Introduction to startup investments Magnus Naustdal Eirik Feedt - - PowerPoint PPT Presentation

“Introduction to startup investments”

• Education: NHH/ St Gallen
• Arkwright Consulting
• Experience as advisor on

digitalization, restructuring, growth strategy, VDD/CDD and corporate finance

Senior Associate

Eirik Feedt Magnus Naustdal

Senior Associate

• Education: INDØK – NTNU
• Arkwright Consulting
• Experience as advisor on

change management, growth strategy, VDD/CDD and corporate finance

• Education: CBS
• Arkwright X
• Experience as advisor on

growth strategy, pricing strategy, organizational design and M&A projects and pricing

Head of Arkwright X

Esben Anneberg Poulsen

04 September 2018 | 3

Arkwright X is 100% owned by Arkwright Consulting

• Corporate advisory firm, North European network

– Founded in 1987 – Stockholm, Oslo and Hamburg, total ~90 employees – Owned by senior staff

• Working only with private companies

– Sole focus on value creation – Continuous relationships

• Broad industry expertise

– Oil & Gas/ Energy, Construction, Process Industries – Private Equity, Financial Services – Retail/ FMCG, IT & Telecom, Media

Strategy and corporate finance consulting Operations & organisation

Arkwright Consulting covers

Disruptive technology incubation

04 September 2018 | 4

Introduction to Arkwright X

Focus on B2B software companies A startup incubator investing in 4-7 new startups each year Startups will reside in Arkwright offices in 12-18 months Primarily pre-seed and seed phase startups

Pre-seed Seed & venture Other Arkwright investments: Simulation Finance is SaaS for Corporate Financial Planning & Risk Management 3-D printing to provide in-port parts on demand for the maritime and

• ffshore industries

Vilect is automating low-skilled hiring, starting with the retail sector Enables public and private

• rganizations to

easily process, preserve, and access their most valuable documents Creates an intelligent digital twin of building sites which allows for monitoring of field progress in real- time Rethinking insurance by making ‘tribes’ of friends that together can bring down your insurance costs significantly Helps businesses become more successful by enabling them to utilize their greatest asset to the full Automated real- time monitoring and analysis of news and social media for banking and finance FJONG makes it easy to rent and share clothes from a digital and intelligent closet

‘Graduated’ from AX

Spacemaker is disrupting urban planning with the use of AI Wireless break technology for Mobility, Sports and Kids Safety Current companies in incubator:

Our investments so far

Removing the pain

• f physical keys

and the need for access planning

04 September 2018 | 6

Agenda

Increased startup activity and the drivers behind it How the big corporates adjust to the new reality How to pick the right investments Startup valuation at a glance

04 September 2018 | 7

Agenda

Increased startup activity and the drivers behind it How the big corporates adjust to the new reality How to pick the right investments Startup valuation at a glance

04 September 2018 | 8

Introduction to the startup funding options

Public/government grants Equity funding Debt / convertible debt funding

Public financing should be maximized to the extent possible Money you receive in exchange for issues share of your stock Several types of equity investors exist: Borrowing cash you will have to pay

• back. Examples: Small business loans,

accounts receivable (AR) line, venture debt. Convertible debt is essentially a mash- up of debt and equity (see deep dive on convertible notes)

Pull yourself up without the help of

• thers (this is not

actually “fundraising” as such) Friends, family and fools

• Less formal than

receiving funds from professionals

• Make sure you

formalize the process and are transparent with regards to investment risk

• Limited value

contribution besides financing

• Use personal savings,

get home equity/ personal loan (or use credit cards)

• Avoids dilution and
• utside interference,

but increases your

• wn risk (by using
• wn savings) and can

slow down development

Raising financing from a large number

• f people

Smaller professional

• perations – often 1

person offering equity and mentorship

• Investing in pre-seed

and seed phase

• Arkwright X has a

network with several capable angels / industry experts

Incubators, accelerators, seed funds (‘såkornfond’) – investing in pre- seed (and seed) phase Bootstrapping The 3 Fs Crowdfunding Angel investors (Pre-) seed funding firms Venture Capital

Dagpenger Oversikt over støtteordninger

EU finansiering

Typically invest in companies past seed stage – invest larger amounts and demand more control

