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Capgemini IT: GROWTH ACCELERATOR

IT trends spotted and checked by experts

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What happens

More than $1bn of venture capital (VC) investment -- an all-time high -- flowed worldwide into artificial intelligence tech start-ups in the second quarter of 2016, according to a report by CB insights, with AI and machine learning predicted to have a transformative impact on businesses in the coming years. Europe is increasingly seen as a key location for incubating globally competitive start-ups that use this technology, as evidenced by Twitter's $150bn purchase last year of London-based Magic Pony Technology, which has created ways of processing images and videos that use machine learning and neural networks.

so what?

Co-founding partner of Hoxton Ventures

Rob is an American venture capitalist who was a co-founding partner of London-based CV firm Hoxton Ventures that invests in early-stage European technology companies...

After heavy investment in the sector 2016, the level of funds pouring into AI start-ups has been forecast to multiply this year as the technology becomes more widely used in sectors ranging from healthcare to cyber security, and functions such as human resources. But investors will also be hoping to identify promising companies in other emerging tech sectors.

Why was there a surge in AI-related VC investments in 2016; is this likely to continue in 2017?

The surge was based on the advances in open-source software, which powers a lot of AI. These building blocks are progressing massively due to the efforts of companies like Google and Amazon, and the rest of the world is able to build on top. It's been a breathtakingly fast year of progress that shows no signs of slowing. I think absolutely the surge will continue to grow in 2017. Like "mobile", every investment and company will need to have an AI strategy and it's still very early days for older businesses who haven't even begun to apply AI.

What new applications are developing in AI and are there any examples that you find especially exciting?

There are so many broader ways to apply computer technology. Particularly with AI and machine learning, there's a lot of sector-specific applications, maybe in agriculture or health. We have one company, Babylon Health, it's basically an AI doctor. It looks over historical data. It analyses and can help with initial diagnosis. You cannot do this in a vacuum, but if people need a quick idea if something is wrong, it's useful.
If you think about most industries, there's quite a lot of [AI] technology that will be applied. It's still really early days for AI. We're quite excited. We've only scratched the surface of which industries will be affected by machine learning and artificial intelligence. I think it's very similar to mobile -- now it's almost taken for granted that something is mobile. It's early stage, but if you look at the trend, AI's going to be pervasive. Over time, you're not going to think about AI -- these concepts will be threaded into everything. It's going to be everywhere.

Apart from AI and machine learning, which other tech sectors are becoming popular with investors?

On the hardware side, battery technology is interesting -- you can fit things in smaller and smaller batteries. Something that was the size of a car battery, five or 10 years on is the size of a watch battery. These are general trends -- miniaturisation and better software. Software companies will be a pretty interesting sector, including software as a service (SaaS). So many older businesses realise it doesn't make sense to have a server room and guys managing your software in your office. Software is borderless. We're seeing great companies building software to sell online.
Cyber security is a very active sector; there are so many things happening. Companies that never needed to think about security, they need to think about how to protect their computers in some way. Often they only think about it after something bad happens.

Are there particular tech start-ups that you expect to attract large amounts of financing in 2017?

As far as start-ups go, I think 2017 is going to be the year of Snapchat with their impending IPO. They've captured a tremendous amount of growth in a short time. They've been very good at creating a very interesting brand and they've moved their company to being more of a photography, camera company. Their IPO will be one of the biggest.
Darktrace is a very interesting [cyber] security company. It's not a sexy space, but the company has done tremendously well. That will be a British winner, people will take notice. In the last 12 months, when we go to our friends in Silicon Valley, it's a brand and name they know. They're selling to big Silicon Valley companies. It will be a British story of 2017 if not more of a global story.

How do you assess tech start-ups? What should investors be looking for when considering where to put their money?

For us it's a couple of things: we look at the team and the product very closely. I'm originally American and I spent a lot of my time in Silicon Valley. If you look at Silicon Valley winners, they tend to be focused on building a fantastic user experience, something that makes users happy -- they come back and use it every day. Whatever the product is, if it's aiming at consumer users, is it something that scratches their itch? Is it the right team that thinks about building something delightful? A consistent fact in every technology success story is that people think it's great, something they want to us all the time. So it's a subjective industry in a way. It's something tens of millions or hundreds of millions of people want to use.
You see people who want to be the next Mark Zuckerberg coming out of London or Manchester or Berlin. Do they really want to take over the world? These are the key things.

What should investors think about when deciding where to put their funds?

We're pretty broad as an investor and we have a pretty wide mandate. For us, we look at things that can be winners globally. Every bet we make has to have the potential of having a massively big outcome. We have to go into every deal asking, 'Can this be a 10 to 20 to 30 times multiple?' We have to look for big outcomes. Is a new market emerging or an existing market changed?

At what stage of development of a start-up should investments ideally be made?

We usually hit right around Series A. Usually there's something tangible produced -- a working version of the software, between four and 10 people in the company, quite early. A lot needs to be done, but we can see that spark. There's always a lot of miracles that have to happen: you have to sell it, it has to be popular. If you can suspend disbelief, is this a good product? If these things can happen, this could be a big company; you want to be part of it now.

Which cities or regions in Europe are currently creating many of the most promising tech start-ups, and which places are becoming more interesting?

London is the biggest -- probably three times the size of Berlin. Berlin has always been number two. We spend quite a lot of time in places like Barcelona, Lisbon and Stockholm. They don't get as much press as Berlin but, per capita, they're probably hitting above their weight. It's a trickle-down effect: are there specific engineering skills; are people hungry; is the cost of communication reasonable? We go regularly to Zagreb in Croatia and places like Tallinn.
In a lot of the former Soviet countries, I think they have two advantages. The countries have a very strong engineering culture, a big focus on math and science. They have at least one national-level university that produces top-tier talent. These countries in general had a strong education focus and often a lot more female representation in engineering, which is a positive thing.
And because historically they didn't have a capitalist culture, the young generation emulates the United States. They see Mark Zuckerberg and watch movies about him. There's not so much negativity. In Western Europe, in certain countries there's still a perception that being entrepreneurial is risky or you should take a corporate job. Out there, people are hungry, entrepreneurs can do really well.

Who cares?

 
We are in the early stages of what has been described as a technological revolution linked to AI and machine learning, and the huge amounts of VC funds being channelled into AI start-ups are hastening its advance into myriad new fields.

The much-publicised 2016 diagnosis of a woman's leukaemia by IBM's AI-based Watson supercomputer illustrates the potential the technology has for sectors like healthcare, among countless others. But there are vast amounts of VC capital chasing a finite number of opportunities in AI, a field where the journey to producing a minimum viable product and monetisation can be long, so smart VC funds will also look to other up-and-coming sectors.

The dozens of tech start-ups valued at more than $1bn that Europe has produced illustrates the wealth of top-rank investment opportunities outside Silicon Valley, and there is much excitement surrounding start-ups in former communist nations competing with counterparts in established western tech centres.
Innovators Race

As Capgemini turns 50, we give early stage start-ups the opportunity to jump-start their business and win equity-free funding of $50,000.

For more information: www.innovatorsrace50.com

Innovators Race

As Capgemini turns 50, we give early stage start-ups the opportunity to jump-start their business and win equity-free funding of $50,000.

For more information: www.innovatorsrace50.com

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