“Introduction to startup investments”verdintnu.no/wordpress/wp-content/uploads/2018/09/... · A...

“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 FeedtMagnus Naustdal

Senior Associate

• Education: INDØK – NTNU

• Arkwright Consulting


change management, growth

strategy, VDD/CDD and

corporate finance

• Education: CBS

• Arkwright X


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 consultingOperations & organisation

Arkwright Consulting covers

Disruptive

technology incubation


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

offshore industries

Vilect is automating

low-skilled hiring,

starting with the

retail sector

Enables public and

private

organizations 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

of physical keys

and the need for

access planning


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


Agenda






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

others (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

outside interference,

but increases your

own risk (by using

own savings) and can

slow down

development

Raising financing

from a large number

of people

Smaller professional

operations – 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

firmsVenture Capital

Dagpenger Oversikt over

støtteordninger

EU finansiering

Typically invest in

companies past seed

stage – invest larger

amounts and demand

more control


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

~3per second

~11,400per hour

~274,000per day

Source: GEM global report 2016


Startup investing has been increasing in recent years…

Investments in European startups

1,411,57 1,43

1,651,95

2,79

3,32

7,91

4,98

6,38

0

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


…also in the Nordics

181

339

708

793

20152014 2016 2017

+338%

846

2,150

201720162014

2,718

1,820

2015

+154%

NORDICS1

Number of startup tech investments

NORDICS1

Amount of capital invested

# o

f in

vestm

en

ts

mU

SD

in

vested

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


Sweden is still far ahead of rest of Nordics

84143123

99

388

87120 125

442

6578301117 20

2015 2016 2017

446350

198274

194 196405

233172

1,318

2251

1,007

85

1,674

# o

f in

vestm

en

ts

mU

SD

in

vested

# of investments per country

Amount of capital invested per country

Iceland Norway Denmark Finland Sweden

Source: The Nordic Web


Stockholm is a unicorn stable

Source: OECD

Stockholm produces the

second-highest number

of billion-dollar tech

companies per capita,

after Silicon Valley


More startups and more investments in startups

More startupsMore startup

investments


The drivers behind the growth in number of startups

Lower price of core technologies

Increased connectivity

Access to capital

Drivers


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


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


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

offerings

Increases knowledge of innovation trends in the market

and thus reduces risk of falling behind competitors


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


Agenda






Corporate investments in startups is rising

Global transaction value in BUSD (number of transactions)

Corporate venture capital activity

989

1.4591.311

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


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


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


The different models for CVC

Pu

rp

ose

Stru

ctu

re

Talen

tK

PIs

Corporate Investment

Gain direct business and

technology experience in

emerging areas

Direct investment, funding each

deal, closely related to business

divisions and future business

opportunities

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


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)


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


Agenda






It all looks very good but…


…majority of startups fail

“9 out 10 startups

will not be successful”

Source: Fortune magazine


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 networkDo your Due

Diligence

Decide on

your focus


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


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


Go to the startups

Network expansion Learning and development Relevance and trust

Wh

yW

here

1

1. Examples are all from Oslo


Build your network

Deal sourcing Next funding round

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

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

Arkwright X example

Various

angelsInbound

Other

investors


Do your due diligenceM

arket

Market size, growth and adoption potential

Cyclicality

Value chain dynamics

Industry profit pool

Market shares & peer positioning

Market trends (e.g. tech development)

Com

pan

y

Differentiators & uniqueness

Team quality

Uniqueness, disruption & entry barriers

Scalability of business model

Commercialization risk & requirements

Acquirer fit/applicability

Fin

an

cials

Organic revenue growth

Margin improvement potential

CAPEX need

M&A opportunities

Financials robustness

Margin level & sustainability

Funding requirements and valuation

Cu

stom

er 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



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.


Our DD template

Value proposition & customer need

Arkwright fit (synergies with client base etc.)

Current valuation & funding terms

Team quality


Addressable market


Commercialization requirements,

timeline and risk

Cu

rren

t

case review

criteria


Agenda






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


Example of startup valuation models

Berkus Valuation based on the assessment of 5 key success factors1

Risk factor summationValuation based on a base value adjusted for 12 standard risk

factors2

Scorecard valuationValuation based on a weighted average value adjusted for a

similar company3

ComparablesValuation based on transactions including companies similar to

yours4

DCF Valuation based on the sum of all future cash flows generated5

First Chicago Valuation based on the weighted average of 3 valuation scenarios6

Venture Capital Valuation based on the return expected by the investor7

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


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

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