04 September 2018 | 9

Typical funding rounds

Time Pre-funding Pre-seed (angel) Seed Series A Series B

15-60 60-120 0,5-3 3-15

Typical amounts of funding raised in the Nordics (MNOK)

Typical valuation ranges (MNOK):

10-20 20-80 80-150

Bootstrapping, government grants 3Fs, angels, (pre-) seed funding firms Angels, seed firms/VCs, early stage VCs Early stage VCs VCs

150-400

Ranges can vary significantly from case to case and from country to country

Source: Pitchbook and Arkwright research

We are seeing A LOT of new startups

~3

per second

~11,400

per hour

~274,000

per day

Source: GEM global report 2016

04 September 2018 | 11

Startup investing has been increasing in recent years…

Investments in European startups

1,41 1,57 1,43 1,65 1,95 2,79 3,32 7,91 4,98 6,38

1 2 3 4 5 6 7 8 9 2007 2008 2009 2010 2011 2012 2013 2014 2015 2016

Investment in startups in Europe

(In Bn €)

Source: Startup hubs Europe

04 September 2018 | 12

…also in the Nordics

181 339 708 793 2015 2014 2016 2017 +338% 846 2,150 2017 2016 2014 2,718 1,820 2015 +154%

NORDICS1

Number of startup tech investments

NORDICS1

Amount of capital invested

# of investments mUSD invested

Source: The Nordic Web

• 1. Norway, Sweden, Denmark, Iceland and Finland

The Nordics are leading in Europe

Source: GEM global report 2016, 2016 Norwegian Funding Analysis

Nordics 50% Nordics 8% Europe 92% Europe 50%

50% of Europe’s >1 BUSD unicorn businesses from the Nordics GDP Unicorns

04 September 2018 | 14

Sweden is still far ahead of rest of Nordics

84 143 123 99 388 87 120 125 442 65 78 30 11 17 20 2015 2016 2017 446 350 198 274 194 196 405 233 172 1,318 22 51 1,007 85 1,674

# of investments mUSD invested

# of investments per country Amount of capital invested per country Iceland Norway Denmark Finland Sweden

Source: The Nordic Web

04 September 2018 | 15

Stockholm is a unicorn stable

Source: OECD

Stockholm produces the second-highest number

• f billion-dollar tech

companies per capita, after Silicon Valley

04 September 2018 | 16

More startups and more investments in startups

More startups More startup investments

04 September 2018 | 17

The drivers behind the growth in number of startups

Lower price of core technologies Increased connectivity Access to capital

Drivers

04 September 2018 | 18

Reasons individuals invest in startups

Looking super smart when you're winning startup picks become hot trending topics Potentially generating uncorrelated outsized returns and provides portfolio diversification The desire to generate enhanced investment returns for their investment portfolio for retirement and beyond Craving to be involved in driving positive change, bringing new solutions to life

04 September 2018 | 19

Reasons corporates invest in startups

Effect of innovation is greater than ever

Source: Innosight/Richard N. Foster/Standard & Poor’s

1955 1975 1995 2015 61 31 23 17

61 year

life span

17 year

life span

Effect of innovation is greater than ever

Source: Innosight/Richard N. Foster/Standard & Poor’s

Old businesses 25% New businesses 75%

1955 1975 1995 2015 61 31 23 17

61 year

life span 2027

75% of the S&P 500 will be replaced by 2027

17 year

life span

04 September 2018 | 22

Investing in startups is also a way to mitigate risk

Source: Accenture College Graduate Employment Study

CVC makes it possible to pursue several technologies and business models at a limited cost of capital and resources relative to in-house R&D efforts Enhances exposure to markets outside core and likelihood of discovering attractive new markets and

• fferings

Increases knowledge of innovation trends in the market and thus reduces risk of falling behind competitors

04 September 2018 | 23

Talent is looking outside large corporates for jobs

20% 16% 15% 14%

Only 1 in 7 students want to work for a large company when they graduate

Source: Accenture College Graduate Employment Study

2013 2014 2015 2016

04 September 2018 | 24

Agenda

Increased startup activity and the drivers behind it How the big corporates adjust to the new reality How to pick the right investments Startup valuation at a glance

04 September 2018 | 25

Corporate investments in startups is rising

Global transaction value in BUSD (number of transactions)

