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1 Investing in Financial Technology & Consumer Digital Technology Companies Copyright © 2015 Frost & Sullivan. All rights reserved. We Accelerate Growth www.frost.com
TABLE OF CONTENTS
1. OBJECTIVES 3
2. INTRODUCTION TO DIGITAL ERA 4 – CONSUMER TECHNOLOGY TRENDS
3. INTRODUCTION TO DIGITAL ERA 6 – FINANCIAL TECHNOLOGY TRENDS
4. INTERNET OF THINGS 7
5. WEARABLES 15
6. EMERGING SOCIAL MEDIA 26
7. ECOMMERCE 33
8. EPAYMENT 44
9. CROWDFUNDING 53
10. BIG DATA & PREDICTIVE ANALYTICS 64
11. CYBER SECURITY 73
12. DATA CENTRE & CLOUD SERVICES 85
13. BLOCKCHAIN 95
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1. OBJECTIVES
Technology today is radically transforming our lives in Investors in these companies have so far been a way we have not envisioned before. Smartphones, venture capital firms that understand technology Internet of Things (IoT), Bitcoin, ecommerce, and trends and valuation parameters well. While most of smartwatches, among others, are changing the these technologies have an exciting future, there are way we live. At the same time, technologies like Big significant risks involved as well. Hence, it is desirable Data and cyber security are transforming the way for retail investors to understand the technologies, businesses are run. trends, and potential risks before investing in these companies. The promise of new technologies is capturing tremendous investor interest. In fact, it is estimated This research paper aims to provide retail investors that approximately US$120 billion will be invested with valuable information on 10 key technology areas, by Venture Capital firms (VCs)1 in 2015, with the including the major trends, business models, risks, bulk of funding going into technology companies. and valuation drivers. The overall goal is to equip Private companies with more than US$1 billion in prospective investors with basic knowledge on the valuation, termed unicorns, are increasingly common potential of emerging technologies to enable them today. There are more than 140 technology unicorns to make well-informed investment decisions about globally as of September 20152. It is expected that these technology companies. The technology areas many of these companies will go for public listing covered in this research paper include: in the near future, drawing significant interest from retail investors.
Figure 1: Technology Coverage3
CONSUMER TECHNOLOGIES FINANCIAL TECHNOLOGIES
INTERNET OF THINGS EPAYMENT
WEARABLES CROWDFUNDING
SOCIAL MEDIA BIG DATA & PREDICTIVE MODELING
ECOMMERCE CYBER SECURITY
CLOUD & DATA CENTRE
1 Source: cbinsights, 2015 BLOCKCHAIN 2 Source: cbinsights, 2015 3 Some technologies may have a broader set of applications but only the financial or consumer aspects are covered in this research paper.
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2. INTRODUCTION TO THE DIGITAL ERA – CONSUMER TECHNOLOGY TRENDS
The past 20 years have been a remarkable era of rapid chess match in 1997, had a performance figure of improvements in digital consumer technology. Digital 11.38 GFLOPS or Giga Floating Point Operations Per technology, once limited to the confines of enterprise Second versus the 69 GFLOPS of a Xiaomi Mi4i). and big business, has now reached consumers worldwide at an unprecedented pace. Even poor While the smartphone and PC markets are considered people in emerging markets who may not even relatively mature, the rapid pace of technological have access to electricity, may own mobile phones advancements remains unabated and set to reinvent that have more processing power and memory than the way we work. These technologies and their the supercomputers of the 1990s (the Deep Blue enabling drivers are described below. supercomputer that defeated Garry Kasparov in a
TRENDS SUPPORTING THE GROWTH OF CONSUMER TECHNOLOGIES
Figure 2: Key Trends in Consumer Technologies
FALLING PRICE OF COMPUTATION CONNECTED INTERNET OF & STORAGE SENSORS THINGS
MINIATURISATION OF PERSONAL WEARABLES DEVICES MINIATURISATION OF COMPONENTS SOCIAL SOCIAL INTERACTIONS USING NETWORKS MULTIPLE DEVICES ENABLING DRIVERS
SALES & PURCHASE RADICAL IMPROVEMENTS IN LAST- FROM COMPUTERS & ECOMMERCE MILE CONNECTIVITY SMARTPHONES
FALLING PRICE OF COMPUTATION AND STORAGE Declining prices is a major catalyst spurring the The popular Moore’s Law observes that processors growth of consumer technology applications. More and memory chip performance will keep doubling consumers across the globe can now afford to own every 18 months. This indicates that performance a smartphone or PC. What’s more a larger number increases by 16 times every 6 years. As a result, of smaller devices can be given the same computing the price of a processor or memory with the same power of smartphones from previous generations, performance keeps reducing. For example, a US$125 leading to the proliferation of smart sensors and smartphone today has double the processing speed wearables into our everyday lives. of the iPhone 3G that sold at US$600 without a contract at the time of its launch in 2009.
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Figure 3: Average Price in US$ of 1 Megabyte Memory, RADICAL IMPROVEMENTS IN LAST-MILE 2008-2015 CONNECTIVITY Consumer devices do not only require processing power and memory; they also need fast connectivity to be truly useful. With the rapid development of wireless broadband technology in the form of ubiquitous and more efficient networks such as 3G, 4G, WiFi and Bluetooth, it is easier for new-generation consumer devices to be connected to a network and other devices. For example, modern cars use concierge and map services using 3G connectivity. Such solutions would not be possible without near- ubiquitous 3G connectivity. Similarly, Samsung Gear and Apple Watch connect with the smartphone using Bluetooth 4.0 that consumes only a fraction of power Source: jcmit.com, Frost & Sullivan Analysis compared to previous standards.
With this connectivity, consumers can now shop from MINIATURISATION OF COMPONENTS their mobile phones, track their fitness levels using A direct consequence of improving chip performance fitness bands, check the security of their homes using is that similar computing power can now be connected IP cameras, and even remotely control the compressed in a smaller chip, which in turn, can be thermostats of their homes. fitted into a smaller device. A smartwatch today has the same memory and processing speed of a The combination of smaller, cheaper and more smartphone 3 years ago and of a PC from 6 years powerful devices with ubiquitous connectivity are ago. In future, even smaller components used in our key drivers behind the rapid progress in consumer clothing or smart glasses can have similar processing technologies. power, making these devices more useful to us.
Figure 4: First Devices with 1 GHz processor and Their Launch Year
COMPAQ TOSHIBA TG01 SAMSUNG DESKPRO EN Year: 2009 GALAXY GEAR Year: 2000 Year: 2013
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3. INTRODUCTION TO THE DIGITAL ERA – FINANCIAL TECHNOLOGY TRENDS
Financial technology (Fintech) refers to a business enabled by improvements in the cloud and cyber that provides financial services using software or security technologies. the Internet. Essentially, it brings many innovations in consumer technology such as web portals and Leveraging these technologies, innovative fintech smartphones to the financial world. Smartphones start-ups are revolutionising the once stagnant are being used to enable payments (epayments), financial services industry by enabling payments, the web is being deployed to raise funds for ideas loans and other financial services, which so far has and companies (crowdfunding) while big data been monopolised by banks and other major financial technology is helping to facilitate credit scoring institutions. and fraud detection. These advancements are being
TRENDS SUPPORTING THE GROWTH OF FINANCIAL TECHNOLOGIES
Figure 5: Key Trends in Financial Technologies
INCREASING INTERNET & EPAYMENT CROWDFUNDING SMARTPHONE PENETRATION
BIG DATA & CYBER IMPROVING CYBER SECURITY PREDICTIVE SECURITY ANALYTICS
ENABLING DRIVERS INFRASTRUCTURE BLOCKCHAIN ADOPTION OF CLOUD AND BIG DATA TECHNOLOGY
INCREASING INTERNET AND SMARTPHONE fintech areas would not have grown. Without strict PENETRATION security measures, we would not be able to make The Internet and smartphone are key enablers payments with our phones. of fintech. As the medium for crowdfunding websites, the Internet enables companies to raise Thus, improvements in cyber security play a huge funds without going to VCs or banks. Similarly, role in the uptake of financial technology. the smartphone facilitates innovative payment options like Apple Pay and smartphone-based ADOPTION OF CLOUD AND BIG DATA card readers like Square. Naturally, the larger Cloud and Big Data are the other two enabling the user base for Internet and smartphone, technologies powering fintech. On the one hand, the faster the growth for fintech companies. cloud technologies allow fintech start-ups to quickly scale up their infrastructure according to their IMPROVING CYBER SECURITY business growth. On the other hand, start-ups use Security is the number one concern associated with Big Data and Analytics for fraud detection and credit performing online transactions, without which most scoring.
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4. INTERNET OF THINGS
The Internet of Things (IoT) refers to the connectivity to make up less than 10% of total connected devices of physical objects (as opposed to devices like the by 2020. smartphone that are directly used by people), that are able to collect and exchange data. Physical The market size of IoT spending in the Asia-Pacific devices can be sensors, electronics and other objects region is estimated at US$24.2 billion in 2015. Growth such as thermostats and IP cameras. In contrast to is expected to be rapid at a compounded annual how the Internet is a way to connect people via growth rate of 26.8% to reach US$79.3 billion in 5 personal devices like PCs and smartphones, IoT aims years’ time. China is projected to be the largest IoT to interconnect devices, machines, services, including market in the region at US$36.8 billion in 2020 due people, allowing for virtually endless connections to numerous smart city developments undertaken and opportunities to take place. by the government. Japan is likely to follow with a market size of US$16.1 billion where automation IoT is expected to accelerate automation of a large is increasingly being adopted to address the array of domestic and industrial areas such as challenges of an ageing population and rising wage home appliances, electric grids, agriculture, traffic costs. Emerging countries in Southeast Asia such as management and automobiles. For example, home Indonesia, the Philippines, and Malaysia are poised to appliances can be switched off automatically when experience the fastest growth due to their relatively sensors at the gate detect that users have left the lower starting base in IoT spending. home. US households are reaping significant cost savings in utility bills with the installation of home IoT applications are influencing a significant number motion sensors. While consumers in the Asia- of areas such as home appliances, agriculture, Pacific region are becoming increasingly aware of automotive, transportation, building management, the benefits IoT can bring to their lives, with similar factory management, industrial automation, adoption trends expected as the technology matures. healthcare, energy, and power systems. The Frost & Sullivan predicts that by 2020, there will technology is enabling banks to monitor and manage be almost 50 billion connected devices globally, their ATM kiosks. However, the biggest impact of IoT averaging to approximately 10 connected devices is being seen in the transportation, energy, and home per person. Although smartphones and laptops form appliance segments. the bulk of connected devices today, they are likely
Figure 6: Industries Adopting IoT Technology
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KEY DRIVERS & RESTRAINTS
Figure 7: Drivers & Restraints of IoT Industry Growth
GROWTH DRIVERS GROWTH RESTRAINTS
IMPROVEMENTS IN THE COST & SECURITY, DATA PRIVACY AND FUNCTIONALITY OF SENSORS SOVEREIGNTY CONCERNS
GOVERNMENT SMART CITY CHALLENGES IN JUSTIFYING THE DEVELOPMENTS DRIVING RAPID IOT RETURN ON INVESTMENT PROLIFERATION COMPETING STANDARDS AND MAJOR IMPACT ON EFFICIENCY & WALLED GARDEN APPROACH CUSTOMER RESPONSIVENESS OF INDUSTRIES
UBIQUITOUS CONNECTIVITY AND THE PROLIFERATION OF SMART DEVICES
KEY DRIVERS While IoT and smart city are different concepts, IoT provides the necessary technological tools for policy 1. IMPROVEMENTS IN THE COST AND makers to capture data and arrive at better policies FUNCTIONALITY OF SENSORS and decisions to improve people’s lives. As part of IoT involves the use of sensors to capture useful data its ambition to become the world’s first smart nation, about its environment. Sensors have been around for the Singapore government is undertaking various some years; a common example is the use of motion smart city initiatives including installing sensors sensors in public toilets to activate the automatic and cameras in various public infrastructures to flush, electronic soap dispenser and sensor tap. In collect data on urban density, pollution, and traffic short, IoT and sensing technologies go hand in hand conditions. Likewise in countries such as Australia, as it aims to connect these sensors. government subsidies are helping to stimulate the adoption of Automated Meter Readers (AMRs) for The declining cost of sensors and increasing the utilities sector. miniaturisation are key drivers in the uptake of IoT. Sensors have evolved to become economical To fund the various measures, government agencies and small enough to be embedded in a range of are striking up partnerships between public ubiquitous objects. For example, the accelerometer and private sectors. Government initiatives and (sensor to measure acceleration or movement of consortiums are key drivers in accelerating the a device) can be easily fitted in a smartphone and development of IoT to reap the critical mass. costs around US$1. The cost of sensors is expected to further decline between 25% and 40% over the next 3. MAJOR IMPACT ON EFFICIENCY AND 3 years. CUSTOMER RESPONSIVENESS OF INDUSTRIES IoT is pivotal in enhancing the competitiveness of 2. GOVERNMENT SMART CITY DEVELOPMENTS industries through the use of enabling technologies. SPURRING RAPID IOT PROLIFERATION Enterprises have found that IoT brings about better In many countries, the public sector is leading the utilisation of costly assets such as transportation way in IoT proliferation with various smart city fleets. With IoT, modern transportation companies initiatives both at the national and regional levels. can pinpoint the exact location of their vehicles, the
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time taken to travel between locations, resting times, plant or hack into a medical device. For example, the and even factors such as fuel efficiency, all thanks to Stuxnet virus attack in 2013 that brought down Iran’s GPS vehicle tracking systems. entire nuclear plant via a cyber worm highlights the vulnerability of critical infrastructure and importance As an another example, in early 2014, the US of security sometimes taken for granted in an National Highways published two automotive recall Internet-driven era. These threats are expected to announcements – one from Tesla Motors and the slow down IoT deployment until the concept evolves other from General Motors – due to fire risks. As to become more technologically mature and reliable. the Tesla cars came equipped with 3G connectivity, 29,000 cars in people’s garages were fixed overnight 2. JUSTIFYING THE RETURN ON INVESTMENT simultaneously via a software upgrade performed Despite the potential advantages IoT can bring to remotely. IoT technology enabled Tesla to incur industries, some enterprises struggle to quantify minimal costs in rectifying the issue. the return on the investment needed to realise the value of the technology. While in sectors like On the other hand, General Motors’ cars did not transportation, the virtues of IoT are clear, however, come with high-speed connectivity at that time. there is a lack of quantifiable benefits and cost Consequently, 380,000 vehicles had to be manually savings of IoT implementation in other use cases. For taken to the dealers, incurring a much higher cost. example, smart meters or AMRs were one of the most The case highlights the tangible benefits of IoT that talked about IoT implementations with governments enterprises cannot afford to ignore. in the UK and Australia investing billions of dollars in the endeavour. However, an audit of smart meter 4. UBIQUITOUS CONNECTIVITY AND investments by the State of Victoria in Australia PROLIFERATION OF SMART DEVICES concluded that any cost saving by smart meters The use of Machine-to-machine (M2M) is evolving was compensated by the higher cost of the meters. and converging from a closed network using diverse Due to cases like this, there is little willingness to technologies such as Ethernet to an all-IP network. embark on costly investments by enterprises in The use of wireless networks and migration to the certain industries. Moreover, the relatively low cost IPv64 provide reliable data connection to support of manpower in emerging Asia-Pacific nations the exchange of data across ubiquitous things signal that enterprises are not prepared to replace without direct human intervention. The 3G and 4G manpower with autonomous machines. mobile networks enable cost effective and robust wireless data connections to end user devices. The 3. COMPETING STANDARDS AND WALLED pervasiveness of cellular technology coupled with GARDEN APPROACH the increasing use of WiFi in places with lower The growth potential offered by IoT is attracting the coverage also provides seamless connection for real- attention of numerous vendors offering proprietary time exchange of mission-critical applications. At systems around platforms and applications to the same time, the proliferation of smartphones will enterprises. In doing so, competing standards are be instrumental as gateways to access and control being established to determine the requirements other connected devices such as connected home around power, hardware devices, capabilities appliances. and types of use. At present, enterprises find the multiple standards confusing, and are concerned KEY RESTRAINTS about the lack of interoperability among competing standards. Given the uncertainty of the standards 1. SECURITY AND DATA PRIVACY CONCERNS that are likely to lead the industry in time to come, Security remains a key concern among people, enterprises are adopting a wait-and-see approach policymakers, and industries in adopting IoT. for standards to mature. The hesitation is likely to One of the risks in connecting equipment, public delay implementation plans over the short-term. infrastructure, and various objects is that data from those devices can be vulnerable to theft, damage and In addition to the confusion, most vendors adopt a malicious attacks. From an enterprise perspective, walled garden approach to protecting their territories IoT has the potential to cripple a manufacturing by selling hardware devices that come with a software
4 IPv6 refers to the latest version of internet protocols which makes it possible to assign IP addresses to a much larger set of devices compared to the previous versions.
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lock-in. Enterprises that deploy their systems are making system integration a challenge, inevitably effectively prevented from procuring solutions from delaying decisions in implementing IoT solutions. competing vendors. The lack of interoperability is
VALUE CHAIN AND KEY BUSINESS MODELS VALUE CHAIN
The basic IoT value chain comprises five key components as illustrated in Figure 8.
Figure 8: The Internet of Things Value Chain
OBJECTS TRANSLATION CONNECTIVITY PLATFORM APPLICATION
As described above, the IoT value chain has five meters), GE (smart meters and industrial sensors), components: Cooper Industries (electric grid sensors) and STMicroelectronics (motion sensors). 1. Objects refer to ubiquitous things that can be connected to the Internet, encompassing consumer 2. Translation refers to the capturing, storing and electronics, sensing devices, embedded systems, sharing of data across devices using a local network. controllers, and virtual objects. Examples include The key components of translation are short range smart thermostats, IP cameras, and smart meters. wireless sensor networks and wireless transmitting Leading players in this segment are Cisco, Nest modules. Examples include NFC, Bluetooth, wireless (Google subsidiary offering smart home solutions), sensor networks and RFID networks. Samsung (smart refrigerators), Itron (smart
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3. Connectivity refers to the connection of sensors host the IoT platform (e.g., Telstra hosts Jasper’s in the field, factory or home to the Internet or private IoT platform) to make it easier for IoT device and networks. They include wired and wireless networks, application providers to use their network and enterprise and service provider gateways and network manage their apps. AT&T goes one step further management. Broadband and 3G/4G networks are by offering a built-in wireless home networking some options. Major connectivity providers are telcos platform covering electrical appliances, security and such as SingTel, AT&T, and Celcom. digital media entertainment as a single subscription package (with upfront payment for devices). AT&T Since most IoT applications require wireless has achieved a one-stop shop approach by entering connectivity, wireless operators are trying to adopt into partnerships with vendors that are leading a central position in the value chain. They typically players in their area of expertise.
Figure 9: AT&T Digital Life Platform
SECURITY CONTROL WIRELESS ANALYTICS SYSTEM PANELS SENSORS E.g., Honeywell E.g., Cisco E.g., Aeon Labs E.g., Aeon Labs
AGGREGATED BY TELECOM OPERATORS
AT&T’S DIGITAL LIFE PLATFORM A B
RETAIL STORES DIRECT SELLING
DIY package sold at retail Professional installation at stores home
AGGREGATOR OPERATION AND MAINTENANCE Telecom vendors Telecom vendors and ecosystem of partners
INSTALLATION ANALYTICS AND MONITORING Telecom vendors Third-party analytics and monitoring (or DIY) stations/telecom vendor monitoring station
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4. Platform refers to an infrastructure layer for up selling a remote baby monitoring device, follows applications to be built on top of it. They include this business model as well. performance management, device management, identity management, payment platform and Sometimes customers have to pay an additional application platform. It is the software that connects one-time fee to get advanced features. For example, the sensors together, automating them and enabling Fitbit’s (the health band) premium service comes easy monitoring. Vendors of IoT platforms include with a 12-week training programme as well as Telenor (Telenor Objects), Jasper Wireless, Ericsson, benchmarking and data export capabilities. and Tridium. DEVICE PLUS SUBSCRIPTION MODEL 5. Applications refer to programs designed to solve In this model, there is an upfront fee for the hardware a particular problem, carry out a function or provide plus a monthly subscription that covers wireless a service. They include enterprise applications (e.g., connectivity and other costs for the vendors. These ERP, CRM and SCM), analytics applications, and models are popular for fleet tracking solutions, where industry-specific applications like fleet management customers pay upfront for the GPS tracker and other solutions, smart car applications, building automation sensors, and a monthly fee per vehicle to the solution solutions, and grid management applications. provider. Examples include fleet management companies such as CarTrack and iTrack. Industry players across the value chain are fairly specialised in their offerings. At present, industry SUBSCRIPTION MODEL players do not have all the capabilities of the value Software only solutions may be sold on a monthly chain to offer an integrated end-to-end IoT solution, subscription. For example, VersaFleet is a fleet be it for the consumer or enterprise sector. For tracking software that uses third-party GPS. Since example, a telecommunications operator focusing on there is no device sold, the pricing is on a monthly providing broadband connectivity is not well placed subscription basis. to manufacture chipset modules. Companies are highly receptive towards greater collaboration within the industry to supplement their lack of internal expertise in certain areas. While partnerships are the most common and fastest way in bringing expertise together, companies have limited control over their partners. On the other hand, acquisitions offer greater control in acquiring capabilities. However, the risk and uncertainty are also the highest in such an arrangement.
KEY BUSINESS MODELS
Business models employed by the connected industry fall into 3 broad categories: Device-centric Business Model; Device plus Subscription Model; and Subscription Model.
DEVICE-CENTRIC BUSINESS MODEL In this model, the prime focus is on selling devices upfront. Services provided after the sale of the devices are either free or make up a minimal part of the overall revenue. A key example is Nest that sells smart thermostats and surveillance cameras for the home. Tesla Motors, which sells the IoT-powered connected car, can also be considered a device- centric vendor. MNH Labs, a Singapore-based start-
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VALUE DRIVERS & KEY RISKS
Figure 10: Value Drivers & Key Risks for IoT Companies
KEY VALUE DRIVERS KEY RISKS
• Partnerships & Collaboration • Eventual Business Case • Ease of Use & Design • Competition & • Installed Base Commoditisation • Lack of Economies of Scale
KEY VALUE DRIVERS Figure 11: Nest Thermostat
The key value drivers of an IoT company are as follows:
1. PARTNERSHIPS AND COLLABORATIONS IoT requires smooth interworking of multiple sensors, devices, connectivity networks and software. IoT applications may also need to work with legacy enterprise applications and networks. In most cases, a single company may not offer the entire range of devices and applications. Therefore it is important to have a wide range of partners that provide complementary services to seamlessly implement the company’s solution.
However, partnerships alone may not be sufficient. 3. INSTALLED BASE The application must also be easy to integrate Like most enterprise applications, the number of with the sensors, wireless sensor networks, cellular IoT application deployments or installed base of networks or the IoT platforms of the partners. For the product signifies the efficacy and reliability of example, AT&T created and opened its IoT platform the solution to potential customers. The larger the to its partners so they could develop innovative installed base, the higher the chances of finding new applications for its consumers, and be assured of customers. seamless integration with the IoT platform and cellular network. This has resulted in AT&T becoming KEY RISKS a leading participant in the IoT segment. The key risks for a company in the IoT sector include 2. EASE OF USE AND DESIGN the following: Companies offering consumer-focused IoT solutions need to be easy to use and have excellent aesthetic 1. EVENTUAL BUSINESS CASE design. For example Nest, a smart thermostat and surveillance camera company, is a successful IoT RISK ASSESSMENT: HIGH (FOR EARLY AND player thanks to its simple to use device and award- GROWTH STAGE COMPANIES) winning design. In fact, it became the third most sold IoT applications have the power to revolutionise the thermostat in the US, 3 years after its launch. world. However, they require a substantial number of
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disparate hardware and software components to work influx of manufacturers from low-cost regions together smoothly; that may not always be possible. producing similar products at lower prices with entry- Cost is another constraint potentially hindering the level features. This is resulting in hardware devices eventual adoption of the technology. Many IoT start- becoming increasingly commoditised – a serious ups with promising solutions fail to gain sufficient concern for hardware-centric IoT applications. momentum in the marketplace. For example, the concept of a connected home was introduced more 3. LACK OF ECONOMIES OF SCALE than 10 years ago by broadband providers. However, RISK ASSESSMENT: HIGH (FOR EARLY AND several early start-ups aiming to provide intelligent GROWTH STAGE COMPANIES) switching to lights and other home appliances failed Start-ups and companies in the early growth because of the high costs, integration challenges and stages face the risk of poor operating and financial low eventual benefits to consumers. performance due to the lack of scale. This is prevalent in the initial stages when the penetration rate of IoT Similarly, smart meters were a big thing a few years solutions and devices is low. Early adoption by niche ago due to heavy investments by governments in segments is not sufficient to elevate the business the UK and Australia. However, the return on these substantially even with a premium placed on the investments has raised doubts, tapering industry pricing of the solutions. Companies in the software growth. aspect have a lower operating cost in the early stages. However, businesses offering devices incur 2. COMPETITION AND COMMODITISATION a much higher cost that translates to higher prices. RISK ASSESSMENT: HIGH Although growth in adoption could result in greater Many IoT devices like smart meters and fleet economies of scale, the risk of failure in hardware management solutions have proliferated with the start-ups is higher.
