Kreos Insights October 16 2018

Kreos Capital Growth Finance and Portfolio Company Seminar 2018

Our 8th annual growth financing seminar held earlier this year in April, a day filled with discussion around the topic of: Innovation Making an Impact. We selected this theme as we see innovation scaling beyond industry and commerce to impacting our daily lives, - the way we live, love and work etc - and changing society more broadly. While Kreos is not specifically an impact investor, we do see the several ways that our portfolio companies impact and change our daily lives and how today technology and innovation are ubiquitous concepts permeating into our lives, and not a standalone sector of business. We put together an exciting program to explore the theme further, launched by our keynote speaker, Michele Giddens from Bridges Fund Management. Michele’s presentation defined impact investing and highlighted the way innovation can be both a force for good but also have significant negative consequences for society overall. She also discussed how investing has moved from a responsible stance (e.g. to avoid investments in harmful activities) to investing for impact where the investment has a significant non-financial effect for several stakeholders. Following Michele’s opening presentation, the CEOs of a selection of our portfolio companies shared with us the ways in which they have significantly grown their businesses and also make an impact on our lives in accordance with our theme. Mike Laven, CEO of Currency Cloud - one of the fastest growing payments platforms described how his company has transformed the cross-border payments for businesses by making them faster, cheaper and more comprehensive than banks, growing to a point where it handles more than $1bn of transactions per month for blue-chip clients. Eyal Ronen, Co-Founder & CEO of Puls spoke about how the business has grown from an idea and 100 technicians repairing mobile phones in Israel to delivering in-home services for almost all electrical items in under 60 minutes across several countries. Eyal described the company’s incredible journey and how Puls is integrating with some leading groups like Target and Walmart to reach even more consumers. Simon Bryson, Founder & MD of Proveca presented the company’s unique business plan which takes well-used generic drugs used in the adult market and re-develops them specifically for paediatric use, taking advantage of a specialised European legislation giving it 10-year market exclusivity for each drug developed under this programme. Its first drug, Sialanar was launched commercially in Europe in 2017 to great success. Asaf Peled, Founder & CEO of Minute Media described how the company has become the fastest growing digital publishing platform in global sports serving tens of millions of highly engaged sports fans. The platform owns well-known brands including 90min, the world’s fastest growing football media platform, present in more than 10 main markets. Roland Lamb, Founder & CEO of ROLI told his own inspiring story of developing the unique ROLI keyboard and music system inspired by his vision of empowering everyone to make music. The company’s products are available at Apple Stores and have won several awards including the Design Museum’s prestigious Product Design of the Year 2014 award as well as receiving accolades from the likes of Pharrell Williams who is also an investor in the company. We also had a special ROLI jam session with the ROLI team. As a special guest speaker we invited Christian Tang-Jespersen, former CEO of Heptagon, who presented its remarkable journey from its inception to its billion plus acquisition by AMS in 2016. Heptagon started life as a wafer-level optics developer continuously building expertise to become an expert in integration and miniaturisation of highly complex optical sensors fuelled by the enormous growth in smartphones and other mobile internet devices. The discussion on impact investing was continued by a panel moderated by David Gann (VP of Innovation at Imperial College) and consisting of David Frykman (CIO of Norrsken), Sabine Kaiser (founder of SK Advisory), Bernard Liautaud (Managing Partner of Balderton) and Charlie Muirhead (Founder and CEO of CognitionX). The panel explored various models for impact investing, concluding that society needs to adopt a continuous and open discussion with its citizens to determine how to best harness the impact of technology and innovation for its benefit. Perhaps the best example of this principle was given by our closing keynote speaker, Eli Beer, Social Innovator and Founder of United Hatzalah, the Israeli ambucycle service. His presentation left no-one in the room unaffected with many of us teary-eyed from the touching stories of saving lives he described. Eli told the story of how he formed United Hatzalah 12 years ago from the idea of using a team of volunteers riding motorcycles to provide first-aid within 5-10 minutes of an incident as a first reaction force before ambulances arrive (seeing that ambulances were ineffective in negotiating traffic in his native Jerusalem). Today United Hatzalah has harnessed technology to link its team of more than 4,000 volunteers via mobile devices and GPS to offer this service answering more than 1,000 calls per day with an average response time of 3 minutes! The United Hatzalah service now serves as a model and is being implemented in many cities globally. This is truly an example of how technology and innovation can be an impactful force for good! We have already begun discussing the theme for our 9th seminar in the spring of 2019 so please do not hesitate to send us any thoughts you might have and we look forward to you joining us again in London on 14th May 2019.