Corporate venture capital activity

989 1.459 1.311 2017 1.791 2013 1.501 2014 2015 2016 Transactions (#) Investment (BUSD)1)

Source: CB Insights, Arkwright research 1) Deal value (BUSD) includes deals involving CVC's, which often involve non-CVC investors as well

9,9 17,4 29,1 26,5 31,2

04 September 2018 | 26

Corporate investments in startups is rising

989 2015 1.791 2013 2014 2016 2017

+215%

Source: CB Insights, Arkwright research 1) Deal value (BUSD) includes deals involving CVC's, which often involve non-CVC investors as well

9,9 31,2

Global transaction value in BUSD (number of transactions)

Corporate venture capital activity

04 September 2018 | 27

CVC is also picking up in Norway

"Innovation is an important focus area for OBOS. We get inspiration and good ideas from start-ups. Our biggest motivation is to be the first customer when something new appears” Simon Vennerød-Diesen, project manager OBOS “DNB’s objective is to deliver the best experience to our customers, to increase our speed and innovation power. A tool for achieving this is to invest in innovative start-ups” Kjerstin Braathen, CFO, DNB «We usually look at two dimensions when evaluating start-ups; like other investors we want financial returns, but the investments must also have a strategic value for both the start-up and Orkla” Espen Wikk, Orkla "Innovation is supercritical for Telenor. It's just simply more power in the way startups run innovation than what we get internally. This power is something we must take part of and use in our own transformation” Jon Gravråk, Chief Digital Officer, Telenor

04 September 2018 | 28

The different models for CVC

Purpose Structure Talent KPIs

Corporate Investment

Gain direct business and technology experience in emerging areas Direct investment, funding each deal, closely related to business divisions and future business

• pportunities

Internal corporate talent Measurement of direct strategic inputs

Internal Dedicated Fund

Emerging business and technology with more autonomy for step out options Corporate acts as LP in a 100% captive fund1. Greater fund autonomy Mixture of external VC hired and internal corporate talent Primarily financial with a level of strategic exposure

Externally Operated Fund

Develop internal VC capabilities whilst gaining market awareness and understanding GP external firm LP corporate part investor Decision on investment GP in fund parameters Experienced VCs and potential secondees from corporate Predominantly ROI CVC models

04 September 2018 | 29

There are many ways for corporates to work with startups

One-off events

(competitions such as hackathons)

Sharing resources

(free tools; co-working spaces)

Business support

(accelerators; incubators)

Acquisitions

(acqui-hire and buying startups)

Investments

(corporate venturing)

Partnerships

(co-development; procurement from startups)

First customer

(take on the risk and be first pilot or ‘real’ customer)

Advisory

(provide mentorship and strategic guidance to startup)

04 September 2018 | 30

Startups and corporates need to connect

Corporates Startups

New insights about innovation & business models Motivation and retention of creative / innovative employees Creating entrepreneurial mindset among employees Test new ideas and concepts Gaining new potential customers Working with a large established player with abundant resources Testing ideas and products, testing product-market fit Access to network

04 September 2018 | 31

Agenda

Increased startup activity and the drivers behind it How the big corporates adjust to the new reality How to pick the right investments Startup valuation at a glance

04 September 2018 | 32

It all looks very good but…

04 September 2018 | 33

…majority of startups fail

“9 out 10 startups will not be successful”

Source: Fortune magazine

04 September 2018 | 34

There is no formula for successful startup investing

Investing in early-stage startups is truly an art “there’s no such thing as a formula for success.”

Tips & tricks to startup investing

Find an edge Go to the startups Build your network Do your Due Diligence Decide on your focus

04 September 2018 | 36

Find an edge – What makes you attractive as investor?

A particular skillset

Legal Business development Programming Design

Industry knowledge Available time to contribute Strong Network Other? Not room for all interested investors in the most attractive deals Investing is getting more mainstream, there is more capital available More interesting and fun to invest in something where you can add value

Why is it so important Examples

04 September 2018 | 37

Decide on your focus

Industry Geography Stage Customer base Software Hardware Non-tech Norway Nordics Europe Pre-seed Seed Series A B2B B2C Company format Marketplace SaaS Physical goods

04 September 2018 | 38

Go to the startups

Network expansion Learning and development Relevance and trust Why Where1

• 1. Examples are all from Oslo

04 September 2018 | 39

Build your network

Deal sourcing Next funding round

You

Angels Networks Incoming Proactive Investor A Investor B Investor C Investor D

AX - our sources (example) AX - Investor friends (example)