RELEVANT VALUATION METRICS
IoT vendors have a simple business model of either outright sales or a subscription model. The valuation can be done based on the revenue (valuation/revenue) of EBITDA (enterprise value/EBITDA) multiple. However, before investing in an IoT company, it is vital to assess the company based on the key value drivers and evaluate risks to judge the future prospects of the company.
Table 1: Valuation Metrics for IoT Companies in Various Stages
S. NO. EARLY STAGE GROWTH STAGE LATE STAGE
1. Revenue & revenue growth Revenue & revenue growth Revenue & revenue growth
2. Growth in monthly active EBITDA margin EBITDA margin users
3. - Profit margin Profit margin
OVERALL CUSTOMER TRACTION TOPLINE & BOTTOMLINE TOPLINE & BOTTOMLINE FOCUS GROWTH GROWTH
EARLY STAGE: Usually first 2 to 3 years of operations. GROWTH STAGE: Approximately 3 to 5 years of operations. LATE STAGE: More than 5 years of operations.
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5. WEARABLES
The terms “wearable technology”, “wearable devices”, Wearable technology has some form of and “wearables” refer to electronic technologies or communications capability enabling the wearer to computers incorporated into items of clothing and access or send information in real-time from the accessories that can be comfortably worn on the wearable device. Data input capabilities are also a body. The wearable devices can perform many of feature of such devices, as is local storage. Examples the same computing tasks as mobile phones and of wearable devices include watches, glasses, contact laptop computers, but in a much smaller form factor. lenses, e-textiles and smart fabrics, headbands, Wearable technology tends to be more sophisticated beanies and caps, jewellery such as rings, bracelets, than handheld technology because it can provide and hearing aid-like devices designed to look like sensory and scanning features not typically seen in earrings. mobile and laptop devices, such as biofeedback and tracking of physiological functions. The figure below provides a classification of wearable technology based on the various types in the market.
Figure 12: Wearable Technology Taxonomy by Product Type
WEARABLE TECHNOLOGIES
ACTIVITY SMART SMART SMART OTHERS TRACKERS WATCHES GLASSES CLOTHING
Traditionally A wrist- A wearable All smart Any other coming in the wearable device clothing and wearable form of smart device which resembling accessories technology bands, which offers a wide glasses which including shoes which does track biometric variety of collects data and jewelry like not fall into the data upon a functions, on and augments rings four previous designated top of time- a user’s sight categories activity telling, and is through an in- often synced to built display smartphones
Source: Frost & Sullivan
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While wearable technology tends to refer to items that superimposes a computer-generated image that can be put on and taken off with ease, there are on a user’s view of the real world, and wearable more invasive versions such as implanted devices technology can combine to create a more realistic including micro-chips and smart tattoos. Ultimately, and immersive environment in real-time. The concept whether a device is worn or incorporated into the is not necessarily new, as augmented reality through body, the purpose of wearable technology is to create the use of wearable devices has been discussed since constant, convenient, seamless, portable, and mostly the late 1990s. However, the prototypes are moving hands-free access to information and insights. away from bulky technology such as large goggles and backpacks, to smaller, lightweight and more mobile The implications and uses of wearable technology are systems. If the more sophisticated designs of mobile far reaching and anticipated to influence the fields phones and digital cameras currently on the market of health and medicine, fitness, ageing, disabilities, are any indication of the future of wearable devices, education, transportation, enterprise, finance, gaming then fashion, practicality, function and design will be and music. The goal of wearable technologies across taken into account as these products advance. This these fields is to smoothly incorporate functional, consideration for both technology and aesthetics is portable electronics and computers into individuals’ already evident in devices such as Google Glass that daily lives. has a sleek, lightweight, and unobtrusive design.
Although wearables could potentially have the CURRENT STATUS biggest impact in the fields of health and fitness, the The following table summarises the current state of technology also promises great influence in gaming market development for various device categories and entertainment. Augmented reality, a technology and the most likely scenarios in the future.
Table 2: Types of Wearable Devices
CURRENT CATEGORY DEFINITION MARKET STATE REASONS
ACTIVITY Wearable bands and other Fast growing Activity trackers use minimal TRACKERS devices that can track athletic segment computational power and activities like running, cycling require a smaller display. They and walking along with are compatible with the current measuring heart rate. battery and display technology, lowering prices. There are multiple options available for consumers to choose.
SMART Watches that can connect to Emerging; set Smart watches consume more WATCHES the smartphone and run third- to grow in a big battery life compared to activity party applications to take way trackers, making long battery calls, check messages, find life a challenge. In addition, most restaurants. applications require the use of touchscreen; hence, the small touchscreen size becomes a constraint. However, aggressive moves by major players like Apple have made it an interesting category to watch.
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CURRENT CATEGORY DEFINITION MARKET STATE REASONS
SMART Wearable glasses that can Nascent; yet to The challenges in providing an GLASSES show content in front of the take off in a big unobtrusive display right in front eye and guide users based on way of the eye with miniaturised their locations. battery and processing are even more than the watch. Privacy of non-users is a major concern revolving around the usage of smart glasses. Google Glass, for example, was a clear failure with most early adopters giving it a “thumbs down”.
SMART Clothes that can track body Nascent; just Doubts hover over the durability CLOTHING temperature, heart rate, beginning to of smart clothing when it comes intensity of workout, sporting grow to long-term usage. Having actions. shrunk sensors into thin, flexible, and comfortable-to-wear forms, producers also need to ensure the clothing can withstand daily wear and tear as well as vigorous washing machine cycles.
OTHERS Niche applications like the Nascent; just Most wearable devices in this medical alert system for beginning to category target the healthcare the elderly, sporting action grow and sports industries. Due to high monitoring, gait detection price and/or limited customer for Parkinson’s patients, base that can benefit from the products, the market for the vital statistics measurement devices has been slow to develop. for workers in hazardous conditions.
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Figure 13: Wearable Technology Vendors by Product Type
SMART GLASSES
ACTIVITY TRACKERS
SMART WATCHES
SMART CLOTHING
OTHERS
To date, only smart watches and activity trackers have constituted around 61% of wearable shipments in gained momentum in the consumer space. However, 2014, in 2020 smart watches are anticipated to be with continuing improvements in battery life, display the largest segment constituting around 54% of the and processor technologies, the future of wearable market. technology is bright. Frost & Sullivan estimates that wearable devices shipments will grow to 210 million The following figure highlights the companies units by 2020 compared to approximately 38 million specialising in various categories of wearables. in 2014. While activity trackers or smart bands
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KEY DRIVERS & RESTRAINTS
Figure 14: Drivers & Restraints of Wearables Industry Growth
GROWTH DRIVERS GROWTH RESTRAINTS
GROWING HEALTH CONSCIOUSNESS BATTERY LIFE & PROCESSING POWER
MINIATURISATION OF SENSORS, USER INTERFACE CONSTRAINTS MEMORY AND PROCESSOR
EASIER ACCESS TO THE DEVICE SENSORS
EASY ACCESS TO FUNDING APPS
APPLICATION IN A WIDE RANGE OF COSTS INDUSTRIES
KEY DRIVERS Similarly, a decade ago it was difficult to imagine that motion sensors could be fitted into mini devices like The figure below provides a snapshot of the key activity trackers. factors driving the wearables market and challenges impeding growth. 3. EASIER ACCESS TO THE DEVICE Smartphones are a revolutionary technology, 1. GROWING HEALTH CONSCIOUSNESS bringing almost the entire information of the world in Growing health awareness is resulting in more people the palm of our hands. However, smartphones have being interested in tracking their physical activities an inherent limitation that they need to be pulled out like walking, cycling and running and comparing of the pocket or bag each time somebody wants to against their peers. Activity trackers provide an ideal use them. Smart watches and smart glasses do away solution for such health-conscious individuals. with this limitation, bringing the information to the user in a more convenient fashion. 2. MINIATURISATION OF SENSORS, MEMORY AND PROCESSORS 4. EASY ACCESS TO FUNDING Sensors, memory and processors are becoming more Start-ups mostly dominate the wearable technologies efficient and smaller, enabling their use in activity industry. The growing prominence of crowdfunding trackers and smart watches. For example, Samsung sites such as Kickstarter and Indiegogo have driven Gear, the first-generation smart watch from Samsung the growth of wearable technologies, enabling start- uses a 800 MHz processor with 512 MB memory – ups to pitch for required funding and seek market equivalent to the specification of a high-end laptop validation. For example, Pebble Watch was funded 10 years ago. by a campaign on Kickstarter. Also, rising interest
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in wearables from the VC community is providing of wearables provide disruptive potential in many impetus to the growth of wearable technologies. industries ranging from healthcare to engineering, and in several application areas. The figure below 5. APPLICATION IN A WIDE RANGE OF illustrates key applications in several industries. INDUSTRIES Portable, compact, and with a broad array of functionalities, the non-intrusive characteristics
Figure 15: Application of Wearables in Various Industries
CUSTOMER REHABILITATION SERVICE & RECOVERY
PAYMENT UMPIRING
ADVERTISING PERFORMANCE MONITORING
RETAIL SPORTS EMPLOYEE STOCK SAFETY MANAGEMENT
ENGINEERING REPAIR & LOGISTICS MAINTENANCE
WAREHOUSING
TRAINING HEALTHCARE HOMELAND SECURITY
REMOTE USER PATIENT CARE AUTHENTICATION
DISEASE IDENTITY MANAGEMENT FITNESS HAZMAT RECOGNITION DETECTION
Source: Frost & Sullivan
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KEY RESTRAINTS Likewise, due to the need to sense a multitude of signals, several sensors have to be miniaturised and 1. BATTERY LIFE AND PROCESSING POWER embedded in wearables. However, miniaturisation Wearables have significantly smaller space than other and the inability to embed sufficient sensors smart devices to house batteries, presenting serious could affect data accuracy. For example, accurate constraints to the size of the battery. To make matters movement sensors from companies like APDM may worse, the energy density of the batteries have not cost thousands of dollars, and are not small enough shown significant improvements over the years. Also, to be fitted into popular wearable devices. many do not allow for battery maintenance or repair due to their inherent design. 3. APPS Wearables have a highly fragmented ecosystem Battery limitations also pose restrictions on resulting in the proliferation of distinctly different processing speed since faster processors consume sets of Software Defined Kits (SDKs) and Application more battery life. Programming Interfaces (APIs) for each device. This acts as an obstacle to the growth of the number of 2. USER INTERFACE AND SENSOR CONSTRAINTS apps available for any particular device. The small size poses a problem in the interaction of the user with the device. It is much harder to use the 4. COSTS touch interface on a smart watch compared to the The cost of wearables for more advanced applications touch interface on a phone. Similarly, smart glasses like healthcare and sports remains prohibitively high. face significant challenges in displaying content in an For example, a gait detection system for use in sports extremely small area so that the normal vision of the or certain diseases can cost thousands of dollars. user is not restricted. Similarly, smart watches such as Apple Watch are facing lower than expected demand both due to pricing and functionality.
VALUE CHAIN AND KEY BUSINESS MODELS VALUE CHAIN
The figure below provides the value chain of the wearable technology industry:
Figure 16: Value Chain of the Wearables Industry
CHIP/SENSOR OEMS/ODMS DEVELOPERS DEVICE CONNECTIVITY VENDORS PROVIDERS APP OS VENDORS DEVELOPERS
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CHIP/SENSOR DEVELOPERS seniors, is available for purchase upfront, and can be Companies that design the chips and components worn around the neck or attached to the wrist. The that form the nuts and bolts of wearable devices device enables the elderly to contact a 24-hour call include: centre by pressing a button in case of an emergency and the call centre will dispatch an ambulance if OEMS/ODMS required. The call centre service is on a monthly Participants that create the original device or subscription basis. equipment and integrate all the components, so they function as one cohesive unit. SUBSCRIPTION MODEL A variant of the Device + Subscription business model, OS VENDORS the subscription model is based solely on subscription Participants that develop the operating system to and restricted to enterprises. For instance, Catapult power the wearable devices. Sports from Australia, a manufacturer of sports wearables provides a subscription service to its APP DEVELOPERS clients. Similarly, HealthSTATS, a Singapore-based They develop applications for wearable devices like medical wearables company, sells BPro® wearable smart watches. devices to monitor heart rate, blood pressure and other vital information of remote patients on DEVICE VENDORS subscription. Participants that design and sell the devices under their own brand name. Figure 17: Business Models for Smart Wearables
CONNECTIVITY PROVIDERS Telecommunications operators that provide wireless WEARABLE TECHNOLOGY connectivity for smart wearables. BUSINESS MODELS
BUSINESS MODELS
There are 3 business models in wearable technology: DEVICE DEVICE + SUBSCRIPTION device sales, device + subscription sales, and SALES SUBSCRIPTION ONLY subscription-only model.
DEVICE SALES In this model, the device is sold upfront along with the associated software. The accessories, replacement parts, and extended warranty may be sold separately or along with the device.
DEVICE + SUBSCRIPTION Fitbit has an interesting model where customers can purchase the device and basic features for a set price. Users then have the option to subscribe to a premium annual subscription that creates a 12-week training programme based on the users’ activity level, provides in-depth data analysis, and ranks the users against their peers.
This model is also used in medical alert systems like eAlert! in Singapore. The portable device targeted at
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VALUE DRIVERS & KEY RISKS
Figure 18: Value Drivers & Key Risks for Wearable Technology Companies
KEY VALUE DRIVERS KEY RISKS
• Device Appeal • Device Acceptance • Cost of Device • Technology Obsolescence • Customer Traction and Changing Market • Application & Device Preferences
Ecosystem • Competition • IPRs & R&D Capability
KEY VALUE DRIVERS 3. CUSTOMER TRACTION While device appeal and cost are important, the best 1. DEVICE APPEAL method to judge the success of these criteria is to look Primarily consumer devices, wearables focus on at customer traction. If the adoption of the device ease-of-use and design. It is important to find out if is growing, it is the best indication that the product the product appeals to consumers in terms of design, has hit the sweet spot. Customer traction is also functionality, practicality and ease-of-use. For important since it creates a buzz around the product, example, Google Glass failed spectacularly due to attracting more partners and future customers. As bugs in the device and the perceived impracticality a benchmark, Fitbit was selling close to 5 million of walking around while looking at a screen. On devices a year within 5 years of launching its first the other hand, Fitbit, which is the most successful device. Apple Watch was expected to sell between wearable device to date, ticks almost all the boxes for 2.5 million and 5 million units within one quarter of a successful consumer device. its launch. Both devices are considered to have good customer traction, although the sales of Apple Watch 2. COST OF DEVICE have been lower than original expectations. While expensive smartphones have achieved astonishing success, primarily because of their 4. APPLICATION AND DEVICE ECOSYSTEM array of functions and subsidisation by mobile Most wearables have limited functionality owing to operators, it is highly unlikely to be the case with their small size. However, they can become extremely costly wearables. These devices are not subsidised powerful when paired with a smartphone and other by operators, and typically perform a limited set of accessories. For example, Apple Watch can be linked functions due to their inherent size restrictions. Thus to an iPhone to receive calls, messages and calendar it is improbable that most customers would choose alerts on the watch. Likewise, although many activity to pay the premium price. An example of cost appeal trackers are standalone devices currently, the number is the hugely successful Mi Band, a fitness tracker of devices and accessories that work seamlessly with from Xiaomi priced at only US$13. According to the the wearables will be an important success factor in company, 6 million units were sold within 6 months future. of the launch.
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In addition, smart watches are expected to run a of smart watches, there is a high risk that the activity number of different applications. The larger the app tracker market may stagnate after 2 to 3 years. ecosystem, the more useful the device will be. 3. COMPETITION 5. INTELLECTUAL PROPERTY RIGHTS (IPRs) AND RISK ASSESSMENT: HIGH R&D CAPABILITIES As new wearable devices inundate the marketplace, The greatest competitive advantage of wearable the risk of a company losing its market share to a technology lies in the strength of its R&D. The competitor with a more compelling value proposition capability of the existing R&D team is a strong is high. For instance, Xiaomi introduced Mi Band in value driver for the company. The amount of money Q3 of 2014 and quickly garnered 25% market share invested in R&D directly impacts the patent portfolio by Q1 of 2015, capturing the market share of other and trademarks, allowing the company to achieve or vendors. retain a dominant position in the market. Between 2010 and 2015, there were a number of patent battles between Apple and other smartphone vendors with most Android vendors paying out hefty royalties or penalties to Apple. In such a situation, the existing set of IPRs is extremely important to determine global success.
KEY RISKS
1. DEVICE ACCEPTANCE RISK ASSESSMENT: HIGH (FOR EARLY STAGE DEVICES) In its early stages, there is a risk whether the device will be accepted by the market. First-generation devices of major companies like Google Glass, Sony Smartwatch, and Samsung Gear were unequivocal failures due to challenges in providing attractive functionality in a small package. Even an established wearables company like Fitbit experienced issues when many users reported skin rashes after wearing its Fitbit Force fitness band.
2. TECHNOLOGICAL OBSOLESCENCE AND CHANGING MARKET PREFERENCES RISK ASSESSMENT: HIGH Wearable technology is an emerging field witnessing rapid growth and tremendous interest from both tech enthusiasts and VCs. As more capital is pumped into new start-ups, there is a genuine risk of a new emerging technology completely disrupting an existing product or device. Such disruptions may be technology-centric (e.g., a new form factor) or customer-centric (e.g., a new business model). For example, activity trackers form the largest wearables product segment today. But with improving appeal
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RELEVANT VALUATION METRICS
Wearable technology companies have a relatively simple business model where they aim to sell as many devices as possible and achieve profitability when they reach a particular scale. Therefore, once the product is out of R&D, the company should be tracked on unit sales and revenue in the growth stage and revenue and profitability towards the later stage.
Table 3: Valuation Metrics for Wearable Technology Companies in Various Stages
S. NO. EARLY STAGE GROWTH STAGE LATE STAGE
1. Paid-up Capital5 Unit sales & growth Revenue & revenue growth
2. Potential Market Size Revenue & revenue growth EBITDA Margin
3. - - Profit Margin
OVERALL RESEARCH & DEVELOPMENT CUSTOMER TRACTION TOPLINE & BOTTOMLINE FOCUS GROWTH
EARLY STAGE: Usually first 2 to 3 years of operations. GROWTH STAGE: Approximately 3 to 7 years of operations. LATE STAGE: More than 7 years of operations.
5 These are the best available metrics at this stage. However, the valuation may change drastically based on the expected competitiveness of the solutions. 25 Investing in Financial Technology & Consumer Digital Technology Companies We Accelerate Growth www.frost.com
6.EMERGING SOCIAL MEDIA
Social media is a platform to share messages, videos, 3. MULTIMEDIA SHARING pictures and other multimedia with the general Several social media apps focus on sharing public or a network of the user’s contacts. The best photographs, video clips and special multimedia examples of social media are Facebook, Twitter and formats. These include Pinterest, Tumblr, Instagram LinkedIn. Together, the three social networks connect and Vine. nearly 20% of humanity. Facebook has 1.2 billion monthly active users (users who use the website at 4. FOCUS ON MOBILE least once a month); Twitter has 300 million monthly With mobile becoming the primary means of active users; while LinkedIn has 364 million monthly accessing the Internet in emerging markets, several active users. Combined, the three companies are mobile-focused social media platforms have sprung valued at US$318 billion in 2015. up recently. Examples include WhatsApp and Foursquare. However, for this research paper, we focus solely on social media platforms that have emerged after the These examples signify the fast-evolving social above 3 platforms. The new apps exploit the niche media landscape. It will be interesting to find out the areas not addressed by the abovementioned major growth drivers of these apps and platforms, and to platforms. assess their potential.
Among the emerging platforms, Instagram and WhatsApp gained the most limelight as both were acquired by Facebook for US$1 billion and US$19 billion respectively. Pinterest, Tumblr, Yik Yak and Quora are other prime examples of emerging social media platforms.
Principal characteristics of the new-age social media platforms include:
1. INCREASED FOCUS ON PRIVACY AND ANONYMITY Many emerging social media companies concentrate on enhanced privacy requirements by featuring messages that expire after a set time to ensure privacy and security. Some of these platforms also feature messages that self-destruct after reading and anonymous postings. Examples include Snapchat, Burn Note, and Whisper.
2. LOCALISED SOCIAL MEDIA Many apps are focusing on localisation by providing access to anonymous messages in the local area of the user. These include Yik Yak, Nearby, and Skout. Apps like Foursquare help users to find places of interest in their locality.
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KEY DRIVERS & RESTRAINTS
Figure 19: Drivers and Restraints of Social Media Industry Growth
GROWTH DRIVERS GROWTH RESTRAINTS
INCREASING INTERNET AND MOBILE “WINNER TAKES ALL” DYNAMICS DATA PENETRATION
GROWING NUMBER OF BUSINESS LACK OF A WELL-DEFINED BUSINESS MODELS MODEL
FUNDING AVAILABILITY
KEY DRIVERS interest from VCs and motivating entrepreneurs to invent new social media offerings, leading to the 1. INCREASING INTERNET AND MOBILE DATA faster expansion of social media. PENETRATION The growing Internet and mobile data penetration KEY RESTRAINTS are the biggest growth drivers for the social media industry. More people online mean more people who 1. “WINNER TAKES ALL” DYNAMICS can be connected via social media platforms. Social As stated earlier, social media platforms have a media has a big network effect, which essentially strong network effect. Social media with a larger means that as more people join in, the utility of number of users and interactivity provides greater the social media increases for each member on value than a smaller, less interactive platform. the platform. As an example, if there were just one Users gravitate towards the largest platform in the telephone in the world, it would be of no use. However, category leading to the gradual demise of smaller as the number of telephone subscribers increased, ones. Orkut, Myspace, Digg, Friendster and Bebo are the usefulness of the telephone would increase for examples of social media platforms that were once every subscriber. In these cases, an escalation in the popular but faded away as users gravitated towards number of users leads to an accelerated growth of Facebook. Even Google+ is facing significant hurdles the platform. despite Google using all its competencies and assets to popularise the platform. 2. GROWING NUMBER OF BUSINESS MODELS As discussed in the introductory section, there is an 2. LACK OF A WELL-DEFINED BUSINESS MODEL increasing number of new business models serving Most social media platforms are designed to attract the unmet needs of privacy, localisation, dating, and users onboard. However, some platforms such as multimedia sharing. This has led to the growth of WhatsApp, Snapchat and Pinterest do not seem to social media platforms and users. have a clear monetisation model. Although this does not appear to be a key obstacle for social media 3. FUNDING AVAILABILITY platforms so far, it may lead to the demise of some The success of social media platforms like Facebook, apps as investors eventually lose patience and pull LinkedIn, Twitter and WhatsApp are attracting keen out.
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TYPES AND REVENUE MODELS OF key success factors for such platforms. SOCIAL MEDIA PLATFORMS OTHERS TYPES Other types of social media platforms include location-based social apps, social news and social MICROBLOGGING PLATFORMS queries. Microblogging websites allow you to share short text, photographs and multimedia posts with a large Location-based social apps enable you to find audience or list of selected friends. locations of interest based on recommendations from friends. Foursquare and HungryGoWhere are Twitter is the classic microblogging website; examples of location-based social apps. however, post-Twitter, there are a growing number of websites focusing on multimedia content. For In social news platforms, people post news items, and example, Pinterest allows people to post interesting other people vote up or down their posts. The news pictures and videos that can be viewed by others. items are then shown to users based on the votes. The pictures can be their own or discovered by them One example is Reddit. on the Internet. Similarly, Tumblr allows you to post a mix of pictures, text and videos. Instagram and Vine In the social queries platform, users can pose a can also be classified as microblogging platforms. question to a large pool of users. Users are then rated In such platforms, content is created or posted by all based on the quality of their answers. An example is members but it is the content from a few influential Quora. content authors that is consumed by a very large number of members. Thus, the key success factor Figure 20: Emerging Social Media Platforms by Category for such platforms is having a substantial number of influential content authors who post attractive MICRO- content at regular intervals. BLOGGING
TEXTING PLATFORMS Texting apps allow users to text with friends or group of friends. The most famous example is WhatsApp and WeChat. In these platforms, the ease of connecting to friends and texting or calling friends are the most TEXTING critical success factors.
There is a variation of texting platforms that focus on sending self-destructing messages . An example is Snapchat that lets users send messages to one other which self-destructs after a certain time. CHATTING CHATTING AND DATING AND There are several social media apps that allow people DATING to chat with strangers mostly with the intent of ultimately meeting up. Key examples include Tinder OTHERS that enables people to view pictures of other users and chat if they are mutually interested. Skout and MeetMe are similar platforms.
The number of users, ease of meeting new people, and mechanisms to ensure privacy and secrecy are
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REVENUE MODELS advertisement models. Even Snapchat is starting to The 3 most common revenue models used by social use this model by allowing advertisers to offer their media platforms include: content to Snapchat users.
