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Why it won’t be Deliveroo that casts a shadow on Darktrace

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You’d have thought a company would need to be brave or foolish to follow in Deliveroo’s smoky wake on to the London market. 

In the event, cyber security company Darktrace appears to be neither. Perhaps because this looks quite a different type of tech offering.

For a start, it has some proper technology behind it. Such is the enthusiasm for showing the UK can attract digital fare that there has been a tendency to pump everything with a website like it’s the next great tech play. 

But Darktrace boasts that it uses machine learning and artificial intelligence in cyber security software. Traditional cyber defence involves building walls against potential attacks, which then must be adapted and replicated as threats evolve and change. Darktrace, founded in Cambridge in 2013, instead deploys its software to understand what a business’s “normal” state is; it says it can then use that to identify and prevent attacks quickly.

In other areas, too, Darktrace should be able to shrug off comparisons. One of the less-discussed concerns around Deliveroo, whose shares fell again Monday to trade about 35 per cent below the offer price, was whether the app with bicycles model really translated into a viable, scalable business beyond its home market. 

Darktrace, in contrast, had more than 4,600 customers in more than 100 countries at the end of last year, up from about 1,600 in 2018. Its software is quick to deploy, meaning it can sell by installing its system and letting it show its worth in a two or three week trial. Subscription contracts mean predictable, recurring revenue.

The cyber company also isn’t as obviously riding high on the back of lockdowns. True, travel restrictions meant lower marketing spending. Normal sales activity would have largely wiped out the adjusted ebitda (earnings before interest, taxes, depreciation and amortisation) profit of $9m for the year to June 2020. (But still, something resembling a profit! In tech!). 

Sales constraints after a pandemic-related hiring freeze will help keep all-important revenue growth to 36-38 per cent this financial year, compared with 45 per cent in 2020, a slowing growth profile that might concern some tech aficionados.

Still, accelerated digital adoption and more remote working should be a boon for cyber companies longer term. And while Darktrace doesn’t have the top-line growth of some US software as a service or cyber peers, like Snowflake or Zscaler, nor is it seeking the same valuation. A mooted $5bn price tag is a sharp step up from its last private valuation of $1.65bn. But it doesn’t look out of line with where some sector companies are trading, according to Public Comps.

Governance is a more complex issue. Darktrace’s five founders, who remain on the management team, aren’t worked up enough about control to demand special treatment. Unlike Deliveroo, there will be no dual-class share structures. 

Its problems are legal rather than structural. Mike Lynch, the former Autonomy boss, was an early investor in Darktrace through his company Invoke Capital. He’s fighting extradition to the US on fraud charges, which he denies, related to the sale of Autonomy to Hewlett-Packard in 2011. His former chief finance officer Sushovan Hussain, also an Darktrace investor, was convicted on similar charges in 2018.

It’s hardly an ideal backdrop to a market debut. And the risk factors in the prospectus make for ugly reading: Darktrace was subpoenaed by the US Justice Department in 2018 and warns it could face potential liability under possible money laundering charges (though it considers successful prosecution a “low risk”)

Lynch left the board of Darktrace in 2018, sufficiently long ago to alleviate concerns about any day to day influence.

But the listing documents suggest a rather tortured attempt to put distance between two things that have been quite closely intertwined. Several Darktrace executives, including its chief executive, were previously employed by Invoke and Autonomy. Lynch was on Darktrace’s advisory council until March 2021, when he moved to a newly-created science & technology council. Invoke has historically provided services to Darktrace, including until recently two employees in its finance operations in Cambridge.

The question is whether potential investors can get comfortable with the reputational headaches — and to focus more on Lynch’s ability to spot homegrown tech potential and less on his continuing legal battles. If they can, Darktrace looks like the kind of tech listing the London market has actually been hoping for.

helen.thomas@ft.com
@helentbiz





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India emerges as China’s tech challenger with record run

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India is rapidly closing the gap with China in minting new unicorns — privately held start-ups valued at $1bn or more — highlighting growing investor appetite for tech start-ups in the country as the pandemic accelerates the adoption of digital services.