Kreos Insights October 16 2018

Interview: Simon Cook, CEO/Co-Founder of Draper Esprit

Simon Cook is the founder and CEO of Draper Esprit PLC. Simon has been investing in European high growth technology companies since 1995 and co-founded Draper Esprit in 2005. Over the last 25 years he has invested in a number of Europe’s most successful high growth companies including Lovefilm, Cambridge Silicon Radio, Virata, nCipher, and KVS, currently he is an active board member of Trustpilot, Graze, Crowdcube, Revolut, Ledger, Perkbox and Podpoint. Previously Simon was a partner with Cazenove Private Eq-uity, which Draper Esprit acquired in 2006; a partner at Elderstreet Investments, which Draper Esprit acquired in 2016; and an Investment Director of 3i Technology Europe, which Draper Esprit acquired in 2009. Simon is a Computer Science graduate of the University of Manchester Institute of Science and Technology (UMIST).   Simon, we have known each other since 1998 when we had just launched Kreos Capital and you were at 3i in Cambridge. The history of your journey to get to where you are now today with Draper Esprit is very special and shows a lot of clever decisions and perseverance. Could you please remind us how it all got started for you and Draper Esprit? Yes. We have done so many deals with Kreos over the last 20 years I can’t even begin to remember them all. Going back to the start, my co-founder Stuart Chapman and I met at 3i in the 1990s when the tech investment scene was very different in Europe. There were a few small funds and there was the giant FTSE100 company 3i which dominated Venture and Private Equity in the UK, peaking at over 900 deals a year. 3i was a significant institution with huge pedigree and was known as the university of tech investment. I worked in Cambridge and had the honour of investing alongside tech visionaries such as Hermann Hauser of Amadeus and Neil Rimer of Index Ventures, even before their first fund. I was very fortunate to be able to invest and join the boards of leading companies such as Virata and Cambridge Silicon Radio. Stuart was based with 3i in London and then he went out to set up 3i in Silicon Valley for 4 years from 1999, and he added the crucial Silicon Valley level of ambition to our story which he brought back with him from the USA. One of the first things we did when we started Esprit in 2006 was to tie up with a leading Silicon Valley firm Draper Fisher Jurvetson (DFJ), now shortened to Draper, built on Stuart’s USA experiences. We always saw the strengths of the 3i platform: its long-term view, their depth of business skills and networks. But also it had some limitations specifically regarding their many different activities such as management buy-outs and infrastructure causing some challenges with technology investing. In fact, we were often telling our bosses at 3i we would run it differently, much to their annoyance; so it was rewarding to be able to buy their European venture and growth business in 2009 for about £170m and add that to the Draper Esprit platform. We have always been acquisitive as a firm and have acquired numerous portfolios and firms since we founded Draper Esprit 12 years ago: in fact, we have acquired every tech investment business where we worked at previously with our acquisitions of Cazenove Private Equity (2006), Prelude (taken private in 2007), 3i (2009), and Elderstreet (2016). These secondary transactions have given us unique expertise to do these secondaries alongside our main primary strategy to add interesting high growth companies to our portfolio. We see the end result is the same whether primary or secondary: we just build a great portfolio of amazing companies that we build and exit over time regardless of how we get in. This has resulted in us doing secondary deals like Top Technology Portfolio (2012), Seedcamp Funds 1 and 2 (2017) and Earlybird Fund 6 (2018). For the entrepreneurs it’s also key to have us come on board whatever stage: being able to provide liquidity to early investors is part of our strategy to enable companies to grow over the long term.   Today, Draper Esprit is one of the very few publicly traded tech investing funds in the UK. Explain the thesis behind this move and what are the strengths of this model? We think of our Draper Esprit listed model as part of the Fintech revolution in its own right. Today you may have invested in a pension fund which may have hired a private equity advisor who might have steered some of this capital into a venture or growth fund, but you might not know it, and there are many layers of fees and advisors. With our model anyone, individual or institutional fund, can be a tech investor directly by buying our stock, reducing layers of fees and adding transparency. In fact many entrepreneurs and funds have now have become small shareholders with us and we answer to them as much as they answer to us. This democratisation of the tech growth investing model is very much another part of the model which drives us. We are proud to have grown our market cap for our large and small investors from £120m to over £600m in 2 years, with a doubling of the share price in 2 years. In some ways what we are building now is taken from the best of a large permanent capital listed balance sheet like 3i but applied purely to high growth technology companies with global potential. Rather than providing equity capital across a wide range of all types of companies, we provide all stages of capital from seed to pre-IPO to a very specific set of high growth companies with global potential who are starved of such capital in Europe. The capital markets are hungry for access to technology growth companies; and we grow as we perform, adding great companies to our portfolio and having regular exits to good buyers or via their own IPOs. We aim to invest 70% in later stage deals and thus 70%+ of our portfolio value (NAV) is in our top 10-15 companies which are growing at 30%+. We have exited some amazing companies since our IPO such as Movidius, Grapeshot and Tails and have also added many new exciting names to that core group such as Transferwise, Graphcore, Ledger and Revolut. We only disclose the combined performance of that core group collectively as a portfolio so the privacy of our individual portfolio companies is maintained.   