1. ADVERTISING 2. FREEMIUM Advertisements are the most dominant revenue In the Freemium model, the basic membership on model for social media platforms. Due to their ability the platform is free. However, members may need to to draw visitors, advertisements are inherently pay for an enhanced membership or certain digital attractive to advertisers keen on showcasing their goods. Key examples are Premium Themes available brand to draw traffic to their websites or apps. for purchase at Tumblr, Tinder Plus subscription that offers additional services to subscribers and LinkedIn Businesses wanting to advertise their brands opt Premium. for a CPM (Cost per thousand impressions) model where they pay based on the number of times their Most social networks utilise this model as an add-on ad was served in front of a viewer. The best examples revenue stream with the major revenue coming from are suggested or sponsored posts on Facebook advertisements. or Twitter. Advertisers aiming to generate traffic choose the CPC (Cost per Click) model where they 3. SUBSCRIPTION pay based on the number of times their ad was In the subscription model, each member has to pay clicked. Most social media platforms typically display an annual fee. Though no social media platform has CPM advertisements. Facebook (suggested posts), started using this model, WhatsApp has switched to Twitter (suggested tweets), Tumblr (sponsored a subscription model in the US and several developed posts) and Pinterest (promoted pins) rely heavily on countries.
VALUE DRIVERS & KEY RISKS
Figure 21: Value Drivers & Key Risks for Social Media Companies
KEY VALUE DRIVERS KEY RISKS
• Number of Active Users • Lack of Availability of Funds • Frequency of Interaction • Viability of Business Model • Growth • Competition • Funding • Changing Market Preference • Proven Revenue Model
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KEY VALUE DRIVERS 5. PROVEN REVENUE MODEL Although most social media platforms do not focus The key value drivers of a social media company are on a revenue model in the early growth stage, it is as follows: an important consideration for late growth stage companies. When user growth starts reducing, 1. NUMBER OF ACTIVE USERS investors start worrying about whether the platform As noted previously, social media platforms have a can be monetized. If a successful monetisation model huge network effect, i.e., the utility of the platform cannot be evolved, investors may lose interest. grows for everyone as the number of active users increase. For example, Facebook is far more useful KEY RISKS if most of the friends, family and acquaintances are actively using the platform compared to when only The primary risks for an ecommerce company include a few are on the platform. Therefore, the number of the following: active users on the platform (instead of competition) directly translates into the probability of the 1. LACK OF AVAILABILITY OF FUNDS platform’s success. RISK ASSESSMENT: HIGH (FOR EARLY AND GROWTH STAGE COMPANIES) 2. FREQUENCY OF INTERACTION Social media platforms usually have negligible Using only the number of active users as a metric revenue in the early stage, and hence, are dependent for predicting the success of a social media platform almost exclusively on external funding for their has obvious pitfalls. In many cases, the platforms can viability. Any disruption in funding either in the form get the user, but they cannot get them to interact of waning interest or lack of funding from VCs can with the platform. For example, while platforms like have an adverse impact on such companies. Pownce Google+ have been able to attract a large number is an example of a microblogging website that had to of users with many visiting the platform actively; shut down due to insufficient funding. however, most don’t share anything through it. Thus, the number of users who share content on a daily 2. VIABILITY OF BUSINESS MODEL basis (app or website) are the other two metrics that RISK ASSESSMENT: HIGH (FOR GROWTH AND LATE predict the success of the platform over the long STAGE COMPANIES) term. At some point, social media platforms need to develop a revenue model and earn a steady income. There is 3. GROWTH always a risk they may not be able to create a model The third value driver is the level of growth the that keeps the business profitable. Even companies platform is experiencing in terms of number of such as Facebook faced difficulties in posting its IPO users and frequency of content sharing. Fast due to doubts over its advertisement-based business expansion of the platform means it has a significant model. One reason Twitter has seen a continuous influence on users and can expand quickly over the decline in its stock prices is the company’s inability entire addressable market even in the presence of to sufficiently monetise its platform to be able to formidable competition. generate profits.
4. FUNDING 3. COMPETITION Most social media platforms are not able to build RISK ASSESSMENT: HIGH a revenue model in their early stages and need to How Facebook made vast social networks such as burn a large amount of cash for R&D and marketing Bebo, Orkut and MySpace defunct is an example of activities. A better-funded company with greater what competition can do in the social media space. interest from investors is more likely to survive the Competitors with new and improved offerings can initial phase of generating little or no revenue. take away existing users and jeopardise the future of existing ecommerce enterprises. Typically, the larger
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the social network and higher the interaction of users, phones. However, as the capability of smartphones the better protected it is from new competitors. increased, users did not mind sharing longer posts on Facebook and other social media platforms 4. CHANGING MARKET PREFERENCE from their mobiles. Frost & Sullivan suspects this as RISK ASSESSMENT: HIGH one of the reasons behind the stalled user growth Twitter was once the second-largest social media of Twitter. The company’s user base has now been platform and touted as the second Facebook. eclipsed by platforms such as Instagram, WhatsApp It was difficult to enter a large amount of text and Facebook Messenger, indicating the effects of in earlier smartphones; Twitter’s 180-character changing market preferences on the future of social microblogging soon became immensely popular media platforms. with people accessing the Internet via their mobile
Figure 22: Number of Active Monthly Users on Leading Social Media Platforms
Facebook WhatsApp Twitter Instagram MILLIONS
Source: Company Press Releases, Frost & Sullivan Estimates
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RELEVANT VALUATION METRICS
Social media platforms focus first on getting the users (or eyeballs) and then try to monetise them. The metrics for early stage firms is usually non-financials. As they develop a revenue model, the focus shifts on revenue, and finally on profitability.
1. EARLY STAGE The key focus at this stage is getting users on the platform to prove its attractiveness and creating a competitive advantage.
The key valuation multiples include valuation/number of monthly active users. Such ratios may vary drastically based on factors such as uniqueness of the platform, frequency of interaction, and growth. For example, as of Q3 2015, Facebook’s valuation was around US$200/monthly active user; Snapchat was US$150/monthly active user; and Twitter was around US$60/monthly active user6.
2. GROWTH A revenue model is usually developed in the growth stage and the focus shifts on STAGE revenue multiples. However, in some cases like Snapchat, social media companies wait longer before monetising the platform, and monthly active users remain an important metric.
The key valuation multiples include valuation/revenue as well as valuation/monthly active users.
3. LATE STAGE In late stage social media companies, the aim is to monetise the platform and maximise profitability and cash flow while maintaining growth. The key metrics are revenue and revenue growth, EBITDA margins and profit margins.
The key valuation multiples include valuation/revenue, valuation/EBITDA (EV/ EBITDA) and valuation/earning (Price earning ratio).
Table 4: Valuation Metrics for Social Media Platforms in Various Stages
S. NO. EARLY STAGE GROWTH STAGE LATE STAGE
1. Number of monthly active Revenue & revenue growth Revenue & revenue growth users
2. Growth in monthly active Monthly active users & EBITDA Margin users growth
3. - - Profit Margin
OVERALL CUSTOMER TRACTION TOPLINE GROWTH & TOPLINE & BOTTOMLINE FOCUS CUSTOMER TRACTION GROWTH, CASH FLOWS
EARLY STAGE: Usually first 2-3 years of operations. GROWTH STAGE: 3-7 years of operations. LATE STAGE: More than 6-7 years of operations
6 Source: Company press releases and Bloomberg.
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7. ECOMMERCE
Electronic commerce or ecommerce is simply including firms such as Lazada, Shopee, Reebonz, defined as websites or apps that facilitate the buying Qoo10, RedMart, Rakuten and Wego. and selling of goods and services online. There are multiple variations of the ecommerce business Despite the astounding growth of ecommerce, model. The differences can be classified based on a profitability remains a critical concern in the sector. number of characteristics including the type of sellers Even mature firms like Amazon are still unprofitable and buyers (consumers, businesses or government), and have focused on cashflow instead of profitability the kind of goods and services being sold (digital as the relevant financial metrics. Against this or physical), and many other such parameters. We backdrop, cash flow instead of profitability is being examine the multiple ecommerce models in a later proposed as the more relevant valuation parameter. section. Valuation becomes even more tricky for companies in the growth phase that are not only unprofitable Attracting nearly US$112 billion in investments but have significant negative cash flows. Despite globally in 2014, the ecommerce sector is undergoing the lack of profitability, investors are willing to pour explosive growth with portals such as Flipkart raising billions of dollars into these firms. In this section, we more than US$1 billion of funding in one single deal. explore the dynamics driving these valuations. New companies and business models enter the fray every day, striving to make online transactions more Note: For the purpose of this research paper we will reliable and convenient for both buyers and sellers focus exclusively on consumer ecommerce – primarily (merchants or individuals) alike. South East Asia the Business to Consumer (B2C) and Consumer to has its fair share of thriving ecommerce start-ups Consumer (C2C) segments.
KEY DRIVERS & RESTRAINTS
Figure 23: Drivers and Restraints of Ecommerce Industry Growth
GROWTH DRIVERS GROWTH RESTRAINTS
RAPID PROLIFERATION OF INTERNET & MOBILE DATA IN EMERGING LARGE INVESTMENT REQUIREMENTS MARKETS & LONG GESTATION PERIOD
BETTER PAYMENT METHOD UNTESTED BUSINESS MODELS
INVESTMENT IN LOGISTICS SHIPPING COSTS
NEW BUSINESS MODELS GOVERMENT REGULATIONS
FUNDING AVAILABILITY
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KEY DRIVERS 3. INVESTMENT IN LOGISTICS A successful ecommerce model requires swift 1. RAPID PROLIFERATION OF INTERNET AND fulfilment of orders, which in turn, calls for efficient MOBILE DATA IN EMERGING MARKETS logistics. While large ecommerce companies like eBay, Internet penetration in emerging markets is growing Rakuten and Rocket Internet are making substantial at a fast pace. For example, Indonesia’s Internet investments in warehousing and advanced logistics penetration increased from 17.5% in 2011 to 33% in solutions, traditional logistics players are also taking 2014. More people online mean a greater addressable steps to tap into the burgeoning ecommerce market. market for ecommerce – a compelling reason for the For example, DHL has a dedicated ecommerce rapid growth of ecommerce in emerging markets. logistics facility and aspires to become an end- to-end ecommerce enabler. Similarly new start- Mobile data penetration plays a pivotal role in ups such as Anchanto are providing a logistics spurring ecommerce activities. Given the challenges fulfilment technology platform exclusively targeting in increasing fixed broadband penetration, most ecommerce companies. new Internet users in these countries are getting online using a mobile phone. For example, portals 4. NEW BUSINESS MODELS like Flipkart receive 20% of their orders via mobile The conventional consumer ecommerce model phones. follows either a Consumer-to-Consumer (C2C) approach where consumers sell small items to other Figure 24: Correlation between Online Sales and Internet consumers or an integrated Business-to-Consumer Penetration in Indonesia (B2C) approach where participants such as Amazon keep the inventory and service consumers who require those goods.
With the growing demand of ecommerce, numerous innovative business models are emerging. The predominant approach today is the marketplace model where multiple sellers (businesses or consumers) list their products, and the ecommerce portal supports the delivery and payment of goods
Internet Penetration (%) Penetration Internet once an order is placed. Other new models include
Online Retail sales (US$ Billion) Online Retail the online mall model where the buyer creates a virtual storefront or mini portal within the larger ecommerce portal like in the case of Rakuten; the Retail subscription model where consumers can subscribe to a beauty product, and the product is delivered to 2. BETTER PAYMENT METHODS them at regular intervals, (e.g., Bellabox); the curated In the past, identity theft and credit card fraud have ecommerce model where sites feature expert curated been among the most critical factors forming a products to target the particular needs of customers significant barrier to ecommerce growth. However, (e.g., Luxola); and social ecommerce where buyers advances in technology, increasing security measures share photographs of items they have purchased, and new payment systems are not only boosting the and visitors are directed to ecommerce sites selling growth of credit card usage, but encouraging users similar items in case they like it (e.g., Clozette). Apart to store their details at ecommerce websites. Several from the new models, the types of goods and services ecommerce portals also provide Cash on Delivery available on ecommerce portals are increasing as well. (CoD) terms, further enhancing the ease of payment. In addition to the conventional items such as digital The emergence of online wallet services, e.g., PayPal, goods (music/movies), groceries, home furnishings, MatchMove Pay and TCash, in emerging markets is services, and beauty products are now available on another feature fuelling the growth of ecommerce ecommerce websites.
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Myriad options are available to users today depending year (e.g., subscription and mobile-only models), it on their needs. Virtually everything you need to buy is not certain which of these will eventually work. is available on an ecommerce portal, increasing the A model that works in one geographical region overall popularity of ecommerce. may not necessarily work in another. For example, Bellabox, a successful subscription portal for curated 5. FUNDING AVAILABILITY beauty products in Australia, attempted to expand The success of emerging market ecommerce portals into Singapore. However, the company soon realised such as Alibaba and Flipkart are attracting the that the Singapore market was too small to gain interest of global venture capital (VC) firms in the a significant number of subscription customers ecommerce space. Singapore-based VC firms such required to keep the business running. The company as Golden Gate Ventures are taking advantage of closed its subscription services within a few years the flourishing market as well. The flexible monetary of operation in Singapore. Similarly, Lykestore, a policy in the US enables VC firms to raise massive curated ecommerce portal owned by SingTel ceased amounts of capital. Since ecommerce portals need operations due to intense competition and lack substantial cash investments in their initial years, of demand for niche brands on the portal. These funding from VCs are spawning a vast number of cases indicate the extremely high failure rates of ecommerce portals worldwide. ecommerce start-ups.
KEY RESTRAINTS 3. SHIPPING COSTS Shipping costs sometimes result in products ending 1. LARGE INVESTMENT REQUIREMENTS AND up being more expensive than in the physical market. LONG GESTATION PERIOD Therefore, smaller yet relatively high-value products, Ecommerce companies require tremendous for which the shipping cost is usually a fraction of the investments over an extended period. It takes at least cost of the items, are preferred over low-value items. five years of operations for ecommerce companies to become cash positive. Substantial investments go 4. GOVERNMENT REGULATIONS into setting up an ecommerce portal, from logistics, Many governments in emerging markets have technology to subsidising the purchase of goods to yet to introduce market-friendly regulations on spur adoption. Since not many companies have the investment, taxation, consumer protection and data investment appetite to go through such a lengthy protection for ecommerce websites resulting in the gestation period, this acts as a significant barrier to postponement of investments in some countries. For the growth of ecommerce. example, Indonesia has blocked foreign investors from investing in ecommerce portals – a move that 2. UNTESTED BUSINESS MODELS is expected to severely erode the competitiveness of While many new business models emerge each the ecommerce market in the country.
VALUE CHAIN AND KEY BUSINESS MODELS VALUE CHAIN
Since ecommerce typically involves aggregating buyers and sellers, it has a relatively simple value chain.
Figure 25: Ecommerce Value Chain
ECOMMERCE SELLERS LOGISTICS BUYERS PLATFORM
PAYMENT
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Ecommerce platforms may have external sellers, logistics and payment systems or they may do everything in- house. As an example, the players selling on Amazon & eBay are sellers (Amazon is a seller as well). Vendors may use Amazon logistics (Amazon-fulfilled) or other logistics companies. Amazon enables payment with the help of PayPal and credit card companies.
BUSINESS MODELS
The business models of ecommerce companies and types of goods and services offered. There can be differentiated based on their value creation, can also be a distinction in the priority of channels charging model (the way customers are charged) (mobile or web) as well.
Figure 26: Dimensions of Ecommerce Business Models
VALUE CREATION How is value being created for buyers and/or sellers?
CHARGING MODEL How are buyers being charged for the products & services?
TYPES OF GOODS What types of goods & services are being sold through the portal?
CHANNELS What is the primary channel to reach customers (web/mobile)?
1. VALUE CREATION Basis of Value Creation: Ease of purchase compared Value creation refers to the way value is created to physical stores. for the clients. The table below describes the most common models and their significance. MULTI-BRAND RETAIL MODEL Figure 28: Representation of Multi-Brand Model SINGLE BRAND RETAIL MODEL Figure 27: Representation of Single Brand Model 1
2
3 1
4
OWN BRAND ECOMMERCE BUYERS BRANDS ECOMMERCE BUYERS PORTAL PORTAL
Description: The simplest ecommerce model where Description: Portal sells goods from multiple brands, the portal sells a single brand usually owned by the as in the case of fashion, groceries, travel and digital portal or its parent company. Examples: Apple Web goods. Examples: Zalora, RedMart Store, Ikea, HipVan.
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Basis of Value Creation: Ease of purchase compared Basis of Value Creation: Connecting different buyers to physical stores, discounts (in some cases), and and sellers that may otherwise fail to reach each product reviews. other, product reviews, and ease of purchase.
MARKETPLACE MODEL (STOREFRONT MODEL) DEAL MODEL Figure 29: Representation of Marketplace Model Description: Portal sells discount coupons from physical retailers. It is a niche model where even pioneers such as Groupon struggle to achieve
1 profitability. Example: Groupon 1 2 Basis of Value Creation: Allows retailers to run 2 3 effective promotion campaigns.
4 3 ECOMMERCE BUYERS OTHER NICHE MODELS PORTAL Description: Business directories or social media BRANDS SELLERS sites that allow consumers to post their preferred products. These sites sometimes connect to other ecommerce portals to facilitate actual purchasing. Description: A platform that brings together multiple Examples: TripAdvisor, Clozette, SGrooms buyers and sellers. There can be different vendors in addition to the portal’s brand. It is the most dominant Basis of Value Creation: Facilitates easier search model and considered the most proven. Sometimes, functionality and features user reviews. sellers can have mini websites within the overall portal like in the case of Rakuten. Examples: Amazon, Lazada, Rakuten
Basis of Value Creation: Connects various buyers and sellers that may otherwise fail to reach each other, product reviews, and ease of purchase.
CONSUMER TO CONSUMER MODEL (C2C) MODEL Figure 30: Representation of C2C Model
1 1 2
2 3
4 3 ECOMMERCE BUYERS PORTAL BRANDS SELLERS
Description: Similar to the marketplace model, however, the sellers are mostly individuals or small companies. The ease of selling is higher, and the mechanism to increase the trustworthiness of sellers is stronger than in the marketplace model. Examples: eBay, Tokopedia, Qoo10
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Table 5: Key Business Models based on Value Creation
SINGLE BRAND Sales of goods & services MODEL
MULTI-BRAND Sales of goods & services RETAIL
MARKETPLACE Commission from sales MODEL (STORE- Sometimes a quarterly membership fee is charged to sellers FRONT MODEL) Portal may sell its own goods to contribute to the revenue
C2C MODEL Commission from sales
DEAL MODELS Commission on discount coupons sold
OTHER NICHE Listing fee MODELS Advertisements Referral fee from the portals to which they lead
CHARGING MODEL Listing/Freemium-based: In this model, anyone can Charging model refers to the way consumers are list products or services they are offering. Sellers can charged. Key models are: list their products for a fee, or for free with a sum charged only if the seller wants a preferential listing. Transaction-based: In this model, consumers Purchases are usually not controlled by the portal are charged separately for each purchase. Most in this model. Delivery charges and payments are ecommerce portals follow this model. settled between the buyers and sellers independently. TripAdvisor, SGroom, OLX, and HungryGoWhere are Subscription-based: In this model, consumers are prime examples of this model. Monetisation is riskiest delivered a set or variable number of goods for a in this model; with even established players such as fixed monthly fee. These can range from beauty Zomato struggling to generate revenue. products (e.g., Bellabox, Dollar Shave Club), to shoes (e.g., shoedazzle), movies (e.g., Netflix), news (e.g., FT.com) and music (e.g., Spotify). While the subscription model has the advantage of greater predictability of revenue, it may be harder to attract customers. Since this model has a low customer conversion rate, it typically requires countries with a broad consumer base. Subscription websites such as Bellabox have failed to make inroads in small countries with limited customer base like Singapore.
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Figure 31: Examples of Key Ecommerce Business Models
VALUE CREATION MARKETPLACE MULTIBRAND CONSUMER TO SINGLE BRAND/ RETAIL CONSUMER NICHE /DEAL REVENUE MODEL
TRANSACTION BASED
SUBSCRIPTION No examples No examples BASED
LISTING/ No examples No examples PREMIUM BASED
2. TYPES OF GOODS AND SERVICES Services Portals: Markets skilled services ranging In addition to the charging and value creation from language translators, handymen, tutors and models, ecommerce companies can also be classified others. Fiverr, which markets digital skills, is a key according to the type of goods and services they example of such portals. sell. Most ecommerce portals fall under one of the following categories: Digital Goods Portals: Sites and apps to purchase or subscribe digital goods. Examples include Apple’s Integrated Portals: Sell a wide range of products AppStore (games and apps), Spotify (music), and including books, music, toys, white goods, clothing, Netflix (movies). jewellery and other items. Amazon is an example of an integrated portal. 3. CHANNEL Considered the fourth dimension, Channel can refer Niche Goods Portals: These include groceries (e.g., to the traditional Internet where the ecommerce RedMart), fashion (e.g., Zalora), hotels (e.g., Agoda), portal is available on the web or as a mobile app. In airlines (e.g., Expedia), luxury goods (e.g., Reebonz), most cases, both channels are used, though mobile- furniture (e.g., HipVan) and beauty and cosmetics only portals are gaining momentum. A key example (e.g., Bellabox). of a mobile-only portal is Myntra.com in India.
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VALUE DRIVERS & KEY RISKS
Figure 32: Value Drivers & Key Risks for Ecommerce Companies
KEY VALUE DRIVERS KEY RISKS
• Scale • Viability of Business Model • Funding • Lack of Availability of Funds • Customer Stickiness & Growth • Competition • Potential Market • Not Reaching Eventual • EBITDA Margin & Working Profitability or Cash Flow Capital Goals • New Competitors & Business Models • Technological & Market Obsolescence
KEY VALUE DRIVERS Investors use metrics such as Gross Merchandise Value (GMV) or the value of total goods or services The key value drivers of an ecommerce company are sold on the portal to assess the scale of the company as follows: in relation to the competition. For example, eBay’s valuation is .36 times its annual GMV whereas for 1. SCALE fast-growing Flipkart, the ratio is 3.5. Scale is the biggest value driver for most ecommerce business models. An ecommerce company with more Figure 33: Virtuous Cycle of Ecommerce Business Models buyers is going to attract more sellers. It is also going to provide larger economies of scale in terms of marketing and brand reach as well as securing better MORE deals from merchants and controlling overheads. BUYERS More sellers and better economies of scales attract a greater number of buyers, becoming a virtuous cycle.
In general, only one or two companies survive within a particular ecommerce category in a given geography. Businesses that cannot achieve significant scale are GREATER not able to attract enough buyers and hence are MORE ECONOMIES unable to compete with larger competitors. This is SELLERS why most ecommerce companies spend tremendous OF SCALE amounts of cash upfront to achieve greater scale. In the early and growth stages, ecommerce enterprises strive to achieve scale and survive longer than Note: In most models, more sellers may not be competitors. Once the competition subsides, it is relevant. However, the overall virtuous cycle remains easier to get more cash and profitability for investors. relevant.
