INNOVATION ACCELERATOR An SKTA Innopartners White Paper August 19, 2014
Executive summary SKTA Innopartners Innovation Accelerator is a core technology focused startup incubator and a seed fund backed by SK Telecom targeting Information and Communication Technologies, which we call, core technologies. A primary differentiator, to similar seed funds and incubators, is the match we provide at the very onset between startups and an industry leader (i.e. Strategic Partner). Through the Partnership, we mitigate the down-side risk of seed-stage investment, shorten the development period, and maximize the success rate of startups. Our process is straightforward. Innovative entrepreneurs or startups present their technology concept. Then, we seek a Strategic Partner with interest in the proposed technology. If we make a match, we invite the startup to join us in the Accelerator. Selected startups are granted: Funding up to $1MM and professional guidance through the initial phase of operation Secure and dedicated space in our state-of-the-art, Silicon Valley facility Professional services(e.g. project management, IT, HR) Favorable rates for accounting and legal services from top firms Access and routine collaboration with mentors at a Strategic Partner and affiliated VCs Assistance preparing for Series A financing round and introductions to top tier VCs During incubation, the startup is free to remain laser focused on product development throughout the typical 12 month incubation phase. The startup s goal, in this phase, is to get from concept to proof-of-concept. Proof-of-concept is routinely required for professional investors to provide funding. Our novel model addresses the dwindling investment ecosystem for core technology startups. We create a win-winwin for Startups, Strategic Partners, and Venture Capitalists. Startups receive the necessary funding to jump-start their development. Strategic Partners get early access to tailor-made innovations in a cost effective manner and in a shortened time-to-market environment. Venture Capitalists receive lower-risk investment opportunities with a higher velocity of capital. Terms and definitions Strategic Partner Core Technology Innovation Accelerator An industry leading company interested in potentially investing in or acquiring the startup when it matures. Alignment with a Strategic Partner must be beneficial for the ecosystem of SK Telecom or affiliated SK entities. Fundamental technologies, such as semiconductor, hardware and enterprise software. Foundational technologies, primarily targeted at the Business-to-Business market segments. The seed fund and accelerator operated by SKTA Innopartners LLC, a wholly owned subsidiary of SK Telecom Americas. SKTA Innopartners Innovation Accelerator 3
Areas of Interest The Accelerator is focused on bringing the most innovative and inspiring concepts in core technology to life. Fundamentally, the Accelerator exists to reinvigorate the funding ecosystem in core technology startups. More specific examples of subject matter eligible for funding by the Accelerator include: TELECOM, ENTERPRISE & DATACENTER Big Data-Related Technologies (E.g. Distributed Processing & Analytics) Virtualization Technologies (E.g. Cloud Management, Software-Defined Network, & Software-Defined Data Center) Location-Based Technologies (E.g. Indoor Positioning, GPS) Beyond LTE-A (E.g. Small Cell, Network Virtualization, Crowd Sourcing Technologies, LTE Direct, Proximity Awareness) SMART DEVICE RELATED Ultra-low power technologies (E.g. Low power RF, Low power image sensor) User Interface technologies (E.g. Gesture Recognition, new touch technologies, multi-modal input) Robotics & Self-Driving Cars (E.g. Vision technology, connected car, machine learning) Internet of Things (E.g. Wearables, smart home, smart retail & analytics) SEMICONDUCTOR & SYSTEMS Memory Solutions (E.g. essd, Flash Array, Memory/New Memory Controller, Hybrid Memory Solutions like NVDIMM) Storage Management (E.g. Efficiency Increase*, Data Backup, Object Storage, High Availability, Operating & Management) HEALTHCARE DEVICES & BIOINFORMATICS Diagnostic Devices and Analytics OMICS Analytics and Modeling DNA Sequencing *Efficiency Increase - Caching, Data Compression/Deduplication High Speed I/O Power Management Sensors (E.g. CMOS-based compound sensor chip) Advanced Materials (E.g. GaN/SiC, nanomaterials and processes) Memory Materials (E.g. GST, MTJ) 4 SKTA Innopartners Innovation Accelerator 2014 SKTA Innopartners LLC. All rights reserved.
Using the semiconductor sector, as a proxy for core technologies as a whole, provides insights regarding the funding ecosystem. The relentless adherence to Moore s Law led to the consolidation of the semiconductor market. As geometries shrink to the atomic scale, the cost of Research & Development climbs astronomically under constant price pressures. The barriers to entry in this ruthless ecosystem grow larger each day. Problem Statement One barrier is access to capital for entrepreneurs. As Venture Capitalists increase funding in consumer apps and similar trendy domains, they decrease funding for core technology. In 2004, 41 new nanotech startups were funded. By 2013, that number had plummeted to 3 newly formed startups. Traditional Venture Model The traditional Venture Capital model requires myriad investments across a multitude of startups. One win, defined as a 10x or more return in 5 years, compensates for the 50-70% failure rate among a VC s startup portfolio. Conversely, the IoT and Wearable domains are experiencing a buyers market with VCs competing to fund the next Nest. For this trend to continue, the network and datacenter infrastructure will have to be raised and rebuilt on an architecture tailored to the heterogeneous nature and the sheer volume of diverse data. 2 SEMICONDUCTOR startups received funding in 2012 Moreover, as the period to qualify and validate new technologies pushes out, the time-to-money for VC s increases in direct proportion. Generally accepted timeframes for a new semiconductor design to get from concept through commercialization is approximately 8 to 10 years and requires tens of millions of investment dollars. A Venture Capitalist realizes a gain when the startup goes public or is acquired. IPOs of core technology companies have been sparse in recent history. Similarly, acquisitions have dwindled as a simple function of supply and demand for core technology startups. Moreover, as geometries shrink, the R&D costs and time-to-market climb. The higher cost to enter further decreases the investment community s appetite to invest in core technologies. With fewer, higher-cost investment opportunities available to VCs coupled with limited exit opportunities, it s not surprising that venture funding is flowing into other market segments. SKTA Innopartners Innovation Accelerator 5
Innovation Accelerator Model While Venture Capitalists may shy away from investing in core technology, the next inflection point driven by wearables, IoT, IoE, etc. necessitates innovation. Breakthroughs and discoveries in core technologies are the lifeblood of the connected world. The Accelerator breathes new life into a failing ecosystem benefiting entrepreneurs, established industry leaders, and investors. The Accelerator provides up to $1 million of seed funding, professional services, and state-of-the-art facilities. The funding is intended to get the startup from concept to proofof-concept, thereby allowing the startup to raise a Series A round. Selecting the Startups There are two ways by which startups are sourced for inclusion in the Accelerator. In limited cases, a Strategic