Draper recently did a deal with Earlybird and has some other fund-of-fund investments in other managers? This is very unique. Can you please explain this side of your platform strategy? Most funds raise a 5+5 year LP fund with a very specific strategy: eg early stage in Spain, or late stage in Biotech, and have only 5 years to invest and 5 years to exit. This inflexibility and fragmentation causes Europe’s best entrepreneurs to be starved of capital, especially at the later stages where real risk-based growth capital is really needed in Europe. We have total flexibility to invest in high growth companies at any stage, in any technology area (outside Biotech), in primary or secondary deals or via funds of funds and across all of Europe. If Warren Buffett could only invest in public company capital raises and only hold for 5 years, like most tech investors, then I expect his returns might suffer. Our 66% return on portfolio value last year demonstrated this flexible approach working. Seed funds are relatively short of capital in Europe so we set up our $100m seed funds of funds programme to steer some capital into this part of the market and allow us to get to know the emerging winners from these seed funds as they appear at an early stage. With our flexibility, occasionally an interesting opportunity comes along with potential at multiple levels such as with Earlybird. Here we were able to combine both a purchase into their latest fund with a secondary, but also provide them with some capital as our partner for our series A deals in Germany and the surrounding regions. With €700m invested by Earlybird in some of the greatest European companies such as Peak Games, N26 and UIpath we expect to be able to find a series of further opportunities to invest together.   With fresh capital available, you are obviously very active in the direct investment market and recently did a few big deals like Revolut. What is the current direct investment strategy of Draper Esprit, and what type of companies and situations are you looking for? There are approx. 400 deals a year in Europe that raise $5m+, growing by 100 deals a year and we aim to see all of them across all industries and European geographies, and we aim to invest in those with the most potential to be global leaders. We actively balance our portfolio for over a decade with 25% in deep tech and hardware, 25% in digital health and 25% in B2C and 25% in B2B and enterprise. This long term focus on deep tech and digital health has stood us well over the decades and we wryly notice the rush back into these unfashionable areas by many investors today.   What are your thoughts on the state of the European growth stage ecosystem in Europe over the next 5-10 years (compared to the US for example)? A few years ago I noted that the data from Silicon Valley in the mid 1990s for deals was exactly the same as Europe in the mid 2010s. The $40bn mature US tech investing industry went from 1000 small deals and only a few hundred large deals, to about 2000 small deals (<$5m) and 2000 larger deals today and has been like that for a decade, with all the growth in the pre- IPO stages. Interestingly 50% of all capital in the USA is raised by about 20 funds who have largely been around since the mid 1990s. Europe is growing at 20% a year from 1000 small deals and 400 growth deals last year, so in 5 years the European industry will have doubked to $20bn+ with 1000+ small deals and 1000+ growth deals, with 10-20 funds dominating. We aim to be one of those top funds over the next 5-20+ years as the European growth ecosystem matures. We are investing €150-200m a year at the moment which makes the equivalent of a €1bn+ LP fund, one of Europe’s largest.   What do you think is Draper’s key role and value add in backing its growth companies? Our main role is to increase European entrepreneurs’ levels of ambition and provide significant risk capital at the growth stage to help them capture that global potential, from series A to pre-IPO. We supercharge what the companies are doing so that we can help open doors for business partners and potential acquirers, help recruit key senior staff, and help internationalise the business to build the most exciting company possible. We are grown up enough to help maximise the timing but also help advise when the market dynamics have changed to ensure we get the best result for everyone.   Do you have some favourite moments or funny stories that you could share with us from your time as an investor? One deal that stands out for me is when we led the £6m series B for Lovefilm with a further £6m of growth debt from Kreos which allowed Lovefilm (then Video Island) to break out from the competitive pack. The creativity shown by Kreos to lend to a high growth business alongside us as lead investors in the £12m B round was transformational. A year later, Simon Calver, the Lovefilm CEO called me on the weekend to tell me the business was “on fire”. “I’ve seen the 100% monthly growth, yes it’s amazing”, I told him. “No,” he said, “the warehouse is actually on fire!”. There are many risks in investing but this was a new one! Needless to say Kreos, as astute as ever, had secured against the DVDs which were mostly out in customers’ homes, so all we had to do was rebuild the warehouse over the weekend and all the DVDs would be returned in the post on Monday. The company, under Simon’s leadership alongside William Reeve, did an amazing job and all was back to business as normal in a day or two.

