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Atomico Need-to-Know 15 June 2017


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Atomico's Need-to-Know, 15 June 2017 - Essential Information for Founders and VCs

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Atomico Need-to-Know 15 June 2017

  1. 1. 15 June 2017 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. Lovingly put together by @twehmeier & @stephen2206 2
  3. 3. ● If CFIUS does indeed enforce stronger regulatory control over M&A and investment activity, will we see retaliatory moves from China (& other states)? ● Given that there have already been murmurings of increased scrutiny of sources of FDI in tech in Europe, how will Europe respond to any move by the US? ● What impact will national competition have on the war for talent in AI? ● AI is increasingly not only the most important battleground for tech giants, corporates and startups, but now increasingly between nation states that have come to understand that AI represents the most important technology wave of the future ● The Chinese government sees AI as highly strategic to its desire to establish the country as a global technology superpower and has been supporting heavy investment at home and overseas to build its own capabilities and access to the technology of others ● The US is the largest destination for Chinese FDI, amounting to ~$46B in 2016 and $22B YTD in 2017. According to CB Insights, China has made 29 investments US AI companies since 2012. ● There are also discussions about how to retain US-educated talent in the US 3 What do you need to know? Why does it matter? Key questions ● Reuters has reported that the US appears set to increase scrutiny of Chinese investment into domestic tech companies as a means protect “sensitive technologies seens as vital to US national security” ● Chinese investment in AI is said to raise the largest concerns, due to fears that Chinese access to US-developed AI tech could advance its military capabilities and also help boost its position in industries considered “strategic” through technology transfer enabled by this investment activity. There are also fears of an opportunity cost, if tech backed by Chinese investors is deemed ‘off limits; ● Increased scrutiny would likely come from a strengthened role for the Committee on Foreign Investment in the United States (CFIUS), an inter-agency body that can review acquisitions, investments, minority stakes and JVs with foreign investors. This follows a review by the Pentagon that warned of China skirting US oversight. Historically, CFIUS has blocked Chinese attempts to acquire US-based semiconductor companies (e.g. Aixtron, a Germany co with a US subsidiary) US considering restricting Chinese investment in AI Source: "Artificial intelligence is one of many leading-edge technologies that China seeks and that has potential military applications. These technologies are so new that our export control system has not yet figured out how to cover them, which is part of the reason they are slipping through the gaps in the existing safeguards" Aide to US Senator John Cormyn (who is drafting legislation to amend CFIUS powers)
  4. 4. AI Will Make Apps Smarter As in smartphones, ML/AI development will make apps smarter. For instance, Nuance showed off a parking app that understands if it is raining, if you require an electric charger, or if there are space limitations when determining the optimal parking space available for your specific circumstance. In Terms Of Sensor Hype, V2X Is On An Uptrend, Lidar On A Downtrend There was much more talk of the use cases for V2V and V2I at this conference than years past, while Lidar, which rode a severe hype cycle the past couple of years appears to be being viewed more skeptically by industry participants that grow impatient waiting for low cost solid state Lidar development, as mechanically oriented Lidar is a non-starter in the real world, and development of higher quality radars is increasing. Value Chain Convergence There was a lot of talk at the conference about OEMs, dealers, banks, insurance companies, and essentially the entire value chain of car ownership working much closer together in the future as the industry transforms more into a service oriented business. ● TU-Automotive Detroit is the world’s largest event covering the connected car and autonomous vehicle space. For the past three years, it’s been dominated by the industry’s major forces of transformation: autonomy, Internet connectivity, electrification and ride sharing/car sharing business models ● Based on evidence from the event, the major auto OEMs and ‘tier 1’ suppliers to the industry are clearly making “incremental progress” in how to address the challenges and opportunities created by these technology trends. It’s also clear that the industry is making in moving from ideas in PowerPoint to real-world efforts ● Outside of the conference, Tim Cook finally confirmed that Apple is working on autonomous systems and views AI for AVs as “the mother of all AI projects”. It increasingly looks like both Apple and Alphabet/Waymo appear to be positioning themselves as software providers to auto industry, rather than as “hardware manufacturers. ● Where are the open spaces for startups to create value as the auto value chain continues to evolve and - perhaps more importantly - as the shifts created by auto impact more broadly into adjacent industries? ● What role will simulation technology play in the advancement of autonomous vehicle technology, can it accelerate time-to-market and how will regulators view the robustness of technology that has been tested and validated in simulated environements, rather than through rubber actually meeting the road? ● As the industry builds a more comprehensive understanding of the impact of connectivity and autonomy, it’s becoming clearer where the obstacles to adoption may lies and, as a result, where there are potential opportunities for new entrants to tackle those problems ● As one example, the importance of simulation technology to complement data collection in the real world is emerging as an area of focus that is likely to attract significant investment, from incumbents, tech giants, as well as from startups 4 What do you need to know? Why does it matter? Key questions Auto industry convenes to discuss hurdles to AV launch Single Greatest Impediment To Autonomous is Validation, Simulators Will Be Required Various statistics suggest that it will essentially be impossible to validate an autonomous car platform on real roads in a manner that would allow a consumer to use the car anywhere. For this reason, the industry