Over the past year, 15 companies from India raised capital at a valuation of $1bn or more for the first time, according to CB Insights and company announcements gathered by Nikkei Asia. Ten of them became unicorns in 2021. By comparison, only two of the 15 companies from China that joined the list over the past year did so in 2021, according to CB Insights.

A successful listing of online food delivery company Zomato, which recently filed a draft prospectus with India’s securities regulator, would set the stage for many of these unicorns to follow suit. Zomato, a lossmaking company operating in a nascent industry once considered too risky to invest in, is planning to raise Rs82.5bn ($1.1bn), including through a pre-IPO placement.

“Indian internet has always been a story on the horizon,” said one investor in Zomato. “But it’s finally here.”

India’s new breed of unicorns are mostly purely online businesses that have benefited from the flood of consumers and businesses that have flocked to their services during the Covid-19 pandemic. Investors are watching whether they can maintain the momentum as India grapples with a deadly second wave — new coronavirus cases have topped 300,000 every day since April 21, the highest rate of infection in the world.

New unicorns in India in 2021

“Every business has been forced to figure out a digital way of selling online,” said Harshil Mathur, co-founder and CEO of fintech start-up Razorpay. “A lot of small traditional retailers who used to sell through offline channels have gone online. We also saw a large number of both individuals and freelancers starting to sell things on WhatsApp, Facebook and Instagram.”

This article is from Nikkei Asia, a global publication with a uniquely Asian perspective on politics, the economy, business and international affairs. Our own correspondents and outside commentators from around the world share their views on Asia, while our Asia300 section provides in-depth coverage of 300 of the biggest and fastest-growing listed companies from 11 economies outside Japan.

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Transactions on Razorpay, which processes payments for online services like food delivery apps, surged to an annualised rate of $35bn-$40bn from $12bn a year ago, Mathur said. The company was valued at $3bn in a recent funding round, just six months after it reached the $1bn mark in October last year. The latest round was led by its existing shareholders, Singapore sovereign wealth fund GIC and Sequoia Capital.

Other start-ups that became unicorns include: Chargebee, which sells software that helps companies manage their subscription services; Meesho, which operates a marketplace for individual business owners that want to sell goods on social media; and Cred, which gives reward points to credit card users who pay their bills on time.

India has lagged China in the size of its digital economy but is rapidly catching up. Investors say this is thanks to a surge in mobile phone users as well as government-led policies like the 2016 launch of the Unified Payments Interface, a real-time payments system that enables instant transfer of money between banks. UPI now accounts for the majority of online payments, and transactions surpassed Rs5tn in March, more than double the figure of a year ago, according to the National Payments Corporation of India, which operates the system.

China still dominates the overall list in Asia with 138 unicorns, more than four times the number in India, according to CB Insights. Some of China’s biggest unicorns are also much larger in size, such as TikTok operator ByteDance, which has a valuation of $140bn. India’s biggest is One97 Communications, the owner of mobile payments app Paytm, worth $16bn.

India’s One97 Communications, which runs the Paytm mobile payment app, is also said to be preparing an IPO © Kosaku Mimura

Still, the rapid rise of India’s unicorns signals a shift in investor appetite.

“We are considering allocating more capital to India in the future,” said Ryu Muramatsu, founding partner of GMO VenturePartners, an early investor in Razorpay and south-east Asian fintech start-ups. “There may be a correction in valuations in the short term. But compared to the past, companies have strong fundamentals.”

Zomato’s IPO will be an important indicator of whether the tech boom can gain momentum. With no record of multibillion-dollar IPOs, sceptics say prospects of a profitable exit are highly uncertain. China, on the other hand, can point to a strong record of homegrown tech companies going public, such as Alibaba and Tencent, which have grown into some of the world’s most valuable companies.

One bottleneck for Indian tech start-ups seeking to go public has been a regulatory rule that generally requires companies to be profitable for three years before they can sell shares to retail investors. But lossmaking companies can go public if they allocate at least 75 per cent of the offering to qualified institutional investors — the route that Zomato, which posted a Rs23.6bn loss for the year ended March, chose to take. If Zomato is successful, less sophisticated investors will be more confident in backing lossmaking companies.