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2. FUNDING injecting more funds into the company. The EBITDA The company with more cash to spend is likely to margins indicate whether the company is able to end up a winner. In short, better-funded companies make an operating profit, i.e., the cost of the goods are more likely to succeed than lesser funded ones. and services it sells and its operating expenditure Therefore, it is advisable to look at the cash position is less than the revenue. However, ecommerce and likelihood of subsequent funding for ecommerce companies employ a unique method where they can companies. get excess cash for investors without necessarily being profitable. 3. CUSTOMER STICKINESS AND GROWTH While growth can be achieved through aggressive Most ecommerce companies have negative working marketing and expansion to new geographies, what capital. They pay their suppliers after consumers pay ultimately ascertains growth sustainability is whether them. Consequently, till their growth is intact, they buyers keep coming back to the site. The repeat always end up generating more cash from customers purchase rate (percentage of buyers who return to than what they have to pay to suppliers. Hence, it the portal for another purchase) is a vital indicator of is argued that the appropriate valuation measure for the long-term success of the company. A successful ecommerce companies is not profitability, but free ecommerce portal will have higher customer cash flows (FCF) since only FCF includes the effect stickiness than its competitors. For a successful of working capital as well. portal, typically 25% to 40% of its customers are more likely to purchase again within a month. KEY RISKS
In addition, a portal’s fast growth often reflects that The crucial risks for an ecommerce company include existing customers are referring friends to the site. the following: While mature portals like Amazon grow at around 20%, growth stage portals such as Flipkart are 1. VIABILITY OF BUSINESS MODEL growing at more than 100% per annum. RISK ASSESSMENT: HIGH (FOR EARLY STAGE COMPANIES) Customer stickiness and growth indicate the presence Early stage ecommerce companies often do not of multiple attributes. These include the relevance have a revenue model or proven revenue models. of available products and services to customers, For example, many advertisement- or referral- appropriate pricing, simple-to-use interface, based firms face monetisation issues. Similarly, niche convenient payment methods, and efficient delivery start-ups like LykeStore focusing on selling curated and product return process. fashion products have had to cease operations. Even relatively older business models selling discount 4. POTENTIAL MARKET coupons online, e.g., Groupon, still face questions A primary value driver of an ecommerce portal is about their survivability. Investors should look for the ultimate potential market. Can the model be past successes of companies with similar business extended to new products and service categories? models, and assess whether the business model How easy would it be for the portal to go into new can work in the focus geography of the company geographies or countries? How many additional (e.g., curated commerce is moderately successful users are likely to start using the offerings of the elsewhere, but mostly failed in Singapore due to its portal in the future (due to reasons such as higher low population). income, access to credit cards and the Internet). The larger the potential market size, the higher the value 2. LACK OF FUNDING AVAILABILITY of the portal in the long-term. RISK ASSESSMENT: HIGH (FOR EARLY AND GROWTH STAGE COMPANIES) 5. EBITDA MARGINS AND WORKING CAPITAL Since ecommerce companies need to utilise a large These key value drivers are more relevant to late amount of cash in the initial and growth stages to stage ecommerce portals where investors are looking stay competitive, the biggest risk is that they will to get returns from their investments instead of run out of cash before the competition. The current
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cash reserves, current cash burn rate (cash used per In fact, companies like Amazon are currently facing month), possibility of raising subsequent funding this very risk. Hence, we perceive this as a high risk and financial capabilities of the investors are some of for ecommerce portals. the key parameters to look at before evaluating the risk of running out of cash. 5. NEW COMPETITORS AND BUSINESS MODELS RISK ASSESSMENT: MODERATE 3. COMPETITION Another key risk is the emergence of new competitors RISK ASSESSMENT: HIGH (FOR EARLY AND into the market, notably larger international GROWTH STAGE COMPANIES) competitors. The competitors may be using the same Most ecommerce business models have significant business model as the portal in question or a superior economies of scale, which means only one to two business model that may be hard to emulate. An players eventually survive in a given business model. example is housing websites that used to connect There is always a risk that larger competitors will consumers to brokers are now facing competition attract more buyers and sellers, driving the smaller from new websites that directly connect consumers players out of business. Thus, the relative size of the to consumers. player compared to key competitors should be an important criterion for investment. However, historically these risks have been moderate since there are not many examples of new players 4. NOT REACHING EVENTUAL PROFITABILITY OR that have been able to displace an existing market CASH FLOW TARGETS leader in the ecommerce space. RISK ASSESSMENT: HIGH Companies invest a lot of cash in the eventual hope 6. TECHNOLOGICAL AND MARKET of having a less competitive market and achieving OBSOLESCENCE higher profitability and positive cash flows. However, RISK ASSESSMENT: MODERATE there is always a risk that the target profitability Ecommerce websites also face risks from new may not be achievable. Perhaps the portal will not competitors coming in with a better technology be able to reach the kind of scale it requires for the platform. However, most large websites have been target profitability, or buyers and sellers move away able to innovate or copy better platforms of new from the portal when the commission is increased, or entrants. In some cases, the market for the key the competition never reduces to the desired level. goods may come down sharply. For example, CDs Another key risk is that negative working capital and DVDs sold by ecommerce websites are being adds to the cash flow only until growth occurs. Once replaced by online downloads, while ebooks are fast growth slows down, the negative working capital replacing books. In these cases, most websites have stops contributing significantly to the cash flow. been able to innovate to match the changing market Thus, the overall cash returns to investors reduce. preferences. Hence, we perceive these risks to be moderate.
RELEVANT VALUATION METRICS
Since the focus of ecommerce firms is first to acquire sufficient scale by investing large amounts of cash upfront and then reaping the rewards, different metrics should be used for ecommerce companies in various stages. The following table shows the relevant metrics for ecommerce companies in different stages.
1. EARLY STAGE The focus at this stage is scaling up by attracting more buyers and visitors to the site to prove the business model.
Thus the key valuation multiples include valuation/visitors, valuation/GMV.
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2. GROWTH In the growth stage, the primary aim is to establish a revenue model and scale up STAGE as rapidly as possible to pre-empt competitive action. Valuation metrics include overall GMV and growth in GMV, revenue and revenue growth, the number of buyers and growth as well as repeat purchase rates.
Consequently, the key valuation multiples include valuation/visitors, valuation/ GMV and valuation/revenue.
3. LATE STAGE For late stage ecommerce companies, the aim is to maximise profitability and cash flow while maintaining growth. Therefore, the critical metrics are revenue and revenue growth, GMV & GMV growth, EBITDA margins and free cash flow.
Key valuation multiples include valuation/revenue, valuation/EBITDA (EV/EBITDA) and valuation/free cash flow.
Table 6: Valuation Metrics for Ecommerce Portals at Various Stages
S. NO. EARLY STAGE GROWTH STAGE LATE STAGE
1 Number of buyers & buyer Revenue & revenue growth Revenue & revenue growth growth
2 GMV & GMV growth GMV & GMV growth GMV & GMV growth
3 Repeat Purchase Rate Number of buyer & growth EBITDA Margin
4 - Repeat Purchase Rate Free Cash Flow
OVERALL CUSTOMER TRACTION TOPLINE GROWTH & TOPLINE & BOTTOMLINE FOCUS CUSTOMER TRACTION GROWTH, CASH FLOW
EARLY STAGE: Usually first 2 to 3 years of operations of an ecommerce company. GROWTH STAGE: Approximately 3 to 6 years of operations. LATE STAGE: More than 6 years of operations.
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8. EPAYMENT
Epayment system is defined as a method of making in the emerging markets. According to The Nilson payments for products or services over an electronic Report, card payment transactions in the APAC grew platform such as the Internet or mobile phone instead 27.4% from US$7,362 billion in 2013 to US$9,382 of using cash, cheque, in person or via mail. billion in 2014. Epayment transactions were said to have grown to a total of 34.8 billion transactions Consumers use epayments because of its globally in 2014. (Source: Capgemini) The epayment convenience. For example, when you make a purchase market, primarily in South East Asia, is drawing keen online, and have a PayPal account, making a payment interest from leading international players such as is as simple as clicking your mouse. PayPal, Alipay and Payment Asia. As per the graph below, the emerging Asian markets have the highest On the other hand, merchants and ecommerce growth potential in epayments, as evident from the websites accept payments using epayment channels current low penetration levels. since it helps them attract more customers. Customers prefer to purchase from ecommerce websites that For the scope of this paper, we focus on the payments provide a greater variety of convenient payment that support business to consumer ecommerce options compared to ones that offer limited options. transactions or payments and transactions enabled Epayments are growing fast driven by the growth by mobile phone (mpayment).
Figure 34: Payment Preferences in Various Regions %, TRANSACTIONAL PER CAPITA 2011 PER CAPITA %, TRANSACTIONAL
Emerging Asia* Latin America** USA & Canada CASH 98% 91% 48% CHECK 0.6% 1% 9% CARD 1% 4% 34% ELECTRONIC 0.4% 4% 9%
* China, India, Indonesia, Malaysia and Thailand Source: McKinsey Global Institute ** Argentina, Brazil, Chile, Colombia, Mexico and Peru
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KEY DRIVERS & RESTRAINTS
Figure 35: Drivers & Restraints of Epayment Industry Growth
GROWTH DRIVERS GROWTH RESTRAINTS
INCREASING INTERNET SECURITY CONCERNS PENETRATION
GROWTH IN ECOMMERCE RESTRICTIVE REGULATIONS
HIGHER ADOPTION, REDUCING INDUSTRY FRAGMENTATION PRICES OF SMARTPHONE DEVICES
KEY DRIVERS 2. GROWTH IN ECOMMERCE Ecommerce is projected to expand at a fast pace, 1. INCREASING INTERNET PENETRATION especially from emerging markets. The Asia-Pacific With electronic payments, it is hard to conduct ecommerce volume is estimated to hit US$524 billion transactions without the Internet. Hence, the in 2016 (with a CAGR of 17% from 2012 to 2016)7 as increasing level of Internet penetration globally shown in the graph below. More ecommerce volume presents a conducive environment to facilitate the means higher usage of epayments regardless of the growth of epayment systems. The number of people methods or gateways. In South East Asia, Indonesia using the Internet is expected to rapidly escalate to is forecasted to be the biggest ecommerce market, 3.6 billion by 2018, representing about 48% of the while the most sophisticated market is Singapore. global population. Figure 37: Correlation between Ecommerce Sales and Figure 36: Correlation between Internet Penetration and Epayment Transactions in Indonesia Epayment Transactions in Indonesia (US$ Mn) (US$ Mn) Daily ePayment Transaction Transaction Daily ePayment Online Retail Sales (US$ Billion) Online Retail Daily ePayment Transaction Transaction Daily ePayment
ePayment volume Online retail sales Daily ePayment Transaction (US$ Mn) Transaction Daily ePayment Internet penetration ePayment volume
7 Source: Deloitte Source: Frost & Sullivan, Bank Indonesia, eMarketeer
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3. HIGHER ADOPTION, REDUCING PRICES OF The increase in online credit card theft, extensive SMARTPHONE DEVICES media coverage of such incidents, and heightened Advanced features in smartphones allow users to awareness among consumers about the threats execute easily electronic transactions (epayment) of performing transactions online offer significant from their devices. Smartphones are also increasingly resistance to epayment growth. For example, the serving as retail credit card readers (Point of Sales) shopping cart of Sourcebooks, an online bookstore, for SMB companies through products such as Square was compromised between April and June of 2014. and mPOS Plus. Hackers were able to steal the names, addresses, credit card numbers, expiration dates, card security The declining prices of smartphones heighten the codes and email addresses of users. affordability for most people. In fact, the penetration rate of smartphones rose to 24.6% of the global 2. RESTRICTIVE REGULATIONS population8 in 2014 and is poised to become a key Since epayment is a fast-evolving industry, driver for mobile payments. governments have not been able to keep up with the rapid pace of innovation in the industry. For example, Figure 38: Indicative Prices of Smartphones in Indonesia, mobile wallet companies have had to face several licencing issues. Customers were even required by law to keep a minimum balance in their THEN NOW emoney accounts. These issues pose serious hurdles in the adoption of epayment in the country, although Xiaomi Elephone Indonesia’s central bank has been trying to relax the rules in recent years. iPhone 3. INDUSTRY FRAGMENTATION For any payment platform to become valuable, a sizable number of merchants and consumers should agree to use the same platform. As an example, PayPal is extremely popular with merchants because of the high number of consumers with a PayPal account. At the same time, it is popular among consumers since many ecommerce websites accept payments via PayPal. However, if too many people try to push their own epayment platform, none will have a critical mass of merchants or consumers. This is happening Doogee with the advent of near field communication (NFC)- enabled payments (a technology allowing two $75 - devices placed near each other to exchange data), >$500 $200 with Apple, Google, and credit card companies like Visa and MasterCard promoting their own platforms. In the end, none of the companies have been able to KEY RESTRAINTS acquire enough merchants or consumers, hampering the growth of the industry. 1. SECURITY CONCERNS Ecommerce offers the electronic payment industry VALUE CHAIN AND BUSINESS immense opportunities and potentially new security MODELS risks and vulnerabilities. Information security, therefore, is a critical management and technical prerequisite for any efficient epayment transaction VALUE CHAIN activities over the Internet. Epayment refers to payments made online on an 8Source: eMarketeer, United Nations, Frost & Sullivan
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ecommerce website. An offline payment made universe. The value chains in the two cases are using a mobile phone is defined as mpayment, and described below: increasingly treated as a subset of the epayment
Figure 39: Online Epayment Value Chain
ONLINE/ ECOMMERCE PAYMENT MERCHANT PAYMENT CUSTOMER MOBILE ISSUER WEBSITE GATEWAY ACQUIRER NETWORK WALLET
ONLINE EPAYMENT VALUE CHAIN data transmission, and data security of the credit card payment. CUSTOMER The customer makes the payment on an ecommerce MERCHANT ACQUIRER website. The bank that agrees to collect payment from the merchant (ecommerce website, in this case). The ONLINE WALLET merchant acquirer takes on the financial risk in Sometimes the consumer may use an online or mobile accepting the merchant’s payment card transactions wallet to make payment on the website to avoid the and pays the merchant an equivalent amount after hassle of filling out credit card details. PayPal, Lemon deducting the processing fee. Wallet and Google Wallet are examples of online wallet services. Consumers can use these wallets PAYMENT NETWORK independently, or link them to their bank account The network allows for transactions between and credit card to avoid the risk of account balance the acquiring bank and card issuing bank. Visa, running out. When used independently, it disrupts MasterCard and NETS are major payment networks. the traditional credit card value chain since it directly In cases when a consumer pays through PayPal transfers money from the buyer’s account to the account without linking to a credit card, PayPal may merchant’s without utilising the credit card network. also serve as a payment network.
ECOMMERCE WEBSITE ISSUING BANK A website that collects payment from customers in The bank that issues the credit card or debit card return for purchases, or in some cases, on behalf of to the consumer. It is the bank that pays for the a third-party. transactions and payments made are ultimately reflected in the credit card account of the customer. PAYMENT GATEWAY An application that allows the website authorisation,
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Figure 40: Offline Epayment Value Chain
CUSTOMER MOBILE OFFLINE POS MERCHANT PAYMENT ISSUER APPLICATION MERCHANT SOLUTION ACQUIRER NETWORK
MPAYMENT VALUE CHAIN POS SOLUTIONS These players provide Point of Sale (POS) terminals to CUSTOMER merchants to accept payments from a mobile phone The customer makes payment to a physical merchant or credit card. The solutions may be smartphone- by swiping or tapping the card at a POS terminal. based as in the case of mPOS Plus and Square POS or swiping/contact-based like First Data. MOBILE APPLICATIONS Encompasses NFC-enabled and other mobile When the consumer exclusively uses a mobile applications that facilitate transactions. The application, or the merchant uses a smartphone- consumer may be using a conventional credit card based POS (mPOS), the transaction falls under the or mobile phone to make payment. An NFC-based definition of mobile payment, which is treated as a app allows the customer to pay by just tapping on subset of epayment in this paper. the payment terminal while other apps require online verification. This distinction is explained in greater The remaining three players (acquirer bank, payment detail in the business model section. The apps may network and issuer) have identical functions as in the or may not be linked to a credit card. case of online epayments.
Sometimes funds transfer or payments can be made via SMS, without the use of a mobile application. Such transfers are popular in countries like Kenya and the Philippines and examined in detail later in this section. Again, such mobile cash transfers may or may not be linked to a credit card.
OFFLINE MERCHANTS These are physical merchants accepting payments.
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BUSINESS MODELS execution of online payments as well as money transfers. The idea behind epayments is simple; it involves payments made electronically. However, models may Charging Model: Transactional-based model vary depending on the functions, device or purpose (generally charged to the merchant; buyer is charged they serve. For this paper, we focus exclusively on the when a credit card is used). most popular product categories and their models. This includes payment gateway, mobile or online 3. MOBILE CASH wallets, mobile cash, NFC-based payments, and Mobile cash is similar to the concept of a mobile smartphone-based credit card transactions. wallet, but comes with a crucial difference – there is no credit card or debit card linked to a mobile cash 1. PAYMENT GATEWAY account. This disrupts the traditional credit card A payment gateway allows you to make payment value chain since the transaction occurs directly through a website or mobile app using a credit card between the consumer’s mobile cash account and or debit card. Traditionally, such gateways were the merchant’s account. There are two variations to only used by ecommerce websites. However, these mobile cash: days payments ranging from utility bills, school fees, to mobile bills can be settled via online gateways. (i) SMS-based mobile cash: The account is linked to Examples include eNETS, PayDollar, and GTPay. a mobile number where money can be transferred to other mobile cash accounts only. The model Basis of Value Creation: Enabling secure credit card is popular in emerging markets with low mobile and debit card transactions online. broadband penetration. Examples include T-Cash in Indonesia, M-PESA in Kenya, and Smart Money in the Charging Model: Merchants are charged a set-up Philippines. fee, annual fees and transaction fee (minor fee per transaction and a percentage of payment value). The (ii) App-based mobile cash: Payment is made using bulk of the fees charged as a percentage of payment an app to other app users or business. Examples value is passed onto the merchant acquirer, payment include Dash Pay and DBS PayLah! in Singapore. network, and issuer. Basis of Value Creation: Convenient and secure 2. ONLINE OR MOBILE WALLET transfers via mobile without credit cards or debit An online wallet is like an online account where you cards. can transfer money and keep a balance. The balance can then be used to pay for online purchases or Charging Model: Transactional-based models. Some transfer funds to online accounts of other users. You services like DBS PayLah! are free. can even store the details of your physical credit cards and use them to pay through your online wallet. 4. NFC-BASED PAYMENTS Modern wallets also allow storing of debit cards and NFC technology allows two devices placed within a reward cards among others. The advantage is that few centimetres of each other to exchange data. For the user need not fill out the details of these cards this to work, both devices must be equipped with an each time a payment is made. Examples include NFC chip. PayPal, Google Wallet, Lemon Wallet, and Paytm. After launching the application on your phone, the Online wallet companies now have a mobile version, phone is tapped on the credit card terminal to make making it simpler to make payments and purchases payment. At this point, you may be asked to scan your through mobile app stores. These are referred to as finger or enter a passcode to approve the transaction. mobile wallets. The transaction is then validated with a separate chip called the secure element (SE), which relays the Basis of Value Creation: Convenient and secure authorisation back to the NFC modem. The payment
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completes processing similar to a traditional credit using a smartphone or tablet and is especially card swipe transaction. The NFC-based payment app beneficial for small-scale merchants that are unable can be linked to your mobile wallet. Examples include to afford expensive POS solutions with high set-up Apple Pay, Android Pay, Samsung Pay, Visa Paywave, and annual fees to accept credit card payments. This and MasterCard PayPass. mode also keeps track of payments, inventory, real- time data, and invoices for the merchant. Examples Basis of Value Creation: Faster payment in a secure include Square POS, mPOS Plus, and ROAMpay. manner. Basis of Value Creation: Lower cost of operation for Charging model: Transactional-based model. merchants, and ease of payment.
5. SMARTPHONE-BASED CARD TRANSACTION Charging Model: Device cost plus transactional- The technology allows credit cards to be swiped based model.
VALUE DRIVERS & KEY RISKS
Figure 41: Value Drivers & Key Risks for Epayment Companies
KEY VALUE DRIVERS KEY RISKS
• Scale • Validation of Technology • Funding Benefits • Customer Growth • Failure to Scale Up • Ease & Security • New Competition & Business Model
Frost & Sullivan
KEY VALUE DRIVERS and consumers. Large investments are required to subsidise payment terminals at merchants, provide 1. SCALE them with better transaction fees compared Any payment platform requires a critical mass to competitors, and publicise features among of merchants and users. If there are not enough consumers, such as cash back promotions. The merchants accepting payments from the platform, amount of funding is important for the long-term users will not find it useful. Likewise, an insufficient prospects of an epayment company. number of users may not encourage merchants to invest in the platform. The number of merchants and For example, eBay paid US$800 million for Braintree, consumers using a particular payment platform is a global payment platform that facilitates mobile and a good predictor of how successful it will be in the ecommerce payments. Square POS received US$590 future. This why the epayment industry is dominated million after 9 rounds of investments. Card payment by leading companies like PayPal since smaller giant, Visa, invested in epayment solutions company players may find it difficult to survive beyond a point. Stripe, with total funding to date amounting to about US$200 million. 2. FUNDING Since scale is critical, epayment companies must 3. CUSTOMER GROWTH heavily invest in initiatives to attract merchants Customer growth indicates the attractiveness of a
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platform. A company with higher customer growth 2. FAILURE TO SCALE UP rate will have a better chance of achieving greater RISK ASSESSMENT: HIGH (FOR EARLY AND scale than its competitors and steady state revenue GROWTH STAGE COMPANIES) in the future. Since scale is of utmost importance in the epayment business, failure to scale up is the biggest risk in the 4. EASE AND SECURITY business. Epayment companies may fail to scale up These are key value drivers for epayment companies. when they are not able to acquire enough merchants Providers that can simplify payment and make it more and consumers on their platform. This can happen secure will gain higher adoption by both merchants due to inferior technology, ineffective marketing and customers, leading to a winning position among strategies or lack of funding. Companies that do other providers. PayPal is a major success due to its not have sufficient funds to spend on merchant and payment ease and customer protection policy; Alipay consumer acquisitions are likely to lose the battle from Alibaba adopts similar features and is poised to better-funded companies. Investors interested in for early success in China. pouring funds into an epayment company should consider the company’s ability to raise successful KEY RISKS funding, as well as its ability to attract enough merchants and users in the future. 1. VALIDATION OF TECHNOLOGY BENEFITS RISK ASSESSMENT: HIGH (FOR EARLY STAGE 3. NEW COMPETITION OR BUSINESS MODELS COMPANIES) RISK ASSESSMENT: LOW Epayment is a fast evolving field with promising There is always a possibility of larger global technologies. However, not all make payments faster, participants entering a regional market, driving more convenient or secure. For example, non-SMS out regional enterprises, or a newer, more efficient based mobile cash platforms like Dash are struggling technology replacing an older one. However, once to grow since it does not simplify payments a payment platform gathers enough merchants compared to credit cards. NFC-based mobile and consumers, it is difficult to displace it. Hence, payment technology has been touted as the next big epayment companies like PayPal continue to maintain thing for several years with many pilot projects being its popularity for the past 15 years. So apart from executed by banks and telco operators. However, the being daunting to set up and expand an epayment pilot projects reaped limited success until recently business, there are significant barriers to entry for because it was difficult to facilitate fast payment while new companies to challenge an already scaled up ensuring security. A combination of convenience and payment platform. security have been made possible only recently with solutions like Apple Pay.
RELEVANT VALUATION METRICS
Similar to ecommerce companies, epayment companies also need to obtain sufficient cash funding initially to spend on operations and infrastructure, and achieve the rewards later. As a result, epayment companies can be evaluated with various metrics at different stages.
1. EARLY STAGE The key focus in this stage is attracting enough number of merchants and consumers and making them transact on the platform. This is also a stage where the company needs to prove that its technology indeed makes payment smoother and secure.
The key valuation multiples include the number of merchants, number of users and monthly transaction volume (total dollar value of transactions on the platform) and growth.
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2. GROWTH In the growth stage, revenue becomes important in addition to the transaction STAGE volume. Hence, the revenue and revenue growth, as well as transaction and transaction growth, become key parameters for valuation.
3. LATER STAGE During this stage, the company’s main focus is to maximise profits and cash flow while keeping growth stable. The metrics we use for evaluation are revenue and revenue growth, EBITDA margins and profit margins.
Table 7: Valuation Metrics for Epayment Companies in Various Stages
S. NO. EARLY STAGE GROWTH STAGE LATE STAGE
1. Merchants & merchant Merchant & merchant Revenue & revenue growth growth growth
2. Users & user growth Users & user growth EBITDA Margin
3. Transaction volume & growth Transaction volume & growth Profit Margin
4. - Revenue & revenue growth -
OVERALL CUSTOMER TRACTION INCREASE GROWTH & TOPLINE & BOTTOMLINE FOCUS CUSTOMER TRACTION GROWTH
EARLY STAGE: Usually first 1 to 2 years of operations. GROWTH STAGE: Approximately 2 to 5 years of operations. LATE STAGE: More than 5 years of operations
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9. CROWDFUNDING
Crowdfunding refers to the use of online platforms by Reward- Equity- project initiators to access a network of prospective Lending/Debt based based based funders/investors beyond the traditional circle of 68% 10% 7% owners, friends and relatives, business angels and venture capitalists (VCs) to fund a campaign project or venture. It is an important source of financing for projects or ventures by start-up or early stage companies that would otherwise not get the Donation- Royalty- based based necessary funds or access to lending. The primary 10% 2% reasons why campaigns turn to crowdfunding include little room for negotiations with banks on interest Hybrid-based rates despite having a lucrative product, inflexible 3% terms from banks, lack of track record/securities with banks, and the risks associated with their business. Source: 2015 Massolution Global Industry Report, These factors limit them to a small pool of VCs that Frost & Sullivan Analysis require high returns, and as such, are highly selective in who they fund. To date, there are over 1,250+ crowdfunding sites listed on the Internet. The number continues to grow yearly Globally, the crowdfunding industry raised US$16.2 as acceptance of the concept increases amongst billion (SGD22.6 billion based on exchange rate of traditional funding markets. Key subcategories are USD/SGD = 1.398 on November 5, 20159) in funding listed in Figure 43 below. volume in 2014. This is expected to grow to US$34.4 billion by the end of 201510 and up to US$96 billion by Moving forward, the focus is expected to be on 202511. It is estimated that US$87,000 is raised on an campaigns that involve investments (equity or hourly basis12. Based on 2014 statistics, North America revenue/profit sharing), localisation (limited locality), continues to lead in the crowdfunding market at 58% mobile solutions and group-based approaches. contribution to the global funding volume with Asia recording exponential growth in funding volume. While the trend looks set to continue, Europe’s contribution is expected to decrease in 2015 from 20.1% to 18.8%10 due to its fragmented regulatory and Intellectual Property Rights (IPRs) regimes.