is moving towards using simulators to enhance real world driving validation. Both Mobileye and University of Michigan, and probably others, have developed at least rudimentary simulators. It is unclear to what degree regulators will trust simulated data for validation, but it is clear that the simulators will need to be massively “photorealistic”, which essentially means yet another end market for GPUs. Monetization of Data OEMs have a much clearer picture on how to monetize the data from their fleets of connected cars. The first order purchasers of this data are likely insurance companies (to prove liability and price services more accurately), dealers (in order to increase proactive maintenance), and radio stations (to improve the quantitative measures of listenership). BMW announced at the show that it is now sharing car data in Germany, and it looks forward to seeing other types of third parties that may have an interest. Commercial Transportation Will Be Just As Transformed Commercial transportation companies are looking at automation to address the drastic labor shortage and improve ROI, and many believe autonomous technology will become ubiquitous in commercial transport long before consumer automobiles because of the strict focus on ROI vs. emotional attachment. Testing for “platooning” in Michigan this year, which allows trucks to travel within 20 feet of each other to save on fuel costs through the use of autonomous technology. Source: Raymond James
  5. 5. What do today’s auto OEMs agree on in terms of trends? 5 Source: Raymond James
  6. 6. ● Will we start to see a greater convergence between the multiples of games companies and other Internet tech categories to erode the significant discount that has typically been applied to games companies due to concerns over revenue volatility and sustainability? ● If games is increasingly viewed as a ‘service’, will this attract back investors that have been less focused on games as a category in the past 4-5 years? 6 What do you need to know? Why does it matter? Key questions ● Goldman Sachs issued a research report outlining the case for a major shift in their valuation methodology for games companies, moving towards a model that looks at a longer forecast horizon ● The decision was based on a “structural transformation” of the games industry that has seen traditionally highly volatile earnings dependent on hits has been replaced with more predictable and stable recurring revenue streams ● As a result, it believes long-term EPS outlook is ‘more pertinent to valuations than the near-term EPS outlook’, based on considerations such as IP portfolio, games development pipeline, and cost of development. GaaS: games-as-a-service finds love at Goldman “The games sector is changing from one where earnings are volatile due to the large impact of title success/failure to one notable for sustainable sales and high contribution margins driven by growth in users (via smartphone and console penetration) and game item sales. We see the sector taking on more service and media content attributes and shedding its product sales business model, and accordingly switch to a valuation method based on FY3/21E EV/NOPAT (in line with our internet sector) from our previous two-year forward P/B-ROE method. With this, we update our target prices.” Source: Goldman Sachs equity research ● This is ultimately an indicator that lags a trend that companies, such as Supercell, King and Rovio have shown to be true: it’s possible to build loyal, highly-engaged customer bases that can generate sustainable revenue streams over a long period (5+ years).
  7. 7. Top 50 US companies have $925B in overseas cash 7 What do you need to know? ● Trump’s tax reform is expected to spur companies that have been stockpiling cash overseas to bring money home ● Trump proposed a one time 10% tax rate on offshore earnings regardless of whether the companies actually repatriate their income ● The 50 top overseas cash holders in the S&P 500 have parked $925 billion of their cash and marketable securities outside the U.S. Why does it matter? ● The repatriated money could be used on share buybacks, dividends, acquisitions and capital spending. ● Tech companies would be the biggest beneficiaries: Apple, Microsoft and Cisco Systems alone have a total of $427 billion stored overseas. Top 5 companies by overseas cash holdings are all tech companies and sit on aggregate $535B Key questions ● What are the most likely strategies that are going to be adopted by big cash holders? ● Given overseas cash holdings have helped drive overseas M&A activity, will there be any impact if cash is repatriated? Source:
  8. 8. ● Will the debate over raising barriers to foreign investment and acquisition of European tech companies get louder? ● Is it better to continue to focus on building Europe’s tech ecosystem through ‘training and skills, investment in digital infrastructure and the efficiency of local capital markets’? ● How can European tech strengthen its networks and relationships in Asia to build stronger bridges to the region? ● Per GP Bullhound, “Asia-to-Europe tech M&A is part of a broader trend, driven by a quest for growth, tech convergence, the rising pace of innovation, the race for IP and talent and the low cost of capital” ● GP Bullhound found no systematic evidence that Asian buyers ‘systematically’ pay a premium in Europe. Transaction drivers are seen as accessing new geos, sharing innovation and consolidation of the value chain ● Per the report, “Asia-to-Europe dealmaking in tech is still in its relative infancy and networks and relationships are still being built” 8 What do you need to know? Why does it matter? Key questions ● Asian appetite for European technology acquisitions has been growing strongly since 2014 and in 2016 came close to the level seen from North America by deal value ● Japan & China have driven largest share of M&A of European targets by Asian buyers. ● UK companies have been the primary targets for Asian buyers (30 out of 49 acquisitions. GP Bullhound digs into Asia-to-Europe tech M&A trends Source: -2017.pdf “Asian acquisitions of European technology companies more than doubled from 2014 to 2016 from 22 deals to 49 and the deal value increased 30 times to $50.4bn. This added to the already strong appetite from the US for European tech. The main drivers for this growth are Softbank’s major strategic bets and the rise in both the volume and the size of acquisitions by Chinese buyers, running in parallel to China’s digital economy strategies. This fast-developing landscape presents new opportunities and challenges for the growing European tech ecosystem.”
