December 2013 Technology / Media / Telecoms / Internet / Healthcare / Cleantech / Materials Go4Venture Advisers’ European Venture & Growth Equity Market Monthly Bulletin December 2013 Published by Go4Venture Advisers Research, the Equity Research unit of Go4Venture Advisers LLP. About Go4Venture Advisers Providing innovative, fast-growing companies and their investors with independent corporate finance advice to help them evaluate, develop and execute growth strategies Equity Capital Markets (ECM) Equity private placements Growth equity financings and secondaries Pre-IPO advisory Mergers & Acquisitions (M&A) Sellside Buyside / Buy and build Valuation services Go4Venture Advisers LLP is authorised and regulated by the Financial Conduct Authority (FCA). © Go4Venture Advisers 2013 December 2013 Contents This Month in Brief 2 Investments 1.1 - Headline Transactions Index (HTI) 5 1.2 - Large Transactions Summary 6 1.3 - Large Transactions Profiles 7 M&A Transactions 2.1 - M&A Activity Index 17 2.2 - Top 5 Global TMT M&A Transactions Summary 18 Headline European VC & PE-Backed M&A Transactions: 2.3 - Summary 21 2.4 - Profiles 22 List of Acronyms 25 About this Bulletin The Go4Venture Advisers’ European Venture & Growth Equity Market Monthly Bulletin provides a summary of corporate finance activity among emerging European TMT companies: Investments, i.e. Venture Capital (VC) and Private Equity (PE) financings, including growth equity, financing rounds with single secondaries components (recapitalisations); and M&A Transactions where the sellers are VC and PE-backed European companies, including all majority transactions with no new investment going into the business (e.g. acquisitions, Management Buyouts (MBOs) and other buyouts). Investment activity is measured using Go4Venture’s European Tech Headline Transactions Index (HTI), which is based on the number and value of transactions reported in professional publications. M&A activity is measured using data from a combination of external sources, primarily Capital IQ, with complementary reporting from 451 Group and VentureSource. Europe is defined as Western, Central and Eastern Europe, excluding Israel. For more details, please refer to the Methodology Note available on our website. Please note that no part of the Bulletin can be reproduced unless content is duly attributed to Go4Venture and the details of republishing are notified to [email protected]. © Go4Venture Advisers 2013 Page 1 ` December 2013 This Month in Brief Dear Clients and Friends, Welcome to the latest edition of Go4Venture Advisers‟ European Venture & Growth Equity Market Monthly Bulletin, featuring our proprietary Headline Transaction Index (HTI) of investment activity, as well as a summary of VC & PE-backed TMT M&A exits of $50 million or more. 2013 Out, 2014 In: The Evidence of a European Venture Market Kicking Into Gear Is Mounting We ended 2013 on a high, at the same time as signs are accumulating that we are moving into the upper part of the investment cycle: as venture market insiders actually temper their enthusiasm for venture investments, public market outsiders are piling in. It is only a question of time before retail investors join the fun. To some extent, they already have – via a revival of angel investment (where losses are often sheltered by tax incentives) and, increasingly, via crowdfunding platforms (where individual investors are on their own – so expect disappointments). Soon, retail investors will demand their share of tech IPOs, as they see Wall Street insiders enjoying first day hikes through 2014. 2015 is going to be even more fun! The irony of it all is that the vagaries of the investment cycle are actually hiding a genuine improvement in the functioning of the European venture funding market. Entrepreneurs are better educated about VC demands and therefore better able to deliver on them (global ambition, large exit and all that); the investor landscape has become much richer (if more complicated to navigate), resulting from a burgeoning enthusiasm for innovation and entrepreneurship across the board; the eco-system is getting denser, across Europe (and we‟d like to think Go4Venture Advisers is pulling its weight here). And we are starting (finally!) to see meaningful exits and valuations for European tech companies, e.g. Spotify on the funding side, or DeepMind, NaturalMotion and Supercell on the M&A side (more on that below). So which way is it? Well, we side with the optimists and believe that European venture is kicking into gear, i.e. will start being a genuine valuation driver – even if we will not avoid the boom and bust inherent to any market. In the case of technology investing, the fads are simply faster and bigger than in other, more steady verticals. Investments The results are in and 2013 finished well ahead of 2012 (+32% by value and +15% by number of transactions). A few comments: The trend data is pretty