Figure 42: Split of Funding Volume Raised through Crowdfunding by Geography and Type
North America Europe Asia 58% 20% 21%
South America, Oceania & Africa 1%
9 Oanda.com 11 Source: Info Dev, World Bank. October 2013 10 Source: 2015 Massolution Global Industry Report. March 2015 12 Source: Entrepreneur, Entrepreneur Media Inc. October 2014
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Figure 43: Examples of Crowdfunding Sites
DEBT-BASED (Contributors receive interest payments in exchange for contributions)
EQUITY-BASED (Contributors receive shares in exchange for contributions)
REWARDS- BASED (Contributors receive goods/ services in exchange for contributions)
DONATION- BASED (Contributions are tax deductible depending on nature of campaign)
HYBRID
Source: Frost & Sullivan
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Of all categories, equity crowdfunding is typically In the US, Title III of the JOBS Act 201213 is anticipated subject to stringent regulations. New regulations to legally open up equity crowdfunding in a big have been adopted in a handful of countries including way to the unaccredited/unprofessional investor by the United States (US), Canada, United Kingdom putting in place appropriate safeguards to mitigate (UK), Italy, France, Germany, Spain, New Zealand investment risks. The recent Regulation A+ that came and Australia. However, the lack of regulation has not into force in June 2015 takes a step towards this by precluded the emergence of equity crowdfunding in targeting only later stage companies. Title III targets a market. the much larger number of start-up or early stage companies (e.g., seed and Series A types) with lower Despite equity crowdfunding being a global activity, regulatory compliance costs. legislation is different in most countries with varied regulations and guidelines on investment limits, the Title III is projected to give the US a head start of exercise of shareholder voting rights, threshold for more than 2 years should Singapore start limiting prospectus requirements, rules on transparency, equity crowdfunding to accredited and institutional investment suitability tests, client money protection, investors as proposed in the February 2015 investment advice as well as tax treatment for consultation paper issued by the Monetary Authority crowdfunding based on their readiness to embrace of Singapore (MAS). The JOBS Act 2012 promotes crowdfunding. This has implications on cross-border crowdfunding as a complement to traditional crowdfunding and may lead prospective investors to funding while the MAS paper views crowdfunding as focus on unregulated jurisdictions. a substitute for seed funding.
KEY DRIVERS & RESTRAINTS
Figure 44: Drivers & Restraints of Crowdfunding Industry Growth
GROWTH DRIVERS GROWTH RESTRAINTS
UNMET NEEDS WITHIN TRADITIONAL FAILURE TO RAISE FUNDS FUNDING SECTOR
GROWTH IN COLLABORATION ON POOR INVESTOR REACH AND THE INTERNET EXHAUSTION
GROWTH OF SOCIAL MEDIA INVESTMENT RISK
CENTRALISED REACH TO AND INTERACTIVITY WITH FUNDERS/ LACK OF REGULATORY FRAMEWORK INVESTORS
GROWTH OF CROWDFUNDING JURISDICTION ISSUES SUCCESS STORIES
INEFFICIENT SECONDARY MARKETS
13 Source: Jumpstart Our Business Startups (JOBS) Act of 2012, Title III-Crowdfunding. Scheduled implementation in October 2015.
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KEY DRIVERS due to access to a much wider network.
1. UNMET NEEDS IN THE TRADITIONAL FUNDING 3. GROWTH OF SOCIAL MEDIA SECTOR Social media with its current global penetration Banks and major investors are increasingly facing of 30%15 and growing, offers the crowdfunding challenges in meeting society’s funding needs. community a ready source of prospects among Community-based projects, as well as less favourable interest-based communities. Social media also has and risky segments, require alternative funding the influence to build trust between stakeholders and channels. Examples of these segments include accelerate adoption of crowdfunding and innovation. start-up and early stage companies, social/non- profit enterprises, innovative entrepreneurs as well 4. CENTRALISED REACH TO AND INTERACTIVITY as organisations in the arts and scientific research WITH FUNDERS/INVESTORS sectors. Crowdfunding, due to its ability to spread Crowdfunding platforms facilitate quick, instant fund acquisition and its associated risks across a access to and interactivity with thousands of large number of investors, is the ideal solution for accredited prospective investors globally. This these segments. supports growth in entrepreneurship as well as in the quality and viability of products developed 2. GROWTH IN COLLABORATION ON THE through valuable feedback and access to skill sets of INTERNET accredited prospective investors via public forums. With global Internet penetration now at 40%14, the Without these platforms, project initiators may potential to tap into connections and resources not have the contacts or the time to interact one- available worldwide is set for exponential growth. on-one with each potential investor. For SMEs and The Alibaba Group’s recent success in ecommerce, other incorporated businesses, crowdfunding offers i.e., surpassing Amazon.com sales in 2012, and the option of funding without the hassle of a public continuous high growth rate is a testament to this listing. fact. Crowdfunding is a prime growth area in today’s collaborative economy. Unlike the traditional VC 5. GROWTH OF CROWDFUNDING SUCCESS model with limited funds spread across highly STORIES selective projects, equity crowdfunding has the Crowdfunding success stories build confidence potential to scale depending on the model employed among investors. Below are some examples:
Table 8: Crowdfunding Success Stories
COUNTRY ROLE OF CROWDFUNDING IN CAMPAIGN FUNDING TARGET PLATFORM OF ORIGIN CAMPAIGN SUCCESS VERSUS ACHIEVED (TYPE)
US Pebble Raised funds for a wristband that Target Kickstarter Time works with iPhone and Android apps US$500,000 (Reward) to provide instant, easy notifications of important calls, emails or other app Achieved alerts via the display on the watch’s US$20,338,986 digital face.
US Scanadu 1. Raised funds for a scanner that reads Target Indiegogo Scout and sends vital signs to the user’s US$100,000 (Reward) smartphone. Achieved 2. Sped up the FDA approval process. US$1,664,574
3. The exposure gained attracted US$14 million in VC funds post-campaign.
14 Source: www.wearesocial.net. Retrieved in August 2015 15 Source: www.internetlivestats.com/internet-users/. Retrieved in November 2015 56 Investing in Financial Technology & Consumer Digital Technology Companies We Accelerate Growth www.frost.com
COUNTRY ROLE OF CROWDFUNDING IN CAMPAIGN FUNDING TARGET PLATFORM OF ORIGIN CAMPAIGN SUCCESS VERSUS ACHIEVED (TYPE)
UK Seedrs Raised funds for “aggressive” expansion Target Seedrs in exchange for combined equity share £750,000 (Equity) of 33% in the business. (Target reached within a few hours!)
Achieved £2,583,420
Singapore Djenee Raised funds to build a digital concierge Achieved FundedByMe business in Singapore. SG$500,000
Taiwan Appendectomy Raised funds to build a platform Target FlyingV Project to increase transparency in politics $11,984,994 NT (Reward) by ranking legislators. (Approx US$400,000)
KEY RESTRAINTS and cons of crowdfunding as well as what to look out for in a crowdfunded investment. In particular, 1. FAILURE TO RAISE FUNDS new investors need to be aware of the risks of Having a brilliant entrepreneurial idea and being able equity-based crowdfunded campaigns and carry to patent it may not translate into the necessary funds out detailed due diligence prior to investing. The to develop it. Due to the lack of experience, project alternative is to concentrate on investor-led models initiators often struggle to send the right signals to on equity crowdfunding platforms such as Syndicate investors and to find the right price points for their Room and AngelList, where the crowds invest products, giving the impression of incompetence. with professionals. Not conducting the proper due There have been several massive crowdfunding diligence carries the risk of investment failure. failures such as the campaign by Canonical Ltd on Indiegogo to raise US$32 million for the Ubuntu 4. LACK OF REGULATORY FRAMEWORK Edge smartphone and the Wikipedia Books Project As the crowdfunding concept is still new, many campaign that had planned to print the entire English countries have yet to adopt formal regulations for Wikipedia in book form. the investment model. Without clear and succinct regulations in place, there is a high likelihood of 2. POOR INVESTOR REACH AND EXHAUSTION scams and potential for abuse of funds. Also, there The success of crowdfunding platforms depends is a risk of investors facing losses if there is no significantly on their ability to reach accredited proper segregation of customer monies in the event investors globally without having to disclose highly- of platform closure or failure. The absence of a guarded intellectual property (IP) information. regulatory framework poses a substantial barrier to Should platforms fail to achieve the right mix (of attracting prospective funders/investors and to the social networks, philanthropic organisations and campaign’s success. large companies) or diverse platforms reach the same network of investors multiple times, its effectiveness 5. JURISDICTION ISSUES is diminished. Due to the nature of crowdfunding platforms sourcing funds via the Internet, it is expected that 3. INVESTMENT RISK in countries where crowdfunding is legal may face As the concept is relatively new, there is a uphill challenges in controlling and regulating considerable need to educate the market on the pros crowdfunding activities that happen outside their
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country. Case in point: the potential regulatory somewhat limited. For example, FOLIOfn Investment arbitrage in Europe where one member state may that offers investors an exit strategy for a fee prior invest in another member state. While harmonisation to loan/note maturity currently only operates in the may be the answer, this may take time. US, Canada and Japan. Other countries have yet to be addressed. The absence of an efficient secondary 6. INEFFICIENT SECONDARY MARKETS market means that investors might have to sell at The availability of an established secondary market a significant discount to exit, potentially deterring for debt- and equity-based crowdfunding is prospective funders/investors.
VALUE CHAIN AND KEY BUSINESS MODELS
Figure 45: Crowdfunding Value Chain
CROWDFUNDING PROJECT INITIATORS PLATFORM INVESTORS
FUNDING
VALUE CHAIN 1. TYPE OF PLATFORM In general, there are 4 types of crowdfunding The value chain for crowdfunding is relatively simple platforms: and straightforward. I. Debt-based Fund Raising Crowdfunding platform companies assist project This platform focuses on personal financing and initiators in leveraging the crowd by connecting later stage businesses. In this case, the fund is raised project initiators and investors via an online as a debt, i.e., the project initiator pays interest on crowdfunding platform. Once key stakeholders the funds raised, and the debt is usually secured by connect and the necessary dialogue or exchange business assets. It is the only sub-category that carries of pertinent information (e.g., on product features/ outbidding via auctions and requires a business functionalities and funding goals/objectives) has continuity plan due to its role in debt recovery. The taken place, project initiators then secure funding interest paid by the project initiator to investors is from investors via the crowdfunding platform with determined after the required loan/note amount is the help of payment partners, e.g., FirstGiving, accumulated based on the lowest bidders’ offered Stripe, WePay, Amazon and PayPal. While project loan/note amount and corresponding interest rate. initiators are usually external, crowdfunding platform The loan/note agreement is between the project companies may also use their own platform to initiator and selected investors. Examples include secure funds to cover operations costs as well as for Lending Club, Prosper and Kabbage in the US, and expansion, e.g., Seedrs (see Table 8). MoolahSense in Singapore. BUSINESS MODELS II. Equity-based Fund Raising Unlike debt-based crowdfunding, this sub-category The business model for crowdfunding platforms is concentrates on early stage and growth stage based on 3 parameters. First, is the type of fundraising financing. As the name signifies, investors get equity (debt-, equity-, reward-, or donation-based); second, in the project in return for funds invested. Project involves restrictions based on funding targets (all-or- initiators decide on their valuation target and if nothing; keep what you raise, and others); and third, “overfunding” is allowed. Each investor’s equity refers to the revenue model for the platform. interest will be proportionate to the investment made in the project initiator’s business. Platform
58 Investing in Financial Technology & Consumer Digital Technology Companies We Accelerate Growth www.frost.com revenues can be earned either from project initiators The project initiator is usually charged a fee. However, or investors. Examples include AngelList, Seedrs and some crowdfunding platform companies offer the CircleUp, all based in the US. option of charging investors related fees, e.g., on charity campaigns, making it free for the project III. Reward-based Fund Raising initiators. In the reward-based funding platform, project initiators offer rewards, for instance, a fixed quantity II. Listing or Due Diligence Fees of the product, to be shipped to the investor once the Many platforms charge a flat fee for listing. The project goes live or discount on purchase from the fee is charged for due diligence of the company or project initiator. Typically reward-based platforms idea. For example, the legal team at Bolstr reviews target a much larger set of investors compared to each campaign before it is launched to protect equity-based platforms. Examples include Kickstarter potential investors. The company charges a legal and RocketHub in the US and Ulule in France. fee of US$500 to US$1,000. Similarly, SeedInvest, a US-based equity crowdfunding website charges IV. Donation-based Fund Raising between US$3,000 and US$5,000 for due diligence As the name suggests, funding is strictly donation- and legal expense reimbursements. Due diligence based and generally for social projects. Examples typically involves confirming the current revenue, include Patreon in the US, YouCaring in the US, and customers, profitability, financing, market potential, Friendfund in Germany. and other financial and commercial parameters critical for valuation and prospects of the company. 2. RESTRICTION BASED ON FUNDING TARGET Several crowdfunding websites do not enable There can be 2 restriction categories if the project transactions between the investors and fundraisers. initiators do not meet their funding targets: In such cases, they act merely as a listing website and the listing fee is their sole revenue source. I. All or Nothing Investors go through the listed ideas on the website, In this model, the project initiator is allowed to collect identify potential investment opportunities, contact funds only if the funding target is met. If the funding the fundraisers independently and finance ventures target is not achieved, there is a high probability the of their choice. The listing fee for such platforms is project will not be financially viable. Hence, investors typically a few hundred dollars. may end up losing money. The All or Nothing restriction aims to protect investors from financial III. Fees for Ancillary Services viability risk. While this model is most prevalent in Many platforms provide multiple ancillary services equity-based crowdfunding, it also applies to debt- such as legal support, advice on campaign and reward-based crowdfunding as well. management, video creation services, and community organising software. Separate fees are charged for II. Keep What You Raise such services. Many reward- and donation-based platforms allow project initiators to collect whatever money they IV. Servicing Fees obtain irrespective of the funds raised. Higher Investors are charged servicing fees of between 0.5% fees may be charged on the Keep What you Raise and 1% of the total value of their investment. This is campaigns that do not meet their funding goals. most popular in debt-based funding.
3. REVENUE MODEL V. Carry Fees Refers to the method project initiators are charged The fee is charged to the investor on capital gains and how revenue is earned for the platforms. Typical made by them upon successful exit. The fee is usually revenue streams for crowdfunding platforms consist 5% to 7.5% of capital gains and is the primary model of the following: for several equity-based crowdfunding platforms.
I. Commission on Funds Collected Investors and project initiators may also incur Nearly all crowdfunding platforms charge a payment processing, late payment, and early exit commission on the funds collected by the project fees. Such costs are transparent for the platform. initiator (called origination fee in debt-based platforms). The standard commission is between 2% In addition to the fees charged to the project initiators and 5% of funds raised – a primary revenue model for and investors, crowdfunding platforms also have the all platforms. following revenue sources:
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I. Investing in successfully funded businesses On the other hand, curated platforms vet the business As part of the agreement to list campaigns on their model and perform due diligence on the company or platform, crowdfunding platform companies can idea before listing on their platform. The due diligence reserve their right to invest in successfully funded involves examining the current revenue, customers, businesses. As an example, Let’sVenture has the profitability, financing, market potential, and other option to invest half of its 2% syndicate fee as equity financial and commercial parameters critical for in a start-up or early stage company. valuation and prospects of the company. Curated platforms such as Funding Club claim that less than II. Investing in downstream markets 5% of ideas pitched to them are eventually listed Relationships with successfully funded businesses on the platform. As a result, investors are assured can be tapped to offer clients an initial marketplace of the quality of the idea and able to invest larger for successful products. sums. Curated crowdfunding platforms earn revenue through carry fees, direct investment in the idea or 4. LEVEL OF CURATION success-based commissions rather than through Crowdfunding websites range from completely open listing fees or ancillary services. Curated platforms platforms to highly curated platforms. are popular for equity-based crowdfunding.
In an open platform, anybody can start a funding Most platforms lie somewhere between completely campaign. The disadvantage of an open platform is open platforms and highly curated platforms. there is no guarantee on the quality of the project. Due to the inherent risks to investors, funding targets are usually lower for the open platform.
Table 9: Revenue Models of Various Crowdfunding Platforms
TYPE OF FUNDRAISING TARGET-BASED RESTRICTIONS REVENUE MODEL
Debt-based 1. All or Nothing • Origination Fee 2. At least 70% of funds • Listing or Due Diligence Fee • Annual Servicing Fee • Early Exit Fee • Ancillary Services
Equity-based All or Nothing • Commission on funds collected • Listing Fee (Optional) • Carry Fee (For some curated platforms) • Ancillary Services
Rewards-based • All or Nothing • Commission on funds collected • Keep What you Raise • Listing Fee (Optional) • Ancillary Services
Donation-based • All or Nothing • Commission on funds collected (by • Keep What you Raise project initiator or by investors) • Ancillary Services
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VALUE DRIVERS & KEY RISKS
Figure 46: Value Drivers & Key Risks for Crowdfunding Platform Companies
KEY VALUE DRIVERS KEY RISKS
• Scale • Competition Risk • Funding Volume on Platform • Intellectual Property Rights • Monetisation Model (IPRs) • Funding Success Rate • Platform Security Risk • Reputational Risk • Business Model Viability • Funding Environment
KEY VALUE DRIVERS 2. FUNDING VALUE OF EACH CAMPAIGN To be self-sustaining and cover individual cost The key value drivers of a crowdfunding platform structures, crowdfunding platform companies need company include the following: to raise a minimum funding volume on their platforms. Apart from increasing the number of successfully 1. SCALE funded campaigns, the size of the campaign is also As with most online businesses, achieving scale early a key driver of funding volume. A few prominent, on offers crowdfunding platform companies several high-value campaigns could raise the same amount benefits. Economies of scale, in this context, means in funding volume as a large number of small, low- the crowdfunding platform company has accessed a value campaigns. large enough network of investors able to offer the funds required by the range of project initiators they 3. MONETISATION MODEL work with. The more project initiators and investors While there is a host of crowdfunding platforms a crowdfunding platform company attracts to its available worldwide, not all end up making money. platform, the higher the likelihood of campaign Revenue earned from commissions and other success resulting in higher funding volume. Higher ancillary services is an indication of whether the funding volume enables crowdfunding platform platform is going to survive in the long-term. companies to lower commission rates both to stay competitive and capture more project initiators. This Platforms like FundersClub rely only on fees on becomes a virtuous cycle. capital gains (carry fee) that are inherently riskier. On the other hand, platforms with a higher number Even for curated crowdfunding platforms, the relative of investors and project initiators, as well as multiple scale compared to similar competitors is important. revenue streams offer lower long-term risks.
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4. FUNDING SUCCESS RATE place to protect the platform from security breaches, The funding success rate is a long-term value driver a company may put at risk its highly sensitive for crowdfunding websites. A low funding success donation records, user information and passwords. rate, compared to other platforms with a similar While this may not be detrimental, it still represents a model, may result in project initiators losing interest violation of the Personal Data Protection Act (PDPA). and shifting to competitors. Low success rate may also signify the absence of serious investors on the 4. REPUTATION platform or issues with project discovery on the RISK ASSESSMENT: MODERATE platform. In general, success rates vary based on the Without proper policies in place, a company may face model and can be as low as 9.8% . reputational risk when its crowdfunding platform is used to raise funds that are not used for its intended KEY RISKS purpose resulting in fraud/misrepresentation or involvement in illegal activities, e.g., production/ The main risks for a crowdfunding platform company distribution of adult content. include: 5. BUSINESS MODEL VIABILITY 1. COMPETITION RISK ASSESSMENT: HIGH (FOR EARLY STAGE) RISK ASSESSMENT: HIGH Crowdfunding websites have to either ensure a When a crowdfunding platform is successful, significant number of listings with easy search competition begins to increase rapidly. With functionality to lure small investments or greater competition, commissions start to spread over a funding and high success rates through curation of larger number of platforms and may decrease over ideas. If it is not able to achieve either, the long-term time. It may become increasingly more difficult to viability of the platform is uncertain. Thus, unless raise the minimum funding volume required to be a platform has already built a large community self-sustaining if a platform is not able to achieve with reasonable success rate, it potentially faces economies of scale. Therefore, competition is a significant risks. significant failure risk for early stage platforms. 6. FUNDING ENVIRONMENT 2. INTELLECTUAL PROPERTY RIGHTS RISK ASSESSMENT: HIGH (FOR EQUITY-BASED RISK ASSESSMENT: HIGH PLATFORM) Intellectual property rights (IPRs) vary from country Equity-based platforms rely on investors being able to country and is a major concern with cross-border to earn handsome profits on their investments when crowdfunding. For example, Europe’s fragmented the company undertakes an IPO, or its stakes are sold IPRs regime means that copyright management to another investor or company. Ultimately, prospects across the region would be a challenge since there for such liquidity events or subsequent stake sales is no single EU patent that provides project initiators are driven by the overall funding environment. This Europe-wide protection. in turn, depends on the overall liquidity in the market and interest in the particular industry. If the funding 3. PLATFORM SECURITY environment deteriorates, it poses tremendous risks RISK ASSESSMENT: MODERATE for equity investors and the business model of equity- Without the necessary network security measures in based crowdfunding platforms.
RELEVANT VALUATION METRICS
Crowdfunding platform companies have to invest heavily in building their platforms before being able to bring in project initiators. As this means investing large amounts of cash upfront and slowly building up the scale to recoup their initial investment, various metrics should be used at different stages. The following table shows the relevant metrics for a crowdfunding platform company at each stage of its development.
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1. EARLY STAGE In the early stages of growth, the focus should be on establishing credibility and trust with stakeholders on the crowdfunding platform. The company should adopt measures to build a secure platform and conduct due diligence on projects and project initiators. A key parameter to consider is whether momentum is building among project initiators and investors.
The key valuation multiples include valuation/number of campaigns, valuation/ successful campaigns, and valuation/fund raised.
2. GROWTH In the growth stage, the aim is to prove the revenue model and to scale up as STAGE rapidly as possible to pre-empt the competition.
The key valuation multiples include valuation/funding value and valuation/revenue.
3. LATE STAGE In the late stage, the aim is to maximise profitability and cash flow while maintaining growth.
The key valuation multiples include valuation/revenue, valuation/EBITDA (EV/ EBITDA) and valuation/earnings (P/E ratio).
Table 10: Valuation Metrics for Crowdfunding Platforms in Various Stages
S. NO. EARLY STAGE GROWTH STAGE LATE STAGE
1. Number of campaigns & Revenue & revenue growth Revenue & revenue growth growth
2 Number of successful Funding value & growth Funding value & growth campaigns & growth
3 Funding value & growth Number of successful EBITDA margin campaigns & growth
4 - - Profit Margin
OVERALL CUSTOMER TRACTION TOPLINE GROWTH & TOPLINE & BOTTOMLINE FOCUS CUSTOMER TRACTION GROWTH
EARLY STAGE: Usually first 2-3 years of operations. GROWTH STAGE: 3-5 years of operations. LATE STAGE: More than 5 years of operations.
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10. BIG DATA AND PREDICTIVE ANALYTICS
Big Data has been attracting much interest and tools and enterprise systems. Big Data refers to a publicity over the past few years as companies and new set of technologies that enable companies to solution providers highlight the tremendous potential store, manage and analyse large volumes of data benefits of the technology. Many organisations being generated at a high velocity from varied believe that data is the new “oil” and will give them sources in different formats. This capability is a game a competitive advantage over their competitors. changer for multiple industries including the financial However, it is still a poorly defined term and needs to sector that extensively uses Big Data technologies be understood properly. for multiple use cases including fraud detection (primarily fraudulent credit card transactions), credit Big Data is a phenomenon that describes the scoring and risk analysis of customers and identifying exponential growth of data, from every imaginable cross-selling and upselling opportunities based on digital source, including machine data, social past activities of their clients. media data, pictures, audio and video collected by commercial and government organisations. The global Big Data market is experiencing Traditionally, much of these different data sources exponential growth, expecting to reach US$78 were not stored and analysed in a meaningful way billion by 2020, and grow at a CAGR of 18.7% for due to the size, speed at which they were generated. the period of 2014 to 2020. The initial growth of the What’s more, the data was not organised into fields market is being driven by the need to manage the to be stored in Relational Database Management cost of storage and adoption of new visualisation System (RDBMS), the de-facto standard for tools that simplify data integration and analysis, but databases in the past. The amount of data generated will give way to a more advanced analytical need as each day has surpassed the capturing and processing organisations increasingly compete on information. capabilities of traditional database management
KEY DRIVERS & RESTRAINTS
Figure 47: Drivers & Restraints of Big Data and Analytics Industry Growth
GROWTH DRIVERS GROWTH RESTRAINTS
NEED FOR REAL-TIME DATA-DRIVEN SHORTAGE OF TALENT INSIGHTS
“CONSUMERISATION” OF SOLUTIONS SIGNIFICANT INVESTMENT
GROWTH OF DATA FROM IOT, SOCIAL LEGACY INFRASTRUCTURE MEDIA AND CONNECTED INDUSTRIES
AVAILABILITY AND AFFORDABILITY BUSINESS & USE CASES OF SOLUTIONS
DIGITAL TRANSFORMATION AND NEW BUSINESS MODELS
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KEY DRIVERS 3. GROWTH OF DATA FROM IOT, SOCIAL MEDIA AND CONNECTED INDUSTRIES 1. NEED FOR REAL-TIME DATA-DRIVEN INSIGHTS By 2020, it is estimated that most individuals on Organisations have long recognised the importance the planet will have an average of 5 to 10 connected of information to help guide decision-making. In devices associated with them. This means that there the early 80s and 90s, this was termed as executive will be between 50 to 80 billion connected devices support and decision support systems to guide generating data and information by 2020. decision-making by senior executives. Although the terminology and technology have evolved from online analytical processing to business intelligence CONNECTED to analytics to Big Data, the main objective of these DEVICES systems have not changed dramatically, that is to support decision-making. By
The difference is the exponential growth of data, 2020 the speed at which data is being generated, and the variety of data formats that is challenging the ability of there will be around existing systems to provide insights on a timely basis. 80 BILLION CONNECTED devices and sensors As organisations’ operations become increasingly complex and time-sensitive, it is critical that these That’s about systems support the need for timely insights to provide organisations with a competitive advantage and to optimise their operations. Big Data solutions provide a new paradigm for storing and computing data and enable organisations to extract near real- CONNECTED time insights from the large volume of data they are DEVICES accumulating. For example Marketstudy, an insurance company in the UK, implemented a Hadoop and Spark solution, enabling them to analyse hundreds of millions of quotes a second compared to the 400 thousand quotes in seven hours previously. This has led to savings of US$7.5 million from the reduction for every human of fraud and decreasing customer cancellation rates on the planet by 50%.
