Atomico Need-to-Know 12 February 2018
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The document outlines recent trends and shifting dynamics in technology and venture capital, highlighting increasing market volatility, the emergence of digital therapeutics, and the growing intersection of the crypto and traditional finance sectors. Key concerns include potential impacts of monetary policy changes on equity markets and the rising significance of data in M&A reviews by regulators, particularly in Europe. Additionally, it discusses the evolution of venture capital amidst economic shifts and the implications for investment strategies moving forward.
Atomico Need-to-Know 12 February 2018
- 1. 12 February 2018 1 Atomico Need-to-Know
- 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. Top 3 Key Points ● Volatility is back: Volatility spiked, triggering a sell-off from volatility-linked funds. Initial spark was report of accelerating wage growth in US, bringing with it fears of inflation & acceleration of adjustments to a decade of loose monetary policy. Builds on record period of declining unemployment in US, ECB ending bond purchases, interest rate hikes in US/UK, etc. Also seen spike in (US, 2-yr) treasury bond yields above S&P Dividend Yield - cementing view that capital reallocations could be around the corner (e.g. from equities back in to fixed income ● Delicate monetary & fiscal balancing act to preserve growth: Underlying fundamentals of global economy are strong (GDP growth, corporate earnings growth), but as fears shift to inflation, focus will shift to reduced bond-buying & more aggressive interest rate hikes. Question now if and when equity prices move from pricing in a so-called ‘sugar high’ to baselining around real fundamentals of companies. Big US fiscal stimulus is another factor that provides more uncertainty of economic response ● Potential implications for venture capital: Too early to tell, but potential implications could include: 1) compression of private market multiples if asset prices reset 2) increased cost of borrowing cost impact debt-financed transactional/M&A activity as flows of capital constrict 3) reallocation of institutional capital to higher-yielding bond market, away from alternatives 3 Making sense of February’s equity markets turmoil Source: twitter.com/realdonaldtrump, S&P Global Market Intelligence Platform, FT, Bloomberg, WSJ The Takeaway $5T in value lost from global equity markets in a near 10% correction amid a spike in volatility and increasingly divergent views on what’s happening now and, more importantly, next. As US & global economies strengthen, signs point to a fundamental shift in monetary policy after a 10-year run of “ultra-loose” policies and cheap money Points of Debate / Next Steps ● Will Trump gamble of fiscal stimulus sustain US econ growth? ● If we enter a new cycle, how will it impact VC asset class? Trump points to paradox of falling equities despite strengthening US economy “In the “old days,” when good news was reported, the Stock Market would go up. Today, when good news is reported, the Stock Market goes down. Big mistake, and we have so much good (great) news about the economy!” - Donald Trump, via Twitter, 7 February 2018 Volatility reflects diverging views on what’s around the corner What is the VIX?: The Cboe Volatility Index® (VIX)® is based on the S&P 500® Index (SPX), the core index for U.S. equities, and estimates expected volatility by averaging the weighted prices of SPX puts and calls over a wide range of strike prices.
- 4. S&P 500 + Tech: Price/Normalised EPS, last 10 years 4 Source: S&P Global Market Intelligence
- 5. Top 3 Key Points ● Digiceuticals work by gathering data, either by asking patients for information or by using sensors, and provide real-time guidance. For example, diabetes apps work with connected monitors and use the information to manage symptoms ● For insurers, digiceuticals provide the attractive proposition of being able to provide treatment at scale and low cost as well as the ability to acquire data for customer acquisition & risk assessment. This has led to investment by insurers (eg. Cigna led Omada Health’s Series C round. Omada diabetes program is also insured under Medicare) ● While some digiceuticals are ‘medicine replacement’, some are ‘medicine augmentation’, opening up opportunities for partnerships between pharma and tech firms (eg. Propeller Health has partnered with GSK to create a digital therapy for people using GSK’s asthma medications) 5 Digital therapeutics are replacing pills with your smartphone Source: https://www.economist.com/news/business/21736197-smartphones-are-increasingly-delivering-verifie d-treatments-diabetes-addictions-and-adhd https://www.technologyreview.com/s/604053/can-digital-therapeutics-be-as-good-as-drugs/ https://www.forbes.com/forbes/welcome/?toURL=https://www.forbes.com/sites/eladnatanson/2017/07 /24/digital-therapeutics-the-future-of-health-care-will-be-app-based/&refURL=https://www.google.co.u k/&referrer=https://www.google.co.uk/ The Takeaway Rise of ‘digital therapeutic’ app companies which enable people to improve chronic conditions (eg. diabetes, insomnia). Unlike other sorts of digital health apps, digiceuticals have often been tested for efficacy, approved by regulatory agencies such as the FDA and are prescribed by a doctor Points of Debate / Next Steps ● Will many of the leading ‘digitceuticals’ have separate hardware elements? (eg. Omada Health’s connected scale) ● How will the prescribing and paying for these apps evolve? Will most be covered by insurance? ● What will be the key defensive moat for these companies? (eg. technology, data, partnerships, etc?) “Many apps will compete to treat the same disease, which should spark very rapid innovation—a rare phenomenon in medicine—and perhaps even to lower prices, a rarer one still” - The Economist