Kreos Insights October 16 2018

Interview: Alexander Artopé, CEO & Founder of Smava

Alexander Artopé is Co-Founder and CEO of Smava, Germany’s leading loan portal. Alexander has more than 18 years of entrepreneurial and internet experience. Before he founded Smava in 2006, Alexander co-founded the enterprise software company Datango and served as the CEO. The company was sold to SAP. Previously, Alexander was co-author and managing editor for the book “The Internet Economy” with the European Communication Council. Alexander studied Business Administration and Communication Science at LMU Munich and FU Berlin.   We started to work together at the end of 2013. Smava was established several years earlier and you had pioneered the peer-to-peer lending market in Germany. Could you share some background on how you have built Smava over the last 10 years? We started out as Germany’s first peer-to-peer lender in 2007, similar to LendingClub in the US, with a strong mission: to make personal loans transparent, fair and affordable. However, we learned over the first years, that the refinancing costs of private lenders were structurally higher than banks. The main reason for this is the deposit overhang which allows banks to re-fi at very low costs. So we transformed into a lending marketplace, similar to Lendingtree, connecting banks to our lender side. This has led to a growth rate of 90% for our loan volume from 2012 to 2018. As of today, Smava is the biggest pure play for personal loans in Germany.   What have been your main learnings so far in the Smava growth journey? First, staying true to your mission is crucial. We put our borrowers first and empower them in dealing with banks. Second, hire the best people you can find, give them a strong focus on execution and put them in charge. Third, persistence and seeing things through has proven to be an important success factor.   The lending market is changing with the emergence of digital models and technology. What are the major trends you are seeing? I believe the online penetration of personal loads in Germany will go up from 10% (currently) to over 50% in the next couple of years, similar to the ratio we currently see in Scandinavia for example. Secondly, we see a strong shift from banks to aggregators. The key rationale for these is more convenience and better prices than offline banks. Third, digital loans will be a standard in the near term. Until today, borrowers had to wait more than 10 days on average to get an online loan. With digital loans, this comes down to 10 minutes. Smava has been pioneering this space by introducing Germany’s first digital loan in October 2016.   What has been the ‘secret sauce’ of getting Smava to its leading position of today in the German market? It was a couple of different factors. First and foremost was the focus on the product, making personal loans more transparent and affordable to our borrowers. This led to a superior conversion rate compared to those of our competitors, and better unit economics. Second, we were able to build a leading consumer brand by providing a simple and clear message: “Smava is always the cheapest offering”, combined with a positioning that we are always on the side of the consumer. This was started with constantly increasing TV budgets, but also strongly supported by PR campaigns. For example, we started the first worldwide negative interest loan for consumers in July 2017, where borrowers got €1,000 for minus 0.4%. Third we focused on constant iteration of our operational model, improving every day. Last, but not least, we always understood that it does not hurt to raise enough funding to grow to the next level - this is where Kreos was of important value to Smava in 2013 and 2014.   How will you continue to drive growth in your business for the coming years? Given that it is still relatively early days, we always say to our team that “the best is yet to come”. Generally speaking, we will try to stay true to our mission, keep on innovating, and stay humble and lean. Specifically speaking, we will focus on daily improvements, because any retail business means detail business. Thus, constantly generating lead bullets will generate the biggest benefit for the business.   You have expanded your equity investor base over the years (most recently with the Vitruvian-led $65m growth fund) and also utilised growth lending. What advice would you offer other growth companies about how they finance their business? I think it is mainly a question of i) the phase (seed, series A, series B etc.) and ii) the flexibility that comes with either equity or debt funding. In general, equity is more dilutive, but flexible. Debt funding has of course little dilution, but requires at least pledges and covenants. I would recommend to use equity in the early stages and supplement with growth lending later on. This is a recipe that worked quite well for Smava.