There 2. “CONSUMERISATION” OF SOLUTIONS are about As companies increasingly compete on information and recognise the value of Big Data, they strive to 50-100 improve the efficiency of their internal analysis sensors in a car across the entire organisation and demand tools that enable their employees to study the growing volume of data being generated. Big Data solutions providers are meeting this demand by making 2X analytics and Big Data more user-friendly and easily consumed for a wider audience beyond the data analyst and data scientist. For example, solutions providers like Tableau and Qlik have made analysis of data easy by simplifying data access and providing The number of sensors in the car are expected to intuitive visualisations to enable data discovery and double and this information analysed in the cloud. exploration. 65 Investing in Financial Technology & Consumer Digital Technology Companies We Accelerate Growth www.frost.com
The data is expected to exceed that of social media have the necessary skill sets in Big Data and deep networking in the next two years. The Internet of analytics is significantly impeding the adoption of Things phenomenon is expected to fuel the need for Big Data effectively across industries. Even in the Big Data solutions as companies struggle to optimise US, the largest market for Big Data and Analytics, it the insights gleaned from collecting information from is estimated that by 2018, there will be a shortage billions of low-cost sensors. of 140,000 to 190,000 people with deep analytics skills and 1.5 million managers and analysts with the 4. AVAILABILITY AND AFFORDABILITY OF ability to leverage Big Data16. The resultant effect SOLUTIONS is the need for organisations to rely on Big Data One of the main drivers of Big Data technology is Analytics solutions providers to provide technical its ability to provide resilient and cost-effective and business consulting services to help them compute and storage using commodity (off-the- achieve their business objectives. Big Data Analytics shelf) hardware, and open source driven software. solutions providers are rising to the challenge by Inspired by Google File System, the Hadoop and adding easy-to-use analytics capabilities into their MapReduce framework enable organisations to solutions, democratising Big Data and Analytics store and compute data over multiple hardware for a much wider audience. An excellent example is as a potential alternative to the more costly Microsoft’s Machine Learning that is providing easy- Enterprise Data Warehouse currently used. This has to-consume data science capabilities over its Azure enabled businesses to lower their cost of storage, cloud platform. accommodate more unstructured data, and in some cases, increase the amount of data storage by 100 to 2. SIGNIFICANT INVESTMENT 150 times. Big Data Analytics is on the radar of many C-suites and identified as a strategic imperative by most 5. DIGITAL TRANSFORMATION AND NEW companies. However, most Big Data Analytics BUSINESS MODELS deployments are not cheap, costing approximately There is an increasing awareness to leverage data to hundreds of thousand dollars, and as much as not only optimise internal efficiencies and increase a few million dollars. Due to the high cost of such sales, but also to use it to create value in the form of implementations, organisations are justifiably new data products and business models. One example cautious about their investments on Big Data of leveraging information to create new business is Analytics and the need to align them with their Uber’s use of data to transform the taxi industry. Uber overall business objectives and strategy. has more in common with a Big Data company than a taxi company. The company is highly valued not 3. LEGACY INFRASTRUCTURE because of its fleets of taxis, but rather for how it uses Traditional database infrastructure was designed for the information to connect drivers and passengers, efficiency; not volume, speed and the varied nature to automate and optimise the taxi industry. These of Big Data. Databases were predominantly designed companies recognise the potential of data to create for data mining and reporting purposes for specific innovative data products and new business models. applications, resulting in a proliferation of databases The trend towards using data to create value is and data stores. A big challenge in introducing Big expected to grow with the IoT phenomenon, as Data is integrating legacy data sources and dealing organisations move from transactional product sales with the data governance and architecture needs of to having ongoing relationships with their clients by the expanding use of existing data and new types of providing them with managed services. data.
KEY RESTRAINTS 4. BUSINESS AND USE CASES Many companies struggle with identifying appropriate 1. SHORTAGE OF TALENT business cases and use cases for deploying Big Data The acute shortage of experienced individuals who solutions. Although many Big Data deployments
16 Source McKinsey Global Institute: Big data (The next frontier for innovation, competition, and productivity)
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have been successful at integrating multiple sources to the creation of new services and business models of data, organisations strive to extract insights from data. across functional silos. Currently, outside of the well-publicised successful use of Big Data to create KEY BUSINESS MODELS new services and products by Facebook, LinkedIn, Amazon, Google and Uber, the most common The business models of Big Data companies are utilisation of Big Data by many organisations has varied, but can be broadly categorised based on been to reduce the cost of storage. However, to the target customer segment, revenue model (way realise the full potential of Big Data, use cases have to customers are charged), distribution channel, and evolve from improving costs and internal efficiencies types of goods and services being offered.
Figure 48: Dimensions of Big Data Business Models
TARGET SEGMENT Is it targeted towards B2B, B2C or B2B2C?
REVENUE MODEL How are buyers being charged for the products & services?
DISTRIBUTION How is the solution being offered into the market? CHANNEL
TYPE OF GOODS & What is being offered: product, software, data, knowledge, and SERVICES OFFERED services?
1. TARGET SEGMENT 2. REVENUE MODEL Defines the consumer of the Big Data services and Refers to how consumers are charged. Key models products being offered. Target customers can be include: individuals, in the case of Business-to-Consumers (B2C), or business-to-business (B2B). Transaction model: In this model customers are charged based on the contractual delivery and An example of Big Data use in B2C includes Amazon’s deployment of hardware, software, and services. recommendation engine to suggest relevant products buyers might be interested in, where the solution Licence model: Software pricing models based on leverages their past transactions to create upsell and Software-as-a-Service using subscription or usage- cross-sell opportunities. based deployment architecture. Solutions can be deployed on-premise or in the cloud. The most Big Data Analytics vendors and solutions providers common factors used to determine pricing include: contribute to the bulk of the B2B segment, with supply-side organisations offering their products and Volume: The volume of data to be analysed would services directly or via channel partners to clients. determine pricing. These include companies such as IBM, Greenplum, Number of concurrent users: Could range from a few Cloudera, SAP and SAS selling and deploying to tens of thousands of users. analytics hardware, software and services for clients Processing capacity: The total capacity required to or offering cloud infrastructure and analytics services process a given volume of data. like Microsoft. Complexity of query: The complexity of queries
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to be run on a data set also affects the processing Technology/Application/OEM Partners: Big Data capacity a company needs. analytics solutions providers form partnerships with software solution providers based on the The software term can be perpetual or annual sophistication of the solution. For example, Alteryx depending on the vendor. For large analytical partners with Cloudera and Hortonworks, the leading providers like SAS or IBM, the contract may be more Hadoop distributors in the market, making its complex based on the combination of purchased software more readily integrated with other Big Data products. solutions providers.
For example, Splunk offers perpetual or term licencing Consulting Service Partners/System Integrators: purchase options. Pricing is based on the amount of Vendors establish partnerships with system data being indexed, with discounts given for larger integrators or service providers to complement data volume. Alternatively, AlchemyAPI, recently their solutions with the services required by the acquired by IBM, charges based on the number of customer. IBM has in-house consultants trained with Application Programming Interface (API) events, the necessary skills required for initial set-up and which refers to the number of times an external training. software utilises the Big Data software capabilities. Resellers: Certified to sell software through their Freemium Model: Several Big Data Analytics start-ups own direct channels. These partnerships are usually adopt similar models as Internet-based start-ups by commission based. providing Freemium-like services where the solution is offered free up to a capacity or data volume being 4. TYPES OF GOODS AND SERVICES OFFERED processed. For example BigML, a machine learning Big Data Analytics solutions providers offer a myriad and data visualisation company, allows its software products and services, including physical hardware, to be used for free up to a task size of less than 16MB. software, and services required to support the data Several Big Data Analytics companies contribute to storage, compute and analytics infrastructure. Well- open source development and make their solutions established solutions providers include Cloudera, open to the public while providing paid enterprise IBM, SAS, MapR, Couchbase, Teradata, Microsoft, support and services. PredictionIO, an open source Google, EMC and HP. machine learning server, offers an enterprise edition that has additional advanced features for its Big Data Analytics solutions providers also offer enterprise clients while providing support, training data and insights as a service. These providers can and other consulting services. be categorised based on the nature of the data on offer and the key activities performed on the data, as 3. DISTRIBUTION CHANNELS illustrated in the following diagram. Big Data Analytics solutions providers offer a direct- selling model, and in many cases, have established networks of end users through indirect channels.
Figure 49: Channels for Big Data Sales
Direct Sales
VARs OEM Partners
System Application Integrators Partners
Service Technology Partners Partners
End User
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Figure 50: Types of Big Data Offerings
KEY ACTIVITY AGGREGATION ANALYTICS DATA GENERATION DATA SOURCES
DATA GENERATION AND TRACKED AND ANALYSIS GENERATED Companies in this category track & generate data and analyse this data. Companies are segregated by data generated from crowdsourcing, web analytics companies, connected devices.
DATA AGGREGATION ANALYTICS AS A MASH UP AND PRIVATE DATA AS A SERVICE SERVICE ANALYSIS Companies collect & Companies provide Companies that aggregate information analytics and insights aggregate data as from multiple internal based on data provided well as track data sources for their by the customers. by themselves and customers. perform analytics on the combined data set.
FREE DATA FREE DATA PUBLIC AGGREGATOR KNOWLEDGE DATA Companies collect & DISCOVERY aggregate information Companies help from available sources, analyse freely available usually free, and provide data, which might be in data distribution/ a non-standard format. dissemination.
Source: University of Cambridge
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VALUE DRIVERS & KEY RISKS
Figure 51: Value Drivers & Key Risks for Big Data Companies
KEY VALUE DRIVERS KEY RISKS
• Data Availability & Access • Viability of Business Model • Funding & Support • Lack of Availability of Funds • Talent • Regulation and Governance • Potential Market • Technological & Market • Embedded User Base and Obsolescence Interoperability
KEY VALUE DRIVERS 3. TALENT There are many new start-ups appearing on the Big Data Analytics scene. While the large analytics The key value drivers of a Big Data company are as companies like IBM, HP, Google, Facebook, EMC, follows: Baidu and SAS have long history and experience in the relevant markets, and extensive capabilities to 1. DATA AVAILABILITY AND ACCESS match, many new Big Data Analytics companies are Access to public and private data, especially unique relatively small, and hence, unproven. Many of these data sources, is a big value driver for companies that companies operate with few employees and deliver build their successes around data products. Data- solutions with relatively low capital by leveraging driven insights and predictions tend to become more the cloud. As deep Big Data Analytics talent is in accurate with larger amounts of data. The economics short supply, it is vital to understand the expertise of data is apparent with Amazon’s use of its vast and experience of individuals that form the company personal catalogue browsing and purchasing history and its technical team. This is one of the most critical to make relevant recommendations or Google’s use value drivers for evaluating Big Data Analytics start- of personal searches to provide highly targeted up companies. In fact, many large Big Data Analytics advertising. Similarly, companies like Next Big Sound, companies have been going on a shopping spree, FarmLogs and Welovroi leverage private and public purchasing companies with an intention to acquire data to provide data/insights as a service. talents in the respective fields of expertise. For example, Google acquired DeepMind Technologies, 2. FUNDING AND SUPPORT a start-up based in London, with the intention of Big Data Analytics start-ups, like most Internet start- adding experts in deep learning rather than specific up companies, need to operate in the initial phase. products to the company. Several start-ups operate in stealth mode in their initial phase and rely heavily on funding to get the 4. POTENTIAL MARKET operations off the ground. It is advisable to look at A key value driver for Big Data Analytics firms is initial backers of the start-ups and their track record identifying the relevant potential addressable market in the relevant domains to understand how they for the solution. Big Data Analytics solutions are could help these businesses grow in their targeted custom built for a variety of purposes, from business areas. intelligence, human capital analytics, network
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performance analytics to social media analytics, and and still closed its doors in 2014 since it was unable to reducing the cost of data storage. Understanding get enough customers for its SaaS model to recoup the potential market requires the current segments its large investments. and geographies the company plays, in how they might grow in future, and which other segments and 2. LACK OF AVAILABILITY OF FUNDS geographies may find use of the company’s solutions. RISK ASSESSMENT: MODERATE (FOR EARLY & For example, companies like Tableau operates in the GROWTH STAGE COMPANIES) data discovery and analytics segment. Currently, it Like most other Internet start-up companies, Big Data has around 35,000 customers in the form of large and Analytics enterprises need a moderate amount of cash medium-sized organisations in the world. However, in the initial and growth stages to stay competitive. its products can potentially be adopted by a number This is necessary to fund the development of of small companies, individuals, research scientists, technology, keep the company operating while it and students in future. acquires a sustainable user base, and retain the necessary talents before it sees a reliable cash flow 5. EMBEDDED USER BASE AND or is acquired by others. The current cash reserves, INTEROPERABILITY operating costs, possibility of raising subsequent Other key value drivers are the size of the funding and experience, and investor capabilities are solution provider’s embedded base of users and some of the main parameters to evaluate. interoperability of its solutions into existing systems. The number of active users and licences are important 3. REGULATION AND GOVERNANCE to sustain the development of features and asset RISK ASSESSMENT: HIGH utilisation for solutions providers offering pay-as- Data-as-a-service and other business models you-use services. leveraging the use of personal data are highly affected by the diverse data laws and regulations in different Similarly, interoperability is essential as organisations countries. Personal data regulations, for the most invest significantly in their existing information part, have not caught up with the speed of innovation infrastructure and require Big Data Analytics vendors in the use of information. As there is increasing to support integration for new solutions into existing interest in privacy and the rules governing the use of systems. The current interest in visualisation tools personal data, there is significant risk associated with such as Tableau and Qlik are due to their increasing how different countries would implement personal support for data integration into existing systems, data use guidelines and rules. The EU has agreed to making it easier for solutions to be deployed and implement new European data protection laws that consumed. potentially pose serious implications for companies such as Facebook and Google. KEY RISKS 4. TECHNOLOGICAL AND MARKET The key risks for Big Data Analytics companies OBSOLESCENCE include the following: RISK ASSESSMENT: HIGH The Big Data Analytics landscape is one of the most 1. VIABILITY OF BUSINESS MODEL vibrant, rapidly evolving technologies with many RISK ASSESSMENT: HIGH (FOR EARLY STAGE new companies appearing. Agile new companies COMPANIES) are continuously innovating, bringing advanced While many large Big Data Analytics vendors have technologies and new ways of doing business. For revenue models based on product, professional and example, Tableau’s visualisation tool is changing the consulting services, and software licence sale, many expectations of business intelligence and analytics early stage Data/Insight-as-a-Service companies do tools, leading BI vendors to evolve and enhance their not have a clear revenue model nor proven revenue existing portfolio or risk losing market share. Similarly, models. Many of these companies are advertisement- mature Big Data Analytics companies continue to and referral-based or B2B2C making it difficult to incorporate changes in the landscape, for instance, evaluate the revenues and profitability of the service. Microsoft working with Hortonworks to introduce For example, OpTier, a major Big Data Analytics Hadoop to Azure, and more recently, Spark. company raised more than US$100 million in funding
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RELEVANT VALUATION METRICS
Valuation metrics for Big Data Analytics companies remain varied depending on the nature of their Big Data Analytics solution. The following table shows the relevant metrics for Big Data Analytics companies in different stages.
1. EARLY STAGE The primary focus in this stage is scaling up by getting more users to try the solution and estimating the potential addressable market.
The key valuation includes the number of software downloads and active users, as well as the potential addressable market and growth of the market. For example, although the analytics application segment contributes to only 12.2% of the US$32.12 billion Big Data Analytics market, it is growing at a much higher CAGR of 28.1% compared to 18.7% for the general Big Data Analytics Market growth.
2. GROWTH In the growth stage, the primary aim is to establish a sustainable revenue model and STAGE to scale up rapidly. The valuation metrics revolve around the usage of the solution and software captured by measuring the number of licences and the consumption/ utilisation of solution.
Valuation multiples include the number of licences, revenue and revenue growth, and consumption/utilisation of solution.
3. LATE STAGE In late stage ecommerce companies, the aim is to maximise the profitability and cash flow while maintaining growth. The key metrics are revenue and revenue growth, EBITDA margins and cash flow.
Table 11: Valuation Metrics for Big Data Companies in Various Stages
S. NO. EARLY STAGE GROWTH STAGE LATE STAGE
1. Number of downloads & Revenue & revenue growth Revenue & revenue growth growth
2. Active users & growth Number of licences & growth EBITDA Margin
OVERALL CUSTOMER TRACTION TOPLINE GROWTH & TOPLINE & BOTTOMLINE FOCUS CUSTOMER TRACTION GROWTH, CASH FLOW
EARLY STAGE: Usually first 2 to 3 years of operations. GROWTH STAGE: Approximately 3 to 5 years of operations. LATE STAGE: More than 5 years of operations.
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11. CYBER SECURITY
Cyber security is the sum total of technologies, The financial services sector is the mainstay of methods, procedures and practices employed in today’s globalised monetary and economic setting. cyberspace to protect systems, networks, programs Large financial transactions and broad industry and data from unauthorised access, attacks, damage scope have resulted in the financial services sector and other malicious intrusions. Cyber security is becoming a prime target for cyber crimes – such as a critical requirement for institutions today. For financial fraud, identity theft, unauthorised access, financial organisations, however, cyber security is vital or loss of data and denial of service attacks. There to survival as it determines how they evolve without are three times as many security incidents among compromising brand reputation, customer loyalty, banks, credit unions and insurance companies than and existence. Cyber security is extensively accepted any other sector. as a challenge for governments and businesses alike. Once considered the realm of IT departments and For example, computer systems were hacked at JP security professionals, companies now recognise Morgan Chase & Co where the names, addresses, that a wider response is required. phone numbers and email addresses of approximately 76 million households and 7 million small businesses Cyber risks are business risks and must be dealt were compromised. The company only became within an overall information and risk management aware of the cyber attack in August 2014. framework. Cyber security is poised to gain prominence as more devices, the Internet of Things, As a result of the growing security threats and become connected to the Internet. awareness, the banking and finance industry is continuously increasing its spending on security The importance of cyber security is also evident products. The overall market is forecasted to rise from the large-scale breaches in the past, with 2014 from US$16.3 billion in 2015 to US$36.9 billion by being the year of cyber security breaches. The trend 2024. in frequency, magnitude and complexity continue to escalate with time.
Figure 52: Notable Security Breaches in Past Years
Adobe, 2013 152 eBay, 2014 145 Heartland, 2013 130 Home Depot, 2014 56 JP Morgan Chase, 2014 76 Sony PSN, 2011 77 Target, 2013 110 Evernote, 2013 50 Ashley Madison, 2015 37
No. of Compromised Records, Millions
Source: Business Insider
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Figure 53: Banking & Finance Security Market SECURITY ESSENTIALS FOR FINTECH SECTOR Forecast From a fintech perspective, the essential cyber security technologies are cloud security, POS Total Banking and Finance Security Technology encryption, mobile security, advanced endpoint Market Revenue Forecast, Global 2015-2024 (mobiles, PCs, laptops) protection, web application Revenue CAGR 9.5% firewalls, anti-DDoS (software to protect websites against distributed denial of service attacks, the most common cyber attack crippling websites) solutions, and integrated security appliances. 2015 16.27 PRODUCTS AND SERVICES
2016 Since financial companies have to focus on multiple 17.53 aspects of cyber security, there are a variety of products and services available in the cyber security 2017 domain. 18.94
CLOUD SECURITY 2018 A rising trend in the fintech sector is the use of 20.62 the cloud platform to host applications. There are specialised software available to secure the 2019 cloud platform to protect the applications hosted 22.53 on it. Cloud security refers to an exhaustive set of technologies and controls installed to protect 2020 data and applications associated with the cloud 24.74 infrastructure. 2021 Cloud technology or “shared” computing services 27.15 enable organisations or individuals to store and access 2022 data and programs over the Internet. Despite their 29.93 advantages, cloud platforms present unique cyber risks. These include compromising an organisation’s 2023 control over its data and systems; especially so with 33.15 a third-party provider or one that operates offshore. This becomes hypercritical for fintech enterprises. 2024 With the banking and finance industry extensively 36.88 adopting cloud application services such as migrating their Customer Relationship Management Revenue Source: Frost & Sullivan (CRM) resources to public cloud applications such as Salesforce.com, the need for cloud security is more important than ever.
Most services in the cloud security market are achieving robust growth, primarily because of the flexible capacity, cost efficacy and technical competence of cloud security providers.
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Figure 54: Key Security Products Used by Financial Organisations
ANTI DDOS
CLOUD WEB SECURITY Cloud Website APPLICATION Infrastructure (ecommerce/ corporate) FIREWALL
INTEGRATED SECURITY Financial APPLIANCES Organisation Office
ADVANCED ENDPOINT SECURITY AND POS Retail FORENSICS Office Worker/ ENCRYPTION Transactions Remote (enabled by MOBILE Worker/ATM the financial SECURITY organisation)
POS ENCRYPTION aimed at gaining access without being detected Point of Sale (POS) describes the technology used to steal vital high-value data rather than causing by consumers to provide their payment information damage) and Zero-Day attacks (exploit previously in exchange for goods or services. The most familiar unknown vulnerabilities in computer applications) example of a POS system is the check-out counter at and enables protection of endpoints by blocking a retail or grocery store. attacks before any malware is initiated.
A virus infecting the POS can compromise data There is a growing need for AESF judging from the stored in the system. Therefore, the best defense increasing number of vulnerabilities and readily to a POS breach lies in effective encryption of available exploit kits, programming tools that allow critical customer data and efficient authentication someone who does not have experience writing techniques to ensure any data transfer with the software code to create, customise and distribute system is completely secure. malware. AESF is most practical to protect the weakest areas of endpoint security in fintech, which ADVANCED ENDPOINT SECURITY AND can be found in legacy systems such as Automated FORENSICS (AESF) Teller Machine (ATM) systems that are still running on Advanced Endpoint Protection is a solution that Windows XP. prevents Advanced Persistent Threats (cyber-attacks
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MOBILE SECURITY WAF is considered crucial for securing ecommerce As organisations and their employees become transactions and to meet compliance standards increasingly dependent on mobile devices, they need such as the Payment Card Industry Data Security to allow these devices to access critical business Standard (PCI-DSS). The PCI Standard is mandated information, requiring a certain level of security for by card brands and administered by the Payment these devices to be implemented. The trend of BYOD Card Industry Security Standards Council They (Bring Your Own Device) is fast gaining popularity also perform the role of protecting websites from with employees using their personal laptops, tablets defacements to save companies from reputation loss. and smartphones for company-related work. There Frost & Sullivan expects the global WAF market to are grave concerns about how these devices that do expand from US$494.1 million in 2014 to US$777.3 not belong to the company can access critical data million by 2018, growing at a CAGR of 12%. on the corporate network. Serious insider threats could occur, such as when an employee exits a ANTI-DDOS SOLUTIONS company, with critical data stored in these devices, To maintain the availability of websites and allow without having to turn them in before leaving. consumers to perform online transactions, it is External hackers could also exploit the vulnerabilities essential for retailers and banks to have the right in a mobile application when it connects directly to detection and mitigation technologies against the corporate network. Distributed Denial of Service (DDoS) attacks. These attacks are usually volumetric in nature, targeting a It is essential for organisations to look into managing website with several attempts of requests that could their data securely with field devices, such as interrupt or suspend services. Mobile Device Management tools, with powerful authentication and secure built-in tunnel to access The Anti-DDoS market is one of the fastest-growing confidential corporate information. In case an industries due to the escalating DDoS attacks in employee leaves the company, there are remote wipe recent years. As per Frost & Sullivan, the global capabilities to erase the application and critical data DDoS market is estimated to reach US$929.5 million from the mobile devices. by 2018 from US$418 million in 2014 with a CAGR of 22.1%. Mobile payment security is also a rapidly growing area. Consumers now store their credit card and INTEGRATED SECURITY APPLIANCES mobile wallet information on their smartphones, and The network firewall is considered to be one of the pay via their mobiles using NFC technology such as most widely adopted security tools in the industry. Apple Pay. The security of this information is a huge It basically filters the traffic permitted in the trusted concern for merchants, issuers, payment networks network of the organisation. and new wallet providers. Given the positive growth projections for mobile payments, mobile payment However, it is not sufficient to prevent injection data security is projected to be one of the fastest- attacks by hackers, requiring additional features, such growing fields in cyber security. as Intrusion Prevention Systems (IPS), Application Control, and Gateway Anti-Virus. The Integrated WEB APPLICATION FIREWALLS Security Appliance approach benefits enterprises by The Web Application Firewall (WAF) is a software offering lower total cost of ownership, and a multi- or hardware solution plug-in, filter or appliance that layered security approach at the perimeter. protects web applications by subjecting network conversations to a set of protocols that enables it Integrated Security Appliance solutions companies to monitor, control, and analyse network traffic on are constantly being challenged to offer enhanced the application layer. More importantly, the ability to performance (additional servers tend to reduce customise rules to specific applications also allows traffic speeds), as well as improve the efficacy of the WAF to enhance protection and guard against detecting advanced threats that attempt to evade increasingly targeted attacks. firewall technologies.