New unicorns in Asia

“It’s a structural shift,” said Rahul Malhotra, an analyst at Bernstein. “Regulation has improved, companies are scaling, fundamentals are there. And the market is still underpenetrated.”

Chinese investors and companies are the most likely to lose out if India’s tech boom gains momentum. Once among the most active investors in India, companies like Ant Group, Zomato’s second-largest shareholder, have been mostly forced to watch from the sidelines due to a new regulation that requires companies from India’s neighbouring countries including China to seek government approval before making an investment. Leading the latest wave of funding rounds are US investors like Tiger Global Management and Sequoia Capital, which have raised billions of dollars for new funds in recent months.

The growing number of deep-pocketed start-ups will also intensify competition between Chinese tech companies. Those operating in India have already been hit hard by the Indian government’s ban on more than 200 Chinese apps last year following a deadly border clash.

Chargebee, which has offices in the Indian city of Chennai as well as San Francisco, says the majority of its 3,500 customers are already from the US and Europe. After raising $125m at a $1.4bn valuation, it plans to expand its footprint to Asian markets like India, Japan and south-east Asia, according to a spokesperson.

A version of this article was first published by Nikkei Asia on May 3 2021. ©2021 Nikkei Inc. All rights reserved

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British Spac king plans his first European blank cheque listing

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Ian Osborne, the British investor at the forefront of the US Spac boom, is turning to Europe with plans to similarly open the market with the region’s largest tech-focused blank cheque company.

Hedosophia, the fund manager run by Osborne, a publicity-shy tech financier and former political fixer, plans to raise €400m for a special purpose acquisition company in Amsterdam to target a European tech “unicorn”.

Hedosophia European Growth, a shell company that will merge with an existing private group and take it public, will target tech companies with a value of up to €5bn. It is expected to be backed by global investors such as Third Point, according to people familiar with the planned listing. 

Goldman Sachs is advising on the deal. The initial public offering could be announced as early as Tuesday. 

In partnership with former Facebook executive Chamath Palihapitiya’s Social Capital, Osborne has been credited with relaunching the US Spac market with his first blank cheque company in 2017, which went on to merge with Richard Branson’s Virgin Galactic. 

Since then, Spacs have become the hottest investment trend in the US and Asia, accounting for nearly half of the $230bn raised globally in new listings over the past year, but have barely featured in Europe.

The new company is expected to be listed on the Euronext in Amsterdam, where the rules are more favourable to the sorts of blank cheque companies that have turbocharged the US tech rally over the past two years. 

Even so, the European equity markets have attracted few Spacs — with only eight so far this year that have raised about $2.2bn compared with the 315 in the US that have raised $95bn, according to Refinitiv data.

Hedosophia wants to spark interest in Europe, people close to the plans said, with a more investor-friendly offer and commitments from management to financially back the listing.

The company will target an initial €400m, and then seek further funds in the so-called Pipe commitment — the additional capital needed to close a merger with a target company — said the people with knowledge of the deal. There is also an overallotment option that could take the fundraising to about €460m.

This would make it the largest tech-focused Spac in Europe, they added. Hedosophia will launch its first Spac in Europe without Social Capital. 

The plans come at a time when the US Spac market has slowed considerably following increasing scrutiny from regulators and a pullback from large institutional investors. 

Shares in companies that have gone public in Spac deals have fallen in recent months, including some supported by Osborne through his partnership with Palihapitiya. Other companies backed by Social Capital Hedosophia include insurer Clover Health and real estate group Opendoor.

Spacs have been criticised for the high rewards paid to so-called sponsors of the listing, who typically get 20 per cent of the equity of the acquired company.

In an attempt to make its first European venture more investor friendly, Hedosophia has revamped the structure of the Spac. Under terms put to investors, management will be initially limited to 10 per cent of the so-called promote shares, and then an additional 5 per cent if stocks rise from an initial price of €10 to €20, €25 and €30 on a sustained trading basis.