Kreos Insights April 30 2018

Interview: Henrik Aspen, General Partner at Verdane Capital

  Henrik Aspen is a General Partner at Verdane Capital. He has been active in the acquisition of several new portfolios of direct investments, and he works closely with companies primarily active in the software sector and in internet retail. He is also responsible for Verdane’s activities in Finland. Henrik holds an MSc in Economics from Stockholm School of Economics (Sweden) and a CEMS Master from the University of St. Gallen (Switzerland). He is also a graduate of the Swedish Naval Academy.   Henrik, firstly, congratulations on your €300m growth fund “Verdane Edda” that you recently announced. Tell us a little bit about the focus and background of the fund since it has a slightly different scope and complements your existing suite of funds. Thank you! The fund will capitalise on the experience and expertise we have built over 15 years of investing in technology enabled companies in the Nordics. In fact, we have made over 170 investments in software and consumer internet companies, so our knowledge base is extensive and our networks vast. This was driving increasing deal flow for us, and for slightly larger opportunities which didn’t really fit into our current funds that mainly acquire portfolios of companies. So, we established Edda to go after these opportunities, and this means that Edda will focus on single companies. Verdane Capital is still one organisation with one investment team – same people same culture. The objective is simply to be able to execute on opportunities up to €50m investments whereas our main fund has a concentration cap at around  €30m. We often come across attractive companies at a later stage (e.g. higher revenue) within sectors where we have particularly strong expertise, such as consumer internet and niches within the broader enterprise software space. With this new fund we can execute such later stage investments by acquiring shares form existing shareholders, invest primary capital, or a combination of the two. You have a focus on technology-enabled growth companies in Northern Europe. Why do you think this focus is of particular interest? This is an area where Northern Europe, and specifically the Nordic region, is particularly strong, due to factors such as good technology infrastructure, a tech savvy population and perhaps paradoxically quite high labour costs, which make automation and digitalisation worthwhile. We think that there are many exciting companies out there which we can help grow into regional champions or international success stories. We have invested and built successful tech enabled growth companies originated from the Nordics for the past 15 years. The Nordic market is unique in the sense that the domestic markets are very adaptive to new technologies but not large enough to support growth beyond a certain stage. This implies that international expansion is part of the DNA from the very start. If you build a company with the objective to expand into your neighbouring countries within 2 years, and Europe, UK and the US within 3-5 years, there is a ‘must build to last’ mentality that plays into every aspect of scaling your business. Today, we see similar thinking in Germany, where technology companies which used to target domestic customers (global brands) only and grow with such customers internationally, have started to shift focus earlier and target UK or US customers at an earlier stage.   At the moment, we have several later stage growth investments together with yourself and your team such as Smava, Babyshop, Searchmetrics and Navabi. Has there been a common theme in these investments that you are trying to replicate in general in your search for successful growth companies? We typically like to back niche players that are number 1 or 2 in their respective markets. We look at every investment opportunity individually although there is a pattern as to where we see Verdane having strong angles based on experience, knowhow and network. Broadly our track-record within digital consumer and enterprise software has helped us a lot. That said these industries are so broad, so we have to break it down to niches such as specific omnichannel niche market focuses (e.g. Navabi), consumer fintech (e.g. Smava), or B2B content marketing solutions (e.g. Searchmetrics) where Verdane has specific knowledge.  When it comes to digital consumer, we really like e-commerce players who carry their own brands, in addition to third party brands. We generally advise these sorts of players to really stick to their knitting and focus on what they are best at. How does Verdane differentiate itself in the current market environment and what is your view of the model for growth investing going forward? The management teams that we work with often emphasise our flexibility in approaching a deal, and our deep sector expertise. Based on the large number of investments we have made in relevant business sectors, we can typically make connections that can be hugely valuable to the firms we work with – for example to another company in our portfolio that has implemented a specific warehouse solution, just to give you one idea. Going forward, we think flexibility will continue to be very important, and real value-add will become ever more important.   Where do you see the use case for growth debt to complement your financing and what are you looking for from a debt partner? Flexibility is key, and the ability to understand a growth business of course. Debt plays a very important role in growth investing today as debt providers have a great understanding of the dynamics in growth stage investing. As revenues and cashflows in today’s subscription-based economy are quite predictable, conservative debt levels can be very complementary. We typically look for a debt partner that understands the company and its market, and buys into the business plan so that the debt package can be structured accordingly.   Verdane has a longer track record of also doing portfolio acquisitions and secondary direct transactions. How do you see the market for such investments going forward? We see more opportunities both in the Nordics and across the EU and UK and think that this market will continue to evolve. We are able to provide liquidity in a flexible manner, and there is always a value attached to that, but perhaps particularly when the business sentiment turns gloomier than it is today. We often source by interactions with management as well as the current VCs or PEs. Again our objective is to align stakeholders (not only shareholder) agendas and let the company grow to its full potential. We try to construct deals where we take all stakeholders interests into account where we for example structure deals where the selling VC/PE investors are entitled to a share of the potential upside. Furthermore, there is no such thing as ‘discount to NAV’ but we evaluate each company by analysing it bottom-up based on unit economics. Almost all of the investors who have sold portfolios to Verdane on this basis are well established and successful firms where a transaction has been very beneficial for the selling GP and its LPs.   We have actually known each other for more than 30 years, which seems like a very long time. If you look back at the market development, your career and involvement with growth companies, management teams and co-investors, what would be your strongest memories and learnings? Every case is unique and there is no such thing as one plan fits all, even if two companies would almost be identical, there are always implications that are specific in each case. What I like to think Verdane has been good at is the fact that we have managed to foster a great positive culture that underpins who we are and what we do. We have grown as a firm quite significantly during the past 24 months, but we put a lot of emphasis into ensuring that we embrace diversity but foster culture and core values. If you ask a management team in one of our holdings I think (hope) they will say that we provide insight and support to help them build their business to reach its full potential.