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Figure 55: Key Cyber Security Vendors
CLOUD ACCESS SECURITY BROKERS
ADVANCED ENDPOINT SECURITY
MOBILE SECURITY
WEB APPLICATION FIREWALLS
ANTI-DDOS
INTEGRATED SECURITY APPLIANCES
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KEY DRIVERS & RESTRAINTS
Figure 56: Drivers & Restraints of Cyber Security Industry Growth
GROWTH DRIVERS GROWTH RESTRAINTS
INCREASING CYBER THREATS AND BUDGETARY CONSTRAINTS RISING AWARENESS
INTERNET AND ECOMMERCE INADEQUACY OF CURRENT GROWTH SOLUTIONS IN MEETING CONTINUOUSLY EVOLVING THREATS
REGULATIONS AND COMPLIANCES
TRUST DEFICIT
RISE OF IOT AND DATA BOOM
KEY DRIVERS million in 2014 and a per-record cost of US$14517. Initially, financial firms used to address the information 1. INCREASING CYBER THREATS AND RISING security risk in a reactive manner, as a response AWARENESS to security breaches. As such, risk management The most ironical thing about the rise of cyber security strategies have been based on what has occurred in is that its main driver is the increasing magnitude the past instead of strengthening the system against and frequency of threats leading to mass awareness all possible future threats. about the possible catastrophic impact it can have on businesses. The intimidating threat landscape in However, more and more financial institutions terms of the magnitude of attacks, frequency, and are gaining greater awareness about the serious potential damage, leaves stakeholders with little consequences of a cyber attack. As such, the onus choice but to opt for cyber security services either now is on creating a more secure environment in by employing in-house experts or involving third- financial institutions by taking a comprehensive and party solutions. holistic end-to-end view of the IT security scenario.
The massive cost of data breaches – tangible and 2. INTERNET AND ECOMMERCE GROWTH intangible – can take a toll on company profits and With growing Internet penetration and ecommerce customer loyalty. A data breach cost companies an explosion, voluminous amounts of critical data average of US$3.79 million, or US$154 for every lost are being serviced and processed each second. or stolen record in 2015. The amounts represent an The data may include credit card information for increase from the overall average cost of US$3.52 a direct access attack or seemingly insignificant
17 Source: IBM and Ponemon Research Institute
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personal information like addresses, phone numbers, KEY RESTRAINTS preferences, and health parameters. 1. BUDGETARY CONSTRAINTS Companies or conglomerates that service such data Given the huge losses incurred by companies like have to ensure its integrity and confidentiality as it Target, Sony, and other major institutions, it is evident may directly affect their reputation, business and that spending on cyber security developments is still revenue. This calls for cyber security facilities. relatively low compared to the risks. To date, the adoption of cyber security is largely determined by 3. REGULATIONS AND COMPLIANCES the size of the business and visibility of threats to It is the prerogative of every government to protect it. Large banks and financial institutions stringently itself, the country and technological systems from adhere to compliances, and it is well within their domestic and foreign attacks and preventing capacity to spend hefty amounts on securing their monetary injuries to civilians and damage to assets. However, the scenario is different for SMEs infrastructure caused by cyber attacks. that do not come under the purview of regional regulations and compliances and lack funding. Even As such governments lay down strict guidelines if they do implement cyber security solutions, the to be rigorously followed by any firm dealing with services are typically cheaper and most likely easier significant amounts of data. The regulations and to breach such as legacy cyber security products. compliances demand well-structured, sophisticated and hard to infiltrate cyber security systems from Budgetary restraints are also intertwined with the these firms. This is particularly essential for financial economic situation of a country where allocations and technological institutions as their data is influence the investments in security. Companies in considered to be the most critical of all. a country with low GDP output and low per capita GDP are less likely to spend heavily on upgrading With mandatory data breach regulations in place, their security infrastructure at least not as a foremost organisations should be able to identify and deal priority. with breaches faster, resulting in increased spending on cyber security. 2. INADEQUACY OF CURRENT SOLUTIONS IN MEETING CONTINUOUSLY EVOLVING THREATS 4. RISE OF IOT AND DATA BOOM The cyber security market is a highly dynamic market With the explosion of Internet of Things where large with emerging, advanced threats and new solutions numbers of devices are interconnected on a network being engendered every second. As such, there is no and sharing real-time data, the devices being IP- definite solution to the threat panorama; a fact that is enabled having firmware, operating systems and well known to all potential adopters of cyber security. thus having vulnerabilities and configuration issues The most striking development in the first half of are expected to increase IT workloads and transform 2015 was the huge shift from URL-based cyber the way cyber security operations are conducted. attacks to threats that rely on malicious document attachments. There has been an increase in the Quite simply, an abundance of online devices means targeting of personally identifiable information (PII), more connections and data to scan for vulnerabilities, use of malvertising (Internet advertisements linked monitor for compromises, and protect from attacks to malicious software) and ransomware (software – an unavoidable reality for cyber security. By 2020, that prevents users from accessing their devices it is predicted that the number of connected devices until a ransom is paid) in the first half of 2015. will soar up to 50 billion, more than 6 times the world Such a dynamic swing of attack strategies makes it population18. difficult to devise a viable and timely solution. A data breach becomes unavoidable under such conditions. Against this backdrop, most adopters acknowledge
18 Source: Frost & Sullivan
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that no matter how strong the security infrastructure, handle their critical and sensitive data. However, lack a zero-day attack or concealed vulnerability could of trust may be a significant barrier to fresh adopters potentially render their solutions ineffective. outsourcing a critical part of their enterprise to a cyber security provider. 3. TRUST DEFICIT Enterprises considering cyber security have to either come up with in-house solutions or rely on a third- party that is competent in cyber security services to
VALUE CHAIN AND BUSINESS MODELS
VALUE CHAIN
Figure 57: Cyber Security Value Chain
MANAGED RESELLERS/ SECURITY DISTRIBUTORS SECURITY SERVICE SYSTEM ENTERPRISE VENDORS PROVIDERS INTEGRATORS
Security vendors provide the R&D and creation of appliance-, software-, or cloud-based solutions to be delivered through a 2-tier channel ecosystem. Distributors import the goods and facilitate the availability of products to in-country channels with the required support on fulfillment. Goods are sold through resellers that could be general retail businesses or system integrators that provide professional services such as installation for the end user. Managed security service providers facilitate the management of these solutions commonly delivered through telecommunications companies that can provide management services via their lines leased to enterprise clients.
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BUSINESS MODEL vendors is that their cash flow starts building immediately. However, in this model, revenues are Cyber security covers various layers of threat harder to predict since new customers are required detection, prevention, and mitigation before, during every year to keep revenues growing. and after an attack. Enterprises looking for security solutions providers prioritise them based on how CLOUD-BASED SOLUTION extensive and secure the solutions are against A cloud-based solution, on the other hand, requires typical attacks. The services and solutions model for no new infrastructure requirements and offers cyber security is extensive. The solutions are highly services at a lower cost. No software licencing costs technical in nature and include Intrusion Detection are incurred by the enterprise either. Third-party System (IDS), Intrusion Prevention System (IPS), technical professionals handle all the security-related Unified Threat Management (UTM), Firewalls, anti- tasks. virus, anti-malware, Security Information and Event Management (SIEM), web filtering, identity and Some applications are well-suited for hosting in the access management, and may be provided either on- cloud such as CRM products, network monitoring, premise or on the cloud. travel applications, systems back-up on-premise hardware/software solutions. On the other hand, ON-PREMISES MODEL applications such as accounting packages, data An on-premise model ensures complete control of the storage solutions for compliance purposes and most systems and processes running on it. In this model, all security products are best implemented on-premise. corporate data is handled internally by dedicated IT However, if the cloud service provider is of high staff meant for maintenance and support. The initial market repute, even critical data is stored on the capital expenditure is high, and the firm may not be cloud. When factoring in the cost savings, the cloud able to keep abreast of the rapidly changing threat often appears to be the best choice, but this does not landscape. mean that a solution’s implementation is justified in terms of the technology, organisation set-up and/or Network security tools such as next-generation its requirements. firewalls and IPS mostly remain on-premise because enterprises need to control the flow of data in and Examples of technologies that live in the cloud out of their networks. The latency, delays, and risks include email security, hosted management, and associated with running confidential data to/from various aspects of gateway anti-virus. a cloud provider are greater than organisations are willing to tolerate. Usually, SMEs prefer cloud-based solutions as they cannot afford the infrastructure and capital-intensive The military is likely to opt for closed on-premise on-premise security solutions. networks because they cannot risk sensitive data related to national security being intercepted and/or Charging Model: Companies are charged monthly or modified through a cloud-based solution. annually for software they use. In this case, vendors or service providers need large investments upfront Likewise, financial institutions such as banks and and revenue build-up at a relatively slower rate. credit card agencies will also choose closed on- However, once scale is achieved, revenues are highly premise networks because they cannot risk sensitive predictable because of the high customer retention data related to financial records, accounting and rates. money transfers being intercepted and/or modified in the cloud.
Charging Model: Companies are charged software and hardware costs upfront with additional Annual Maintenance Charges (AMC). The advantage for
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VALUE DRIVERS & KEY RISKS
Figure 58: Value Drivers & Key Risks for Cyber Security Vendors
KEY VALUE DRIVERS KEY RISKS
• Existing Installed Base • Technological Obsolescence • Technological Edge and • Competition Efficacy • Security Breach Event • Completeness of Solution
KEY VALUE DRIVERS control over the applications in the network, gaining high adoption in recent years for their efficacy in not 1. EXISTING INSTALLED BASE only mitigating the circumventing of policies, but A critical value driver for cyber security companies also increasing work productivity. is the presence of an installed base in and around the region of operation and geographical region 3. COMPLETENESS OF SOLUTION being served. Since cyber security is highly critical; Cyber security addresses a varied set of risks and customers need to know if the solutions are working threats that are so diverse that each type of threat well for other similar companies as well. An existing has a custom-generated remediation or mitigation installed base is the most effective way to convince strategy. A cyber security provider with an extensive customers of the solutions’ efficacy. Since the platform of solutions catering to most or virtually requirements of cyber security may vary from one all threats in the market is most likely to emerge a area to the next, a regional installed base is more winner. This is due to customers’ preference for important compared to a global one. working with fewer vendors compared to adopting multiple solutions from different vendors that may 2. TECHNOLOGICAL EDGE AND EFFICACY be difficult to integrate. The efficacy of the technology a particular company is using in comparison to the solutions of the A company having a vast array of solutions is more competitors is a strong value driver. A company likely to succeed compared to a company providing a that has more secure solutions based on the latest point solution. This could explain the spate of mergers technologies will find more customers compared to and acquisitions happening as cyber security vendors one based on older technology or a relatively less strive to increase the coverage of their solutions. For secure solution. As an example, the firewall industry example, Trend Micro recently signed a definitive faces constant challenges where cyber attackers agreement to acquire HP TippingPoint, a provider could use several techniques to bypass firewall rules. of next-generation intrusion prevention systems For example, the use of unauthorised applications (NGIPS) and related network security solutions. The such as Zenmate, that can be installed in browsers to almost US$300 million agreement encompasses encrypt all traffic and bypass the policy rules being security technology, intellectual property, industry set in the organisation. Next-generation firewalls expertise, as well as an extensive, loyal enterprise were developed to have visibility and granular customer base. The acquisition positions Trend Micro
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as the go-to enterprise security provider of dynamic For example, Target, a popular US-based retailer, threat defense solutions spanning endpoints, was hit by a massive security breach where cyber network, data centres and the cloud. Trend Micro attackers accessed the personal information of will also combine current and acquired capabilities almost 110 million of its customers. It was disclosed to create a Network Defense business unit, serving that Target was using security tools from a major more than 3,500 enterprise customers. security solutions vendor that detected the attack. However, the security analysts at Target were not KEY RISKS able to decide on how to react. It was also observed that key competitors tried to leverage the situation. 1. TECHNOLOGICAL OBSOLESCENCE The overall impact on the reputation of the solutions RISK ASSESSMENT: HIGH vendor for Target was severe after the incident. The ramifications of an ever-changing technological setting on the performance and growth of a cyber There have been instances where malware was security service provider can hardly be ignored. discovered in cyber security firms, and in some Hardware (equipment required to maintain and use cases, acts of insider threats performing a level of digital objects) and software (off-the-shelf and in- espionage on the security technologies used to house software programs and packages required to mitigate malware so as to develop exploit codes that maintain and use digital objects) are fast becoming could circumvent them. obsolete. Furthermore, solutions that are cutting edge today are likely to become commonly available at low prices in the future. For example, anti-virus technology was the biggest cyber security segment a decade ago. However, today anti-virus comes embedded in both Windows and Apple platforms. Consequently, anti-virus is the only major cyber security segment declining year on year.
2. COMPETITION RISK ASSESSMENT: HIGH Since cyber security is an evolving technology, cyber security companies constantly face the risk of new competition coming in with better products. With the growing list of cyber security vendors entering each security sector, it is essential for decision-makers to use third-party vendor assessments to provide an impartial view when shortlisting potential service providers.
3. SECURITY BREACH EVENT RISK ASSESSMENT: HIGH A cyber security provider can face major risk to its business if one of its customers faces a serious security breach.
Data breaches are a significant business risk. Companies hold large amounts of personal information, including financial information on individuals, customers, suppliers or staff.
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RELEVANT VALUATION METRICS
Cyber security vendors have a simpler business model of either outright sales or a monthly payment based cloud business model. Hence, the valuation can be done simply on the basis of revenue (valuation/revenue) of EBITDA (enterprise value/EBITDA) multiple. However, before investing in a cyber security company, it is vital to assess the company on the key value drivers and assess the key risks to judge the future prospects of the company.
Table 12: Valuation Metrics for Cyber Security Companies in Various Stages
S. NO. EARLY STAGE GROWTH STAGE LATE STAGE
1. Paid-up capital19 Revenue & revenue growth Revenue & revenue growth
2. Addressable market size Growth in monthly active EBITDA margin users
3. - - Profit margin
OVERALL RESEARCH & DEVELOPMENT TOPLINE & BOTTOMLINE TOPLINE & BOTTOMLINE FOCUS GROWTH GROWTH
EARLY STAGE: Usually first 1 to 3 years of operations. GROWTH STAGE: Approximately 3 to 5 years of operations. LATE STAGE: More than 5 years of operations.
19 These are the best available metrics at this stage. But the valuation may change drastically based on the expected competitiveness of the solutions.
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12. DATA CENTRE AND CLOUD SERVICES
DATA CENTRE SERVICES billion in 2014, a growth of 17.0% over 2013. The A data centre is a facility used to house computer market is mostly driven by an explosion in demand systems and associated components, such as for data centre capacity, increasing complexities in telecommunications and storage systems. It managing data centres, and the burgeoning cloud generally includes a raised floor, redundant or back- computing services market. up power supplies, redundant data communications connections, environmental controls (e.g., air Current data centres aim at packing more powerful conditioning, fire suppression) and security devices. servers in increasingly smaller spaces, which mean higher power requirements for servers and better There are 2 main data centre operating models. One is cooling technologies to siphon the heat generated where an organisation builds, operates and manages from them. As a result, power and cooling technologies its own data centre for internal purposes, known as are fast becoming critical for new data centres. In a captive data centre. The other is an outsourced fact, companies like Google are attempting to build model, where organisations lease space and hosting data centres in cold-weather areas like Ireland and services from external data centre providers. In the using seawater to reduce temperatures to save on outsourced model, the data centre provider furnishes the immense cooling costs for modern data centres. the security, power and cooling needs for the data centre, and customers can use the space to deploy Another growing trend is the Data Centre their servers and other equipment. This is commonly Infrastructure Management (DCIM) solutions. DCIM referred to as data centre services. solutions refer to complex software that collect, filter and analyse data from sensors in a data Traditional data centre services primarily involve the centre and proactively raise alarms, model potential co-location of servers and managed hosting. Co- workload placement and make recommendations location refers to the provisioning of racks within the about prospective changes. This ensures that server data centre. Along with the racks, the power, cooling, workloads, cooling in different areas and other connectivity and security features are supplied by critical parameters are optimised for efficiency and the data centre service providers. Managed hosting greater reliability. DCIM is critical to manage highly- refers to the hosting of applications like website complex modern data centres and ensure reliability. within a server. In fact, the rising popularity of Big Data and Analytics is impacting DCIM solutions as well, as they are now Frost & Sullivan estimates the global data centre being used to undertake what-if analysis to improve services market to be valued at more than US$42 power usage efficiency (PUE).
Figure 59: Data Centre Investment Plans in Singapore
DATA CENTRE INVESTMENT OPERATOR PLANS
• Building its largest facility in Asia - SG3 • Phase 1 - 1,000 cabinets; Finished - 5,000 cabinets
• Building its second DC in Singapore • At an investment of US$380 million, the bigger multi-level facility will be ready in 2017
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DATA CENTRE INVESTMENT OPERATOR PLANS
• Building its second facility with 200,000 sq. ft. of space with an investment of about US$130 million • Facility opened in 2015 and serves ASEAN
• At an investment of US$200 million, the 2nd facility will have about 177,000 sq. ft. of rentable space • With over 13 MW of power it will connect 50 cloud providers
• Building its second facility in the IDA DC park with 200,000 sq. ft. of total space • Its largest investment outside Indonesia to support the communications hub for the region
CLOUD SERVICES Overall, the cloud services market is largely being Cloud services refer to computing and storage driven by advancements in cloud infrastructure services or applications delivered as a service over a offered by the vendors. Key technologies include network with seemingly infinite scalability. With the virtualisation and next-generation computing and cloud, the customer can use computing resources storage servers. Virtualisation refers to creating or applications as much as they want (scaling up or virtual versions of computing and storage servers; down as required) and pay only for what they use. meaning the same physical server can act as multiple virtual servers. This technology lies at the core of Cloud technology is radically changing the way cloud computing since it enables service providers to organisations work. In the old model, enterprises had swiftly ramp up capacity for clients without having to to purchase the entire hardware and software upfront add new physical servers. Any new requirement can and keep a large IT department to maintain them. If be quickly served by creating a virtual server within there was a fresh requirement to add more hardware an existing physical server. or scale up software, the process could take months. However, in the cloud paradigm, enterprises pay for the Next-generation computing and storage servers aim hardware and software on a pay-per-use basis, doing to pack higher computing (or storage) capacity in a away with upfront expenses. Any new demand for smaller space while utilising lower power. They also hardware and software is met almost instantaneously have management features to make them easier to by ordering extra capacity or licences from the cloud use for cloud applications. service provider. Also, the infrastructure or software is maintained by the cloud service provider, not the In addition to the two technologies, cloud services internal IT department. Finally, any upgrade cycle are also being enabled by modern DCIM solutions is managed by the cloud service provider. With the that allow easy management of multiple servers. benefits of agility and flexibility, it is no wonder cloud services have become one of the fastest growing business segments currently. We estimate cloud services to be worth more than US$50 billion globally in 2014, having grown by 38.4% over 2013.
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KEY CHARACTERISTICS OF CLOUD COMPUTING
RAPID ELASTICITY, SCALE ON DEMAND, SELF-SERVICE UP/DOWN
PAY AS YOU USE, METERED SHARED POOLS, ILLUSION CONSUMPTION OF INFINITE RESOURCES
BROAD NETWORK ACCESS USING STANDARD INTERNET PROTOCOLS
TYPES OF CLOUD SERVICES application is hosted by a service provider and made available to customers over a public or private Cloud services can be grouped into 3 categories: network. In the SaaS model, software or application Infrastructure-as-a-Service (IaaS), Software-as-a- is provided over the cloud instead of computing Service (SaaS) and Platform-as-a-Services (PaaS). or storage infrastructure. Key examples include Salesforce.com, Microsoft 360 and Gmail. This is INFRASTRUCTURE-AS-A-SERVICE (IAAS) the largest cloud segment with an estimated global The IaaS model involves an organisation outsourcing market size of around US$37.4 billion in 2014 as per the hardware (computing or data storage resources) Frost & Sullivan. Growth rate in APAC from 2014 to to support business operations. The service provider 2019 is projected at 29.5%. owns the equipment and is responsible for housing, running and maintaining it with the client typically PLATFORM-AS-A-SERVICE (PAAS) paying on a per-use basis. Key examples include PaaS is a key component of the new cloud computing Amazon Web Services (AWS) and Rackspace. This environment, in which developers use templates is the second largest cloud service segment after provided by the platform vendor to build their SaaS. Frost & Sullivan estimates the global spending software applications to be delivered over the cloud. on IaaS at US$12 billion in 2014, a growth of 47.9% Examples include Google AppEngine and Microsoft over 2013. Growth rate in APAC from 2014 to 2019 is Azure. PaaS makes up a minor portion of the overall projected at 42.4%. cloud revenue; however, it is also growing the fastest. Frost & Sullivan predicts growth from 2014 to 2019 SOFTWARE-AS-A-SERVICE (SAAS) in APAC to be around 54.3% from a market size of SaaS is a software distribution model where an US$1.05 billion in 2014.
Figure 60: Types & Enablers of Cloud Services
CLOUD ENABLERS TYPES OF CLOUD SERVICES
VIRTUALIZATION SAAS
NEXT GENERATION PAAS SERVERS
DCIM IAAS
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KEY DRIVERS & RESTRAINTS
Figure 61: Drivers & Restraints of Data Centre and Cloud Services Industry Growth
GROWTH DRIVERS GROWTH RESTRAINTS
EXPLOSION OF CONTENT SECURITY
REDUCING COST OF CLOUD CONCERNS OVER LOSS OF CONTROL TECHNOLOGIES
TREND TOWARDS OPEX DRIVEN UNRELIABLE NETWORK MODEL CONNECTIONS
INCREASING CONNECTIVITY AND REGULATORY ISSUES ADOPTION BY SMBs
KEY DRIVERS 2. REDUCING COST OF CLOUD TECHNOLOGIES Cloud technologies, including the next-generation servers, are becoming increasingly efficient. Frost & 1. EXPLOSION OF CONTENT Sullivan estimates that server prices have declined The explosive growth of ecommerce, social media, by 3% to 5% annually over the 2012 to 2015 period, content streaming sites like Netflix and other assuming compute and storage capacities and websites is contributing to the influx of content. performances remain constant. Trends like Big Data and Internet of Things (IoT) are also contributing to the data explosion. The data In addition, cloud offerings available in the market are needs to be stored and “mirrored” across the globe becoming more affordable by the day. For example, for faster access to consumers worldwide, resulting Amazon’s new on-demand pricing for certain Linux/ in the tremendous demand for Internet data centres. Unix instances on EC2 fell between 10% and 40% in early 2014, with a similar price reduction in Q3 2015 Figure 62: Content vs Data Centre Growth as well.
3. OPEX DRIVEN MODEL Enterprises are increasingly looking to reduce huge upfront investments in IT for models where users only need to pay a small monthly fee. An attractive feature about the cloud is that enterprises need to pay for only what they use. Many companies involved Traffic (Zettabyte) Traffic
Spending (US$ Bn) in product development, rent capacity from AWS only when they require it for product testing. Similarly, ecommerce companies are able to scale up easily in Global Data Center Services Spending ($ Bn) Global Data Center Traffic (Zettabytes) line with customer growth. The diversity of flexible financing models continue to drive the expansion of Source: Cisco GCI, Frost & Sullivan cloud computing.
