellers JamesAllen.com / R2Net Online diamond trading website $328M

Israeli startup, R2Net, has sold its diamond trading website for $328M. The deal was driven by the technology R2Net had built to deliver a superior online experience for evaluating and purchasing diamonds.

Fiserv Monitise Software for financial services industry ~£75M Monitise, a one-time $B+ company and prioneer in London fintech, has seen the completion of its sale to Fiserv, for around £75M.

M&A wrap up

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