- 6. 6 Source: https://www.cnbc.com/2017/12/14/bitcoin-keeps-soaring-but-big-crypto-deals-are-scarce.html The Takeaway M&A in this space is still small but increasingly frequent; shows increasing interest in the space from incumbent and traditional tech co’s, as well as crypto moving into more parts of the everyday economy and a blurring of a definitive distinction between the old, centralised model and new, decentralised approaches Points of Debate / Next Steps ● Will the most successful attempts to use blockchain across verticals come from incumbents, established tech companies, or ‘crypto-native’ entrants? ● Most activity remains in financial services - when will see more of the promised activity in other areas? The Story Target Acquiror Desc Korbit Nexon Listed Korean games co buys second largest Korean exchange Keep Key Shapeshift Large European crypto exchange buys hardware wallet co TransferZero BitPesa Crypto cross-border payments co acquires online payments co Kingdom Trust BitGo Crypto security co buys asset custodian Pacific Private Bank Bankera Crypto-based online bank acquires private wealth mgmt firm Top 3 Key Points ● 2017 saw relatively little M&A in space compared to the sizeable mkt cap of crypto. 2018 has seen number o transactions involving blockchain companies has increased - notably with blockchain companies both as acquirer and target ● Types of M&A include ○ Crypto buying crypto; crypto buying tech; crypto buying financial services; tech buying crypto ● Most of the transactions have involved financial services companies (e.g. payment companies, banks), though some have included other tech verticals (e.g. games co buying nexon) "The question is, can I build it, or do I need to buy it?" … "Talent is scarce, time to development is long, and if your board is breathing down your neck acquisition may be the best strategy." - Meltem Demirors, director of development for Digital Currency Group M&A is driving integration of crypto & non-crypto worlds
- 7. Top 3 Key Points ● Size doesn’t matter. Shazam last reported revenue of $56M, well below usual threshold levels of €100M for automatic review for EC competition probes. At levels below that, however, countries can refer a transaction for referral. Austria did this and was joined by 6 other EU countries. ● Data assets are now a key area of investigation in competition law. Big tech companies have made numerous data-centric acquisitions (e.g. Google/Waze, Facebook/Instagram) that have not been subject to deep competition reviews as they didn’t pass the revenue thresholds. But it’s clear that there is now greater awareness that data is key to driving the competitive dominance of large players and should factor in to analyses, even if the revenue levels of target companies are minimal ● Europe continues to aggressively target US tech. This will be perceived as simply the latest in a long line of attacks by European authorities to seek to address the dominance of US tech giants. Margrethe Vestager, the Competition Commissioners, is outspoken of the need to address this issue. 7 Margrethe Vestager walking the walk on data & competition Source: https://www.theguardian.com/technology/2018/feb/07/apple-shazam-eu-review-purchase-music-app, http://fortune.com/2018/02/07/eu-antitrust-apple-shazam/ The Takeaway European Commission’s decision to review Apple’s proposed $400M acquisition of Shazam draws a new line in how M&A transactions will be reviewed in Europe with data assets now a critical area of focus Points of Debate / Next Steps ● How will EC set about proving adverse competition effects? ● Will Apple have to make concessions to push it through? ● Is this a new norm, and will it impact M&A volumes in Europe? Margrethe Vestager talks the talk AND walks the walk: “Companies need to make sure they don’t use data in a way that stops others competing. It’s possible that…data could be an important factor in how a merger affects competition. A company might even buy up a rival just to get hold of its data, even though it hasn’t yet managed to turn that data into money. We are therefore exploring whether we need to start looking at mergers with valuable data involved, even though the company that owns it doesn’t have a large turnover” - Margrethe Vestager in 2016 ” EU will review Apple’s $400M acquisition of Shazam
- 8. In case you missed it 8 Footnotes Companies What happened? Canyon Bridge Capital A Chinese-backed, California-based PE firm behind failed acquisition of Lattice Semiconductors (blocked by CFIUS) has announced it is shifting focus from the US to Europe, where it will be focused on investing in European tech companies. Fund sees Europe is more open and welcome to Chinese PE capital than US JD.com Chinese tech giant (~$65B market cap) is doubling down on Europe, where it aims to achieve ‘ubiquity’ by 2019. Opening an AI research centre in Cambridge (UK) in 2019 and investing €1B over two years to build a logistics network in France. It will first launch its ecommerce platform and delivery services in France, then the UK and Germany. Uber/Waymo Waymo and Uber have settled their dispute over Uber’s acquisition of Otto and the associated IP for self-driving vehicles. The settlement is worth $245M, paid in shares in Uber. Apple Apple announced it is intending to reduce its cash pile from $163B to $0. Sequoia Capital Sequoia’s growth fund is now rumoured to hit $8B (last reported at $5-6B) and will be a global fund Intel Intel announced a new pair of smart glasses (Vaunt) that are the closest yet to look indistinguishable from normal glasses. From the Verge: Vaunt is simply a system for displaying a small heads-up style display in your peripheral vision. It can show you simple messages like directions or notifications. It works over Bluetooth with either an Android phone or an iPhone much in the same way your smartwatch does, taking commands from an app that runs in the background to control it. Deliveroo Deliveroo reported to have appointed advisors (PWC) to evaluate its strategic options and is said to be considering an IPO (London or New York) for 2019 Softbank Vision Fund Latest numbers disclosed by Softbank shows the SVF had deployed $27.5B as of 1 January. This excluded $860M invested in Wag ($300M) and Auto1 ($560M). Investments are being held at fair value of $29.8B, or 1.08 MoM, driven almost entirely by the stake in NVIDIA.
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