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4. INCREASING CONNECTIVITY AND IT ADOPTION without access to applications hosted in the cloud. BY SMBs In Frost & Sullivan’s 2014 Cloud User Survey, almost Traditionally, SMBs have not been extremely IT 54% of respondents mentioned unreliable networks savvy, with most using basic connectivity and a as a deterrent to cloud adoption. However, cloud handful of critical applications like email. These service providers are quick to address this hurdle days, however, there is a growing number of SMBs by offering customers the choice to connect over adopting applications such as CRM, ERP and other private networks (e.g., MPLS or Carrier Ethernet) that productivity-enhancing solutions. Since SMBs cannot offer better availability and reliability in comparison afford huge upfront investments to purchase the to the Internet. In the past few years, almost every applications and associated hardware, they prefer to leading cloud provider has entered into partnerships use cloud-based applications. with leading network providers to enable private connectivity to their cloud services. For example, KEY RESTRAINTS AWS has partnered with network service providers such as Level 3, TW telecom, and Zayo. 1. SECURITY According to Frost & Sullivan’s 2014 Cloud User 4. REGULATORY ISSUES Survey, the largest number of respondents (63%) The cloud model faces a number of regulatory identified security as a major roadblock towards challenges. For example, regulations in Indonesia cloud adoption. The primary concern about the mandate that local businesses maintain data of all cloud is that data resides outside of the enterprise Indonesian customers in the country. Therefore, IT network and may be vulnerable to greater security Indonesian companies may not be able to use cloud risks. While models like private cloud (private cloud services at data centres outside Indonesia. Similarly infrastructure of an enterprise) help reduce the in highly-regulated industries, such as healthcare and security threats, they fail to offer the economies-of- financial services, cloud service providers must be scale cloud solutions offered by AWS. compliant with a number of standards. These issues are motivating cloud providers to develop hosted With the growing interest in cloud security, models private cloud services that may become certified like the hybrid cloud (part private to ensure security as compliant with specific standards or regulations. and part public to reap cost advantages) are able to However, such community clouds or industry-specific effectively tackle these issues. That stated, skepticism private hosted clouds are typically priced higher than among a large number of companies remains. public IaaS.
2. CONCERNS OVER LOSS OF CONTROL Loss of control is the second biggest issue in cloud IaaS adoption, with 55% of survey respondents citing it as a top concern. IT leaders are not confident that a multi-tenant environment is well-suited to keep their apps running in the face of equipment or network failures. In the traditional IT model, when a hard drive or network failed, the IT department was responsible for fixing the problem or reaching out to a service provider. With the cloud model, the enterprise IT does not own the hardware; hence, they have little to no control over addressing the system failure. However, as the cloud market continues to evolve, this restraint is expected to be mitigated with providers consistently building up trust of customers.
3. UNRELIABLE NETWORK CONNECTIVITY A majority of users connect to the cloud over the public Internet that offers best-effort connectivity. Any disruption to the access network can leave users
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VALUE CHAIN
Figure 63: Value Chain of Data Centre & Cloud Services
CLOUD & DCIM CONSULTING DATA CENTRE CLOUD CONNECTIVITY ENTERPRISE HARDWARE SOFTWARE & SYSTEM SERVICE SERVICE SERVICE & CONTENT VENDORS PROVIDERS INTEGRATION PROVIDERS PROVIDERS PROVIDERS PLAYERS
HARDWARE VENDORS CLOUD SERVICE PROVIDERS Provide the storage and computing servers as well As discussed earlier, cloud services can be classified as networking gear for data centres and cloud as IaaS, SaaS or PaaS providers. infrastructure. Key examples include Cisco, IBM, HP, Dell, EMC, and Oracle. IAAS: These providers use third-party data centres or build their own data centres to host IaaS capabilities. CLOUD AND DCIM SOFTWARE PROVIDERS Amazon Web Services (AWS) dominates this space Provide the necessary software for enabling and with extremely cheap and flexible options, and is the managing cloud technologies. Key virtualisation top choice of leading companies like Netflix, Expedia, technology vendors include VMware, Citrix, Oracle Adobe, Pfizer, and Airbnb. Other players in this space and Microsoft. Key DCIM vendors are Emerson include AT&T, CenturyLink, Rackspace, NTT Data, Network Power, ABB, Schneider Electric, and Nlyte and SingTel. Software. These players charge customers on a per month CONSULTING AND SYSTEM INTEGRATION basis according to capacity (storage or compute) Assists enterprises and data centres adopt cloud and service levels. technologies. Primary services include data centre implementation, application migration (to the cloud), SAAS: A highly fragmented space with literally and private cloud consultation. Key players in this thousands of software players offering software market include IBM, EMC, NTT Data, TCS, Unisys, HP, through the cloud. The most well-known SaaS and Accenture. provider is SalesForce.com that offers CRM solutions over the cloud. For the financial industry, key SaaS DATA CENTRE SERVICE PROVIDERS vendors include Oracle, SAP, and Temenos. Provide the data centre space required for server colocation or managed server offerings. Several These players charge customers on a per month companies require a basic data centre shell with cloud basis according to the number of user licences and service providers while other larger participants can features of the software subscribed by the enterprise. rent and fit out according to their needs, closely resembling a real-estate model. Key players in this PAAS: A smaller yet fast-growing field; key players space include Digital Realty. Other participants may include Microsoft and Google. provide a completely built-out data centre with connectivity to multiple networks and racks in place. CONNECTIVITY SERVICE PROVIDERS These encompass enterprise data centres that host These encompass local, regional of global telecom a server for the enterprise and Internet data centres operators providing connectivity to data centres. (IDCs) that primarily store content to be delivered to Examples include SingTel, AT&T, Telekom Malaysia, the enterprise and consumers by carriers, ecommerce Telkom Indonesia, and NTT Communications. companies and content players. Completely built out data centres are typically connected to multiple high- They charge customers per month on the basis of speed networks and to other similar IDCs worldwide. capacity and other value-added services. Key enterprise data centre players include Equinix, Cyrus One, and Global Switch. Larger enterprise ENTERPRISE AND CONTENT PLAYERS data centre participants in the region include NTT Content players deliver multimedia content to Communications, SingTel, Telkomsigma, and CSF. consumers worldwide and are emerging as major
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demand drivers for data centre services. There verticals such as banking and finance, manufacturing, are a massive number of participants in this space and retail. The banking and finance sector is one including Netflix, Spotify, and ecommerce companies. of the largest verticals for enterprise data centre Enterprise data centre services can also belong to services
VALUE DRIVERS & KEY RISKS
Figure 64: Value Drivers & Key Risks for Data Centre & Cloud Services Providers
KEY VALUE DRIVERS KEY RISKS
• Scale & Investment Capacity • Failure to fill Capacity • Capacity Utilisation • Delay in achieving
• Operational Efficiency Profitability • Geographical Reach • Customer Risk • Alliances & Partnerships • Competition and
• Customer Traction & Growth Overinvestment
KEY VALUE DRIVERS the infrastructure to earn revenue. Since this involves substantial fixed costs, it is essential to have high 1. SCALE AND INVESTMENT CAPACITY capacity utilisation to reach profitability. Companies Cloud services have significant economies of scale. with higher capacity utilisation are more likely to A service provider with a larger infrastructure base succeed in the future. will be able to serve additional customers at lower additional cost (since spare capacity of existing However, this may not be true for SaaS players that servers can be used to serve extra customers). This is only have the opportunity to increase investments a major reason why AWS is priced more competitively as demand grows. Many SaaS providers use IaaS than IaaS offered by telecoms operators in smaller services like AWS and expand capacity only when markets. required.
Investment capacity is another significant driver. 3. OPERATIONAL EFFICIENCY A company that can invest in bigger data centres Due to the significant investments, data centres and globally will be more successful compared to a cloud services providers need to have low operating company that does not have similar investment cost to recoup their upfront investments as fast as capacity. The current cash position and capacity to possible. A high operating margin is a good indicator raise additional funding (internally or externally) are of the eventual success of a data centre and cloud important. This is why cloud services such as IaaS, services company. are dominated by giants like Amazon. 4. GEOGRAPHICAL REACH 2. CAPACITY UTILISATION Major investors in IT include MNCs with a global Data centres and cloud services require large upfront footprint. A single service provider that can serve investments to acquire infrastructure and then utilise all markets where the company is present has a
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competitive advantage over a local provider. Similarly, capacity or competitive price pressures may prevent content providers (video, social media) that need to these companies from becoming profitable even after deliver content worldwide look for data centres or a long period. Equinix, one of the largest Internet data cloud players that have a global footprint. Companies centre companies in the world, was unprofitable until like Equinix, NTT Communications and Amazon tout 2014 even after 16 years of operations. It achieved their geographic coverage as a compelling advantage single-digit profitability only in 2015. over competitors. 3. CUSTOMER RISK 5. ALLIANCES AND PARTNERSHIPS A crucial uncertainty data centres and cloud services Internet data centres that are well linked to large data providers face is customer risk. Ecommerce and centres have a clear advantage over ones that are content companies are key customers of many of not connected. This appeals to customers that have these providers and inherently volatile businesses. For servers at different data centres and want to connect example, the dot-com collapse of 2000 significantly to them immediately. Likewise, the large capacity affected the data centre business in the US. A similar may require sales partners that can reach out to end crash today can have serious implications for data customers and fill this capacity. Hence, connectivity centre participants worldwide. to other data centres and network of resellers are critical indicators of success for these players. 4. COMPETITION AND OVERINVESTMENT The data centre industry is cyclical in nature where 6. CUSTOMER TRACTION & GROWTH large investments are made when customer demand Customer traction and growth are important rises. New entrants set up huge capacities and go indicators of how optimised SaaS or IaaS offerings after the same customers. However, once demand are for the customers. Providers that experience slows, the industry players may realise they have rapid growth in their customers are more likely to overinvested in capacity, and not reach target succeed in the long-term. capacity utilisation. A similar scenario occurred when the dot-com bubble burst in 2000; many data KEY RISKS centres had invested heavily in substantial modern capacity in the hope of huge demand from dot-com 1. FAILURE TO FILL CAPACITY companies. However, when the tech boom ended, Cloud and data centre service providers need to demand swiftly declined and the industry was invest in sizable infrastructure to be competitive. saddled with significant spare capacity for a long However, this capacity becomes profitable only period. after reaching a particular utilisation level. If the capacity is not fully utilised fast enough, it may lead Competition also plays a significant role from a to heavy losses for the company. For example, CSF, a pricing perspective. For example, a number of local major Malaysian data centre provider invested huge telecoms operators have made huge investments to capacities in Indonesia and Malaysia through equity offer IaaS services. However, Amazon offers its AWS funding. However, it failed to fill the capacity, making services at a fraction of the cost giving telecoms significant losses. The company’s stock price crashed operators stiff competition. from GBP77 in January 2011 to less than GBP1.5 in 2015.
The company was most likely unable to fill capacity due to a number of factors including lower than expected demand, growing competition, and uncompetitive offerings.
2. DELAY IN ACHIEVING PROFITABILITY Data centre and cloud businesses require massive upfront investments that can result in losses in the initial years. In return for these high investments and heavy losses, investors hope to make a profit in the later years. However, the imperative to keep adding
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RELEVANT VALUATION METRICS
For the purpose of valuation, data centres and IaaS need to be viewed separately from SaaS. Data centre and IaaS businesses require much higher upfront investments, while SaaS is mostly about customer traction and competitiveness of the offering. Data centres and IaaS enterprises are also concerned about achieving a big enough scale in addition to customer traction.
DATA CENTRES & IAAS The focus of early and growth stage companies is to achieve significant scale in infrastructure and customers before achieving profitability when they become mature companies. The key valuation metrics for companies in different stages are:
1. EARLY STAGE For these companies, the focus is on building capacity and getting customers. COMPANIES Therefore, the key valuation multiples should be capacity and revenue.
2. GROWTH At this stage, monetisation of infrastructure becomes important. Companies should STAGE have high EBITDA margins since it is required to compensate for the high initial COMPANIES investments. Since growth is imperative, the cash flows may still be negative. Key metrics include capacity, revenue and EBITDA margin.
3. LATE STAGE At this stage, it is crucial for data centres and IaaS companies to be profitable COMPANIES and cash positive. Hence, revenue, EBITDA and profit margins, become important valuation metrics.
Table 13: Valuation Metrics for Data Centre and IaaS Companies in Various Stages S. NO. EARLY STAGE GROWTH STAGE LATE STAGE
1. Revenue & revenue growth Revenue & revenue growth Revenue & revenue growth
2. Capacity & capacity growth Capacity & capacity growth EBITDA margin
3. - EBITDA margin Profit Margin
OVERALL CAPACITY CREATION & TOPLINE GROWTH & TOPLINE & BOTTOMLINE FOCUS CUSTOMER TRACTION CAPACITY CREATION GROWTH
EARLY STAGE: Usually first 2 to 3 years of operations. GROWTH STAGE: Approximately 3 to 6 years of operations. LATE STAGE: More than 6 years of operations.
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SAAS For SaaS companies, the upfront investment is lower compared to IaaS or data centre companies. As a result, they usually reach overall profitability faster. In addition, instead of capacity, they should be valued based on the number of customers during their early stages.
1. EARLY STAGE For these companies, the focus is on achieving significant customer traction COMPANIES typically through competitive pricing. The key valuation multiples should be the number of customers as well as revenue.
2. GROWTH At this stage, revenues become important while EBITDA margins may or may not STAGE be positive. Therefore, the right metrics are still revenue and revenue growth. COMPANIES
3. LATE STAGE At this stage, profitability becomes crucial. Hence, revenue as well as EBITDA and COMPANIES profit margins become important valuation metrics.
Table 14: Valuation Metrics for SaaS Companies in Various Stages
S. NO. EARLY STAGE GROWTH STAGE LATE STAGE
1. Revenue & revenue growth Revenue & revenue growth Revenue & revenue growth
2. Number of customers & Number of customers & EBITDA margin growth growth
3. - - Profit Margin
OVERALL CUSTOMER TRACTION TOPLINE GROWTH TOPLINE & BOTTOMLINE FOCUS GROWTH
EARLY STAGE: Usually first 2 to 3 years of operations. GROWTH STAGE: Approximately 3 to 5 years of operations. LATE STAGE: More than 5 years of operations.
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13. BLOCKCHAIN
Blockchain is the little-known enabling technology transaction is kept by a central intermediary. In case behind Bitcoin, the mysterious digital currency that of any future conflict (e.g., disputes arising from the has featured prominently in the news for the past 4 transaction), the central intermediary verifies its to 5 years. Bitcoin is a digital currency that can be records to prove the legitimacy of the transaction. transacted across the globe in relatively anonymous For example, in credit card transactions, companies fashion without any regulatory oversight with low like Visa or MasterCard are the central intermediary. transaction fees and a tamper-proof record system In civil contracts of property deals, the relevant where transactions can be quickly verified. Bitcoin government agency acts as the central intermediary. has grown in popularity with daily transactions increasing from around 2,000 transactions per day Figure 65: Traditional Transaction Record Management in 2012 to almost 204,000 as of July 12, 201520. The value of the Bitcoin has also leaped from US$10 in CENTRAL INTERMEDIARY 2012 to more than US$220 in 2015. However, the success and hype surrounding Bitcoins may soon be eclipsed by the blockchain technology.
Blockchain is a distributed database technology; TRANSACTION and the primary reason behind the popularity of RECORDS Bitcoin. Facilitating the most attractive attributes of Bitcoin, blockchain enables low transaction fees, tamper-proof transaction records, easy verification of previous transactions, and relative anonymity of transacting parties. Blockchain offers numerous potential applications that Marc Andreessen, owner of Andreessen Horowitz, one of the most influential BUYERS SELLERS Venture Capital (VC) firms in the Silicon Valley, has likened it to the invention of the PC and Internet. While this method works well in most cases, there Potential uses include renting or selling assets are certain issues with traditional transaction record protected by digital locks, transacting real management: currencies, building crowdfunding platforms with low transactions fees, facilitating anonymous and secure 1. HIGHER COST contract management, and enabling the transaction The central intermediary needs to invest significantly of financial shares and other fiscal instruments. to record every transaction and ensure it is tamper- proof to preserve the integrity of its records. Hence, To see how blockchain can add value to the it needs to charge a transaction fee from the buyers abovementioned scenarios, we first need to and sellers. understand the difference between blockchain and traditional transactions. Central intermediaries, such as credit card networks (Visa, MasterCard) charge 3% fee for each credit card TRADITIONAL TRANSACTIONS transaction. On the other hand, the transaction fee for Bitcoins is usually less than 40 cents and can even be 021. In most traditional transactions such as credit card transactions or land purchases, the record of the
20 Source: coindesk.com 21 Source: Bitcoinfees
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2. LACK OF ANONYMITY among a large number of nodes, or record-keeping The identity of the buyers and sellers is known to the systems, operated by independent node operators central intermediary. While the central intermediary worldwide. All nodes have an identical copy of the keeps the identity of buyers and sellers confidential, blocks. Together, these nodes form a network. it may share the information for legal or other purposes. New blocks, which keep a record of the most recent transactions on the network as well as information 3. POSSIBILITY OF CORRUPTION OR on older blocks, are created continuously and shared DESTRUCTION OF RECORDS with all the nodes. As a result, a chain of blocks is While it is rare, there is always a possibility of formed (hence, the term “blockchain”). When a new corruption within the central intermediary that may block is created, every node can verify if the block lead to tampering of records or leakage of personal is genuine by checking whether it provides accurate information. information about the older blocks. The probability of manipulation is low. The new block created then Records could also be destroyed due to a natural starts recording the new transactions happening calamity or hacker attack if the level of technological across the blockchain network. sophistication of the central intermediary is low. This method ensures that transactions are tamper- BLOCKCHAIN TRANSACTIONS proof through two ways. First, since the copies of transactions are kept in multiple blocks, tampering Figure 66: Record Management in Blockchain-enabled a transaction will require tampering multiple blocks, Transactions which is more difficult than tampering one block. Second, multiple nodes have the same copy of these blocks. So tampering a transaction will require IDENTICAL COPIES OF TRANSACTION RECORDS tampering the blocks in a large number of nodes, which is even more problematic. Furthermore, the chain of blocks (and record of all transactions) stored in the nodes are completely public. Anyone can go through the blockchain to verify whether a particular NODES transaction has taken place.
The key advantage of blockchain is that it offers high integrity and verifiability of the transaction record without the need for an expensive central intermediary. As a result, the transaction cost reduces significantly, as in the case of the Bitcoin. Second, the NODES NODES blockchain only records the blockchain addresses of buyers and sellers and not their real identity. Therefore, it is hard for an entity to determine the real
TRANSACTION identity of the buyer or seller (though not impossible). RECORDS Consequently, in certain scenarios blockchain offers greater anonymity. Finally, there is no possibility of corruption within a central intermediary since such an intermediary does not exist. Most nodes in the BUYERS SELLERS network need to be corrupted simultaneously for tampering of a transaction. Blocks are simply a record of a certain number of transactions and form the basis of blockchain Blockchain is an ideal instrument to perform digital transactions. The blocks are immediately shared transactions with high degree of trust, ease and at
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a low cost compared to traditional methods. Since (e.g., keyless entry system for cars) blockchain even physical assets can be secured by digital locks applications can be extended to these assets as well.
KEY DRIVERS & RESTRAINTS
Figure 67: Drivers & Restraints of Blockchain Adoption
GROWTH DRIVERS GROWTH RESTRAINTS
PERVASIVE NEED FOR DISTRIBUTED LACK OF PROVEN BUSINESS MODELS TRANSACTION SETTLEMENT
AGGRESSIVE FUNDING BY VCs SLOW END USER ADOPTION
SUCCESS OF BITCOIN LACK OF REGULATORY FRAMEWORK
KEY DRIVERS US$1 billion may have been invested in these start- ups, stimulating the entry of various business models 1. PERVASIVE NEED FOR DISTRIBUTED and new blockchain-based platforms for different TRANSACTION SETTLEMENT industries. Current transaction settlements and contract management require a central intermediary, and 3. SUCCESS OF BITCOIN most times, multiple intermediaries. As discussed The success of Bitcoin is a major catalyst for lucrative earlier, this increases the transaction cost and may investments in the blockchain sector. The hype even make the process slower. There is a need to surrounding Bitcoins is generating the interest of have a blockchain-type distributed transaction VCs and entrepreneurs alike towards the potential of settlement to reduce cost and increase efficiency. blockchain technology. While this is especially relevant for the trading of financial instruments, its need is felt in many other KEY RESTRAINTS areas as well. 1. LACK OF PROVEN BUSINESS MODELS 2. AGGRESSIVE FUNDING BY VCs Despite numerous efforts, we have yet to see many Blockchain and Bitcoin are current favourites among successful implementation cases of blockchain VCs like Andreessen Horowitz that are big proponents beyond the realm of Bitcoins. Even for completed of the technology. In 2015 alone, the total funding to implementations, a successful revenue model is yet Bitcoin and blockchain start-ups was estimated at to be seen outside the Bitcoin ecosystem. Until the US$380 million till July.22 Based on actual investments few success stories of Bitcoin gain popularity, large- till July 2015 and current trends, we estimate that by scale adoption of the technology may not happen. between January 2012 and October 2015 close to a
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2. SLOW END USER ADOPTION with new Bitcoins. For Bitcoin technology to work, Even in cases where implementation has been new blocks need to be continuously created. This successful, the end user adoption has remained low. requires processing or hashing of recent transactions An example is Ripple, which enables cross-currency as well as relevant information from previous blocks, settlements between banks. Despite being a success requiring computing resources. Since there is no in implementation, the actual adoption has been low. central intermediary, Bitcoin technology incentivises As of October 2015, Fidor Bank in Germany is said to any entity in the world to contribute to the creation be the only financial institution “using” Ripple. process of new blocks by allowing them to generate Bitcoins for every block created. By investing their Key factors for the low adoption can be attributed to computing resources and time, users can earn Bitcoins, poor familiarity with the new technology and a higher a process called Bitcoin mining. While Bitcoin mining comfort level with the existing interbank settlement has been limited to companies like BitFury, firms like system. 21 Inc provide necessary processors and hardware to the general public for Bitcoin mining. 3. LACK OF REGULATORY FRAMEWORK The current legal framework in most countries is 3. FINANCIAL SETTLEMENTS AND PAYMENTS not ready for blockchain-based transactions. As These refer to the general application of blockchain a fairly recent trend, the blockchain regulatory that is not based on Bitcoin. Due to the high framework is not explicit about the legal validity transaction fee and network of intermediaries, of its contracts and even more complex in cross- financial settlements are one of the early targets for border transactions. Furthermore, countries like the blockchain-based platforms. Ripple Lab provides US requires that transaction platforms based on the services related to money market settlements. blockchain comply with same legal restrictions that Nasdaq also recently launched a new platform exist for other platforms. This is often a problem for called Linq that manages the transfer of shares of blockchain-based platforms. private companies based on the blockchain ledger. In addition, several banks including RBS, Bank of For example, in May 2015, US regulatory body New York Mellon, Barclays, are experimenting with FinCEN, fined Ripple Labs for violating several blockchain applications to see how it can enable requirements of the Bank Secrecy Act (BSA) and payments and other financial transactions for their failing to implement and maintain an adequate anti- customers. Companies like Circle also facilitate the money laundering (AML) program. transfer of US dollars using blockchain technology.
BUSINESS MODELS 4. BLOCKCHAIN PLATFORMS Several companies offer a blockchain platform to Major business models for blockchain relate to the enable multiple applications. For example, Chain Bitcoin ecosystem. These include: Inc, one of the best-funded blockchain start-ups, offers a blockchain platform that enables Nasdaq’s 1. BITCOIN EXCHANGES, TRANSACTION Linq platform. The platform can also be used to PROCESSORS AND WALLETS enable settlement of minutes for mobile carriers Bitcoin exchanges provide a platform for trading and to transfer digital gift cards. Ethereum is Bitcoin with other currencies. Key examples of Bitcoin another platform that facilitates blockchain-based exchanges include Coinbase, BTC China, Bitcoin applications. Source, and Bitstamp. Companies like Blockchain offer digital wallets for Bitcoin; an equivalent of a OTHER APPLICATIONS bank account for Bitcoin. Blockchain’s fundamental advantage is that a 2. BITCOIN MINING transaction recorded through blockchain cannot Bitcoin technology incentivises the creation of new be tampered with and can be verified by anyone blocks by rewarding people who generate blocks easily without the need for a high-cost intermediary.
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This opens up significant opportunities for other of digital assets like digital tickets, coupons and blockchain applications. These include determining copyrights. While there are several companies the authenticity of rare art products (by tracing working in these domains, significant customer its ownership transfers based on blockchain traction or lucrative revenue models have yet to transactions), low-cost digital escrow, intellectual emerge. property registration, transfer and management
Figure 68: Blockchain Companies with Different Business Models
BITCOIN EXCHANGES, TRANSACTION & WALLETS
BITCOIN MINING
FINANCIAL SETTLEMENTS & PAYMENTS
OTHERS
CONCLUSION We believe one has to wait for the technology and business model to evolve, before we can develop Blockchain is an extremely promising technology a framework for evaluating these companies and since it creates an immutable record of any digital business models. At this point, investment in asset transfer at a much lower cost than traditional blockchain start-ups by the VCs is a longer-term bet, intermediaries. This has the potential to change the and investors with a lower risk appetite may choose way we transfer any digital asset or an asset that can to wait for clarity to emerge. be digitised.
At the same time, attempts to gain significant customer traction and create a viable business model are ongoing. Bitcoin is the only exception, where despite its volatility, the business models have stabilised and companies are making money by providing exchanges, payment processing and wallets.
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