robust: these numbers are in line with figures reported by market research companies such as Preqin, even if their data gathering methodology is quite different from ours. The average transaction size is going up, reflecting a drive for bigger outcomes (actually a mix of both riskier bets and less risky growth equity assets) which our Headline Transactions Index (HTI) picks up because (by design) it largely ignores activity at seed level and for Series A rounds of less than £5mn/€7.5mn/$10mn. © Go4Venture Advisers 2013 Page 2 ` December 2013 Larger transactions are driven by the Darwinian moment which the VC industry has just gone through: o Surviving established funds have further built their brand name and reputation (Accel, Balderton, Index etc.), which means they see most transactions and are benefiting from an obvious information advantage; o New players (e.g. Hoxton Ventures – which closed their $40mn (€28mn) fund to invest in European start-ups in December) are coming at it with a level of self-confidence, energy and global approach, which has traditionally mostly been lacking in European venture; o And of course PE funds are adding to the DNA of the industry through their “think big” mentality (e.g. Vitruvian Partners which closed their second fund on £1bn (€1.2bn) in December). The acceleration we saw from summer 2012 has now reversed, with a slower pace of growth since summer 2013. Is it a pause? Or are we going to see a sudden interest from big public market players (hedge funds, institutional investors, family offices, etc.) put the market into overdrive as in the late 1990s? As an asset class only worth c. €5bn a year, the European venture market is easily moved by a few hundreds of millions of asset reallocation from a handful of large asset managers. In line with this growth rate slowdown, December 2013 was below December last year – in both value and number of financings. Interestingly, out of 10 Large HTI deals (>£5mn / €7.5mn / $10mn) profiled in our December issue, 8 are from the internet services segment, including 5 e-commerce plays. It seems, though, that e-commerce is hitting two snags: lots of me-toos (furniture, fashion, ticketing, etc.) and increasingly niche plays (e.g. plus-size e-fashion – well, admittedly already half the population, and growing!). In a way, this follows a similar trend in enterprise software, where the shift from upfront licence to SaaS models (on the back of cloud-based delivery) is now hitting smaller and smaller segments. Are these smaller markets big enough to support venture plays? This becomes a more pressing question as valuations are now going up dramatically. Whereas Silicon Valley investors argue (of course they would) that “we‟re talking about a fairly small number of companies”, “it hasn‟t affected public market that much” and consequently “bubble believers don‟t know what they‟re talking about” (as per Marc Andreesssen‟s January interview with the Wall Street Journal), recent data points suggest exactly the opposite (leading the Financial Times to ask the question: “Valuations: It this nuts?”): From the funding market (admittedly mostly from the Valley): o Dropbox raising $250mn (€175mn) (from BlackRock) in January at a $10bn (€7bn) valuation, 25% higher than the valuation touted three months earlier in November when a price of $8bn (€5.6bn) was mentioned, and of course 2.5x more than the valuation of September 2011 only 18 months ago. Warren Buffet must be looking in with bemusement. From the IPO market: o AO.com, a UK-based online electricals retailer, is hoping for a £1bn (€1.2bn) valuation when it floats later this year, more than 3x the valuation it was hoping to achieve just four months ago. This would represent 3x historical revenues for a business that growing at 50% per annum but hardly profitable. All this while the market is waking to the fact that “e-commerce is a bear”. From the M&A front: o This month Google paid $3.2bn for 4-year-old Nest Labs, the maker of beautiful $130 thermostats and smoke detectors. The company has sold “hundreds of thousands” of units (not millions), so we‟re talking something like 30x revenues at best, and possibly as much as 100x revenues or more. It‟s the data, you stupid. © Go4Venture Advisers 2013 Page 3 ` December 2013 At least Europe is starting to benefit from these increased valuations. Only in the last month, we‟ve seen 3 major transactions of more than €100mn (which will be profiled in our January issue next month): Google buying UK-based artificial intelligence start-up Deepmind for £400mn (€485mn) Zynga acquiring UK-based NaturalMotion, a developer of mobile apps, for $500mn (€370mn) Equix buying TDX Group, a technology-led debt collection business, for £200mn (€240mn) Exits The year ended like it started – a tech M&A market lacking excitement, even if many pundits around (M&A advisers, brokers, etc.) are cheering and predicting more action.