  9. 9. GP Bullhound: Charts and graphics 9 Source:
  10. 10. ● Will we see Amazon move further into areas that extend beyond the cloud? ● What long-term pricing model will adopt for Greengrass, will it move to its preferred consumption-based model over time, or stick to the initial per-device/unit licence model? ● Coming from AWS, the king of cloud data processing, this is a huge validation of the concept of edge computing, or local data processing that takes place on the ‘device’, whatever form that may take. ● This is a very useful framework for thinking about how companies might approach data processing and whether it should happen in the cloud, or locally on end-user devices ● 10 What do you need to know? Why does it matter? Key questions ● Amazon’s CTO, Werner Vogels, published a blog outlining reasons why and use cases when local data processing (i.e. on the device, not in the cloud) is valuable and necessary ● Vogels outlines three reasons (“laws”) that he and AWS expect to hold even as technology improves: ‘Law of Physics’, ‘Law of Economics’ and ‘Law of the Land’. ● These laws essentially equate to the importance of 1) latency & impact on decision-making speed 2) ROI on transmitting and processing lower-value data in the cloud 3) regulation/compliance in determining how and where data should be stored and processed AWS/Vogels make a case for the value of ‘edge computing’ Source:
  11. 11. M&A wrap up Acquiror Target Target desc. Amt Comments Alibaba TicketNew Online ticket sales (India) $35M Alibaba increasingly investing into its Indian market presence. TicketNew specialised in cinema ticket sales. Acquisition made via Alibaba Pictures, Ali’s movie business Porsche Automobil PTV Planung Traffic planning and management software €300M Software for transport logistics, as well as traffic planning and management. PTV, based in Karlsruhe, Germany. €93M revenue in last financial year. Growing at “double digit” amounts. 700 employees in 20 locations. Porsche is seeking to position itself to be a key provider of mobility services beyond the sales of vehicles in the longer term. LexisNexis Ravel Law Legal research analytics n/a Ravel Law had raised $9M from investors incl. NEA, but not raised publicly since February 2014. Boston Logic Propertybase CRM & marketing SaaS for real estate agents and developers n/a Berlin-based Propertybase acquired for an undisclosed sum. Propertybase had built a CRM solution on top of Salesforce targeted specifically at the real estate industry. Interesting to see an application built on top of SF’s developer platform be acquired, even if at likely small amount. Propertybase had raised undisclosed sums back in 2011 from HTGF Caterpillar Yard Club Online heavy equipment rental & management technology n/a Acquisition will support Caterpillar’s digital offering. Yard Club did $120M GMV in 2016. Caterpillar has been seeking to transform itself Softbank Boston Dynamics/ Shaft Smart robotics x 2 n/a SoftBank, which has already positioned itself as a leader in robotics (Pepper), acquired two businesses to further strengthen its capabilities in smart robotic tech (robots + AI). Boston Dynamics was acquired from Alphabet, while it also acquired a local Japanese player, Shaft as part of the deal. Terms of the deal were not disclosed StarHub Accel Systems & Tech Cybersecurity systems integrator $14M StarHub, the Singaporean telco, has acquired 51% stake in Accel to broaden its portfolio of cybersecruity services for enterprise customers. It’s yet another sign that the global teclo community is seeking to expand its offering beyond basic connectivity services. Hogg Robinson eWings SaaS platform for travel booking and management n/a Hogg Robinson acquired Berlin-based eWings to build its digital travel management capabilities. HRG was founded in 1845 and is valued at ~$290M, or 0.7x revenues, reflecting its profile as a largely offline, legacy business in the travel management space 11
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