Kreos Insights April 30 2018

Interview: Christian Tang Jespersen, Former CEO Heptagon

Christian has a proven track record in developing high growth technology businesses and currently acts in advisory roles for global investors, PE and VC firms, including acting as strategic advisor for Temasek Holding (Singapore). In addition, he invests in and advises fast-growing technology and value-based companies including Scandion Oncology (DK), Dear Leader (DK), Tessa Therapeutics (Singapore) and Friday SmartLocks (UK). As CEO & President, he grew Heptagon exponentially since joining in 2010, resulting in an excess of $1bn trade sale to ams AG in late 2017. Prior to joining Heptagon, Christian served as CEO for Singapore-based Hymite that was sold to TSMC, a leading global semiconductor foundry. Before Hymite, he worked in Shanghai, China as senior vice president at Jabra-GN, a global maker of headset solutions. Christian has previously served as board member in several technology and IP companies, ranging from listed conglomerate GN Great Nordic, Swedish late stage start-up Flatfrog Laboratories and Scandinavian IPR firm Zacco.   Christian, I would like to take the opportunity to thank you for all the hard work to grow Heptagon into a billion dollar exit success story as it was acquired by ams AG. It is one of the “hidden” recent fantastic European technology success stories. Was this what you expected when you joined the company back in 2010? To be honest, I had a very different set of expectations, joining Heptagon. The company was losing double-digit millions that year, it had a hard time growing the business and it really seemed like an uphill battle, more designed for an aggressive cost-down and subsequent IP sale. I was asked initially by the Asian investors of Heptagon to review the business and I was warned that it could be a very negative conclusion I would end up with. At the same time, they made it clear that we were in it together which gave my team a high degree of confidence to explore different ways of addressing the business challenges. No-one could have expected - nor hoped for - a 50x growth, revenue-wise, over the past 7 years. But relatively quickly, we determined that we had something unique, technology-wise, we knew we had a strong core-team and we really wanted to go for the moon-shot of embedding our technology into consumer mobile devices.   Kreos provided growth lending facilities to Heptagon during the period 2007-2008, and there were certainly some challenging moments during the macro financial crisis in 2009-2010, but all stakeholders showed support and the company managed through. What were the key success factors and decisions made to be able to manage through that difficult period? Kreos was actually one of my first “challenges", having to engage with a knowledgeable stakeholder group who had been through too many broken promises: - I recall my first meeting with Mårten and the team in London, where we laid out the situation and the strategy/plan moving forward. There were a lot of questions - and many of them quite good albeit somewhat critical - that we were forced to consider, and we really took the input seriously. Kreos is obviously a financial investor but with clear commercial focus and understanding - you feel that immediately when engaging with Kreos. At the end of the first meeting, we had a much better mutual understanding which I believe led to a way forward - and ultimately moved Heptagon from a company going side-ways to a successful growth story. So, was there a single key factor? Probably not - the turn-around was based on a number of complex factors as well as a large degree of, well, luck. That said, I keep coming back to one thing: complete honesty. We decided as a management team to be open to the extreme with our stakeholders and the stakeholders responded in return with a much higher degree of confidence and even risk-willingness in the process.   Given the global nature of the business with operations on 3 continents, what is your experience of building the financing structure for Heptagon over the years and the support from investors? Heptagon had a global shareholder base, including leading investors from the US, Singapore, China and Europe. This presented a much more complex shareholder engagement initially, but also allowed us to engage and seek deep and broad advice from our shareholder base. I would respectfully argue that European investors are somewhat more risk-averse than Asian investors. However, they contribute very actively to the growth strategy and are quite active when it comes to the financial planning. Heptagon would not have been what it is today without the deep engagement we had with each of the stakeholders. We were allowed to think bigger than what you normally are brought up to do as a European-based company.   