Arkwright X example Various angels Inbound Other investors

04 September 2018 | 40

Do your due diligence

Market

Market size, growth and adoption potential Cyclicality Value chain dynamics Industry profit pool Market shares & peer positioning Market trends (e.g. tech development)

Company

Differentiators & uniqueness Team quality Uniqueness, disruption & entry barriers Scalability of business model Commercialization risk & requirements Acquirer fit/applicability

Financials

Organic revenue growth Margin improvement potential CAPEX need M&A opportunities Financials robustness Margin level & sustainability Funding requirements and valuation

Customer

Customer types (existing and new) Relationship (customer/company driven) Customer needs Customer perception / feedback

Typical Commercial DD Arkwright “Innovation DD”

Market size, growth and adoption potential Cyclicality Value chain dynamics Industry profit pool Market shares & peer positioning Market trends (e.g. tech development) Differentiators & uniqueness Team quality Uniqueness, disruption & entry barriers Scalability of business model Commercialization risk & requirements Acquirer fit/applicability Organic revenue growth Margin improvement potential CAPEX need M&A opportunities Financials robustness Margin level & sustainability Funding requirements and valuation Customer types (existing and new) Relationship (customer/company driven) Customer needs Customer perception / feedback

For many startups the key to understand is market adoption and growth potential When evaluating a startup the key is to focus on financial value drivers and ensure that the valuation and funding requirements are reasonable and fair Understanding the customers, including their needs, perceptions, patterns etc. is critical For startups a particularly thorough analysis is needed on team, tech scalability, risks, fit with acquirer, etc.

04 September 2018 | 41

Our DD template

Value proposition & customer need Arkwright fit (synergies with client base etc.) Current valuation & funding terms Team quality Uniqueness, disruption & entry barriers Addressable market Scalability of business model Commercialization requirements, timeline and risk Current case review criteria

04 September 2018 | 42

Agenda

Increased startup activity and the drivers behind it How the big corporates adjust to the new reality How to pick the right investments Startup valuation at a glance

04 September 2018 | 43

Startup valuation

Valuation Time

Milestone

• Valuations will not increase linearly over time (since

the last funding round)

• Startup valuations are based on a calculation of risk

and reward. Valuations increase when…

• …the risk goes down
• …the expected reward goes up
• In practice risk is reduced (or reward is increased)

when particular milestones are reached

Understand the milestones that drives your valuation and create the right plan to achieve those milestones in the right timeframe

Customer traction & adaptability (market fit) Repeatable, Scalable Sales Model Typical milestones that impact valuation: Having and hiring fantastic team Reaching profitability Product breakthrough Milestone Milestone Revenue & growth driven

04 September 2018 | 44

Example of startup valuation models

Berkus

Valuation based on the assessment of 5 key success factors

1

Risk factor summation

Valuation based on a base value adjusted for 12 standard risk factors

2

Scorecard valuation

Valuation based on a weighted average value adjusted for a similar company

3

Comparables

Valuation based on transactions including companies similar to yours

4

DCF

Valuation based on the sum of all future cash flows generated

5

First Chicago

Valuation based on the weighted average of 3 valuation scenarios

6

Venture Capital

Valuation based on the return expected by the investor

7

When valuating pre-seed and seed phase startups we use parts of the above models, but the most important for us is to look at the characteristics of the company/deal and compare with similar companies/deals

04 September 2018 | 45

We offer the opportunity to experience the start-up world in Arkwright X; internships in Arkwright Consulting also relevant

Please post your application at:

• Internship – Arkwright Consulting:

https://www.koble.co/companies/arkwright/postings/08Ofjk

• Internship – Arkwright X:

https://www.koble.co/companies/arkwright/postings/0V1fbk

The application must include:

• Cover letter
• CV
• Transcript of grades, both academic and secondary

school (vgs)

• Other relevant information

Internship – Arkwright Consulting

• 6+ weeks during 2018/2019
• Flexible internship program;
• Summer and / or off-cycle
• Application deadline: September 9th

Internship – Arkwright X

• An exciting chance to work with our start-up incubator
• During Summer 2019
• Application deadline: September 9th