Hedosophia management plans to buy 5 per cent of the offering, in addition to covering underwriting and other fees. The listing marks the first time that Hedosophia has invested in a Spac IPO directly in this way.

It will also offer to cover any impact that negative interest rates have on investors that want to sell out of the Spac.

One person familiar with the plans said traditional institutional investors that had never bought into a Spac had been attracted to these reforms: “No sponsor has ever offered such an investor-aligned package either in the US or Europe.”

The Spac will have four independent directors drawn from European tech founders or executives, including Jan Kemper, chief finance officer at N26 and former Zalando executive, Jochen Engert, chief executive at Flixbus, Max Bittner, chief executive of Vestiaire Collective, and Stephanie Phair, chief customer officer at Farfetch.

Hedosophia declined to comment. Goldman Sachs declined to comment.



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Music group Believe aims to raise €500m at IPO

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Believe, a French company that bills itself as a new breed of music label for the streaming era, has filed for an initial public offering with the aim of raising €500m to fuel its expansion and fund acquisitions.

Founded in 2005 by chief executive Denis Ladegaillerie, Paris-based Believe is aiming for a valuation of above €2bn, according to a person familiar with the matter.

The company is seeking to capitalise on renewed investor enthusiasm for the music sector, which has returned to growth after two decades of decline as subscription-based streaming services including Spotify, Deezer and Apple Music replace CD sales.

The new era has also begun to shift the power dynamics among artists, major labels, and the private equity companies and specialist investors rushing into the market. Streaming has not only boosted the value of back catalogues, but also put pressure on major labels to deliver more of the profit derived from it back to artists, creating an opening for newcomers such as Believe.

“Artists want to keep their own intellectual property and have a partner with digital expertise, who offers them economic terms that are more favourable [than traditional labels],” Ladegaillerie said on Monday.

“You do not develop an artist in the digital era as you did in the analogue one. As music goes digital globally in the next 10 years, this creates an opportunity for us as the market transforms.”

Believe works with independent musicians and music labels as they seek to build up popularity via social media and put their work on streaming music platforms. These include a broad range of artists from individuals just starting out to more established artists, such as French rapper Jul, Australian band Parcels and Lebanese singer Nancy Ajram.

For smaller artists, it offers a platform called TuneCore to allow them publish their music at a low cost, but the vast majority of its revenues comes from its premium service for bigger artists. But unlike traditional music labels, the bigger artists it works with keep their own copyright and pay Believe a share of revenue for the services it provides.

Believe is one of several new digital music companies looking to challenge the major labels with more flexible deals and service-oriented contracts. Companies including Kobalt’s AWAL, sold this year to Sony, Ditto in the UK and Downtown in the US have emerged in the streaming age to offer musicians an alternative to traditional record deals to promote and develop their work.

According to its IPO registration document, the company reported €441.4m in sales in 2020, up 12 per cent from 2019. However this was down from 65 per cent achieved from 2018 to 2019 as growth slowed because of the pandemic. It also swung to a net loss of €26.3m last year due to heavy investment in technology and staff, after having achieved a €4.6m profit in 2019.

Believe’s adjusted earnings before interest, taxes, depreciation and amortisation margin was 2 per cent in 2020, lower than the roughly 10 per cent in the two years before.

The company said it was aiming for like-for-like sales growth of about 20 per cent this year and for adjusted ebitda margins to be stable. By 2025, it aims for 22 to 25 per cent annual sales growth and an ebitda margin of 5 to 7 per cent.

Ladegaillerie said that Believe was still focused on growing and expanding into new countries so it would continue to invest in the coming years as opposed to focusing on profitability.

The company wants to become more acquisitive following the IPO, aiming to spend €100m a year on deals from 2022 to 2025 compared with €126m since 2018.

Believe’s biggest shareholder is California-based growth fund TCV with a 49 per cent stake, while other backers include French venture group Ventech and London-based GP Bullhound. Ladegaillerie owns a 15 per cent stake and does not have special voting rights.

Citi, JPMorgan and Société Générale are acting as joint global coordinators and joint bookrunners.



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