Heptagon moved from being a Finnish company to a Swiss company and eventually having its largest operation in Singapore and addressing global customers. How were you able to deal with all the international cultures, time differences, local operations etc. and at the same time grow the company in such an explosive way? The interesting thing with Heptagon is that it truly is, and always have been, a global company - we employed more than 20 nationalities and as mentioned above, we had a very global shareholder base. Our board was represented by US, China, Singapore, France, Denmark and Taiwan. We made this challenge a strength. Initially, we called ourselves the worlds' smallest global company…. I guess after surpassing 7,000 employees this is no longer the case. But we acted as a small company. We wanted to stay focused and at the same time, open for new ideas and ways of problem-solving. We took the best from each culture and combined it. As an example - initially we had great challenges with manufacturing in Singapore the products designed in Europe (which is not an uncommon problem for European-based engineering companies). We turned this around and insisted that product design move much closer to operations and only maintained the proto-lines in Europe. This had several quite positive results: Not only could we re-assign a large engineering team in Singapore towards product design, we could expand our focus on fast-technology development and, somewhat surprising, we realised that we brought the engineering and operations team much closer together. We made everyone accountable in a positive way. When we came up with ideas, everyone contributed - and when we encountered challenges (and we had plenty of them, too) the same group was also willing to actively engage in the problem-solving.   Can you tell us a little bit about how Heptagon has been part of transforming the optical sensor industry for smartphones and where you see the technology and related applications and services heading? This could be a very lengthy story, but to make it over-simplified, we were ultra-focused at Heptagon on our key strengths, making ultra-small and quite complicated optical sensor systems. We have been convinced - and put our money behind this - that the world will benefit from great expansion of sensors and this will facilitate the way we engage and the way we live. We focused on optical sensing, our core expertise, and added complimentary technologies hereto, including 3D and spectral applications. Whilst the industry focused on imaging and optics we decided to use or optical capabilities and know-how to take a different direction and focus on optical sensing. In short, we locked in to our “niche” which luckily quickly became main stream.   What was the main reason behind selling Heptagon to ams AG rather than continuing to build the company towards an independent IPO? Originally, we actually did pursue an IPO and had back in 2011/2012 made a confidential filing, getting ready for a public life! We had very deep deliberations with our board and key shareholders in respect to pro & cons of an IPO. We were obviously attracted to the public markets and creating a more valuable (and bankable) equity for M&A however, we also realised that we as a company needed a complete focus to implement the aggressive growth plan rather than spending valuable management time on public markets management. At the end of the day, we were fortunate to have the right investor base that could carry us through quite capital-intensive times without need to reach out to public markets. The ams AG sale was also a very logical - albeit not exactly planned.  When the opportunity came up, our board responded very quickly and enabled us to focus on an intensive negotiation process rather than having to manage both internally and externally. Combining with ams - that had a strong base in optical chips and electronics and a shared customer base with us, gave us the missing link to create a complete optical system, without any direct competition, globally. As such, it was a no-brainer to combine the businesses.   What has been your biggest learning experience from the Heptagon journey, and would you do it again? Absolutely yes. I would do everything again. It may sound cheesy but the process and what we jointly achieved was so much more rewarding than the end-result, a successful (and quite rewarding!) sale. The Heptagon team created something unique and I am proud to have been part of this. We created a company culture that at the same time was aggressive, balanced and people-oriented. We were individualist but acted as one group. This was always the key; acting as a group. I once read an interesting study comparing a group of kindergarten kids’ building structures that consistently exceeded same task performed by a group of highly educated business school students…why was this? The kids had absolutely no internal competition and was much more focus on the task at hand……with the risk of offending my team, I like to compare us to the kindergarten group. We acted as a single entity, our behaviour was efficient and effective. We kept it simple. This really represented the Heptagon team. We moved quickly, spotting problems and offering help. We experimented, consistently took risks and we never competed for status. In short, we became a group that added up to be greater than the sum of the parts. This is probably the biggest take-away from the Heptagon journey.

Kreos Insights April 30 2018

Observations from Dublin European Growth Capital Conference

Earlier this month, Ross Ahlgren represented Kreos Capital at the 0100 Conference in Dublin dedicated to connecting UK, Irish, European and US, Growing Companies and Growth Capital and Private Equity investors.  Some of the panels that are worth highlighting included “Capitalizing in the golden age of private equity” and “Investing in the Mid-Market” as well as the panel that Ross moderated - “Late stage capital in Europe” with SVB, TCV, Insight, Medicxi and Frog Capital.  In addition to several specific sector discussions on Healthcare, FinTech, and Artificial Intelligence, all sectors Kreos is actively investing in and continually assessing, the overall tone of the conference was quite upbeat regarding Europe’s attractiveness to global investors, growth capital availability and exit prospects for European companies. On Ross’s panel, Alex McCracken from SVB said “2018 will be a great year.  We believe that we will see more mega rounds, more syndicated loans to equity backed companies and competition from wide ranging corporates, sovereign wealth funds, mutual funds, hedge funds, etc”. Alex also added, “There is a lot of momentum building in 2018 for very big, world class European companies like Klarna, Funding Circle, etc. to exit.  Several could be European IPOs, and this will be a turning point in the ecosystem going forward”. Cian Cotter, Managing Director at Insight Venture Partners, was particularly excited about European prospects in 2018 saying “we are more bullish on Europe than Silicon Valley.  We see more alignment with capital efficiency, timing of growth, timing of exits, etc. with the European GPs”. John Doran, a General Partner at TCV added that “While on an absolute basis, there are less opportunities in Europe than the US, however, the number of deals vs. the relatively lower amount of capital and firms chasing those deals makes Europe more attractive now relative to the US.” When discussing exit prospects for European growth companies, one of the panellists indicated that, “We definitely are seeing more competition for prospective M&A exits and strategic corporate investments.  Our different European exchanges continue to develop and deepen their bases and we are seeing more corporate buyers willing to pay higher prices for European portfolio companies.  That being said, corporate buyers and strategic investors are very sophisticated, and at the end of the day, companies are bought, not sold.  So, we need to build real market leaders with strategic importance”.   On the topic of corporate investors, Kevin Johnson, General Partner at Medicxi Capital said that “In Healthcare, corporate investors are a very good thing.  The science is really the known and relatively easy part.  The hard part is to know if the end product will be commercially viable.  Corporate investors on the boards and within our companies are surrogates for the market place at large and help focus the boards and teams”.   Looking beyond healthcare, on the Artificial Intelligence and Machine Learning panel, the prevailing consensus was summed up well, “These technologies are now so pervasive across all sectors that they are becoming embedded into all business models, not just autonomous driving applications, automation & IOT”. Addressing one of the main concerns about AI, he noted that “AI is not about loss of jobs.  The current supply of software engineers can’t keep up with cyber security threats alone, much less the mountains of data that we are creating from the rapid proliferation of connected devices.  It is simply beyond human capacity to manage or mine all of the data, so AI and Machine Learning are the best solutions”.   As noted above, while the general consensus was rightfully quite positive about the outlook, there were several notes of caution added, John of TCV also added, that “Softbank and others are distorting the very late stage market a bit.  But in the mid-market, we are paying slightly higher multiples than the B2B valuations on NASDAQ which are now ~ 5.5x which, while not cheap, are rational and not overpriced.”   Additionally, as expected, a topic on everyone’s mind going forward was Brexit and how it might affect different sectors.  Quotes from the panels included - “As we have already seen, Brexit will affect the Goliaths of industry that we are trying to disrupt, more than our agile, innovative and disruptive companies, so we are diligent but not overly-worried about it.”  And furthermore, it was said that “Teams and business models that are focused solely on the UK may have issues, but not the vast majority of the companies we see.  Most of these companies are global by default and leaders in their sectors”. While these observations are a just a sampling of what we heard at the conference, they seemed to capture the current sentiment that we are also seeing as we actively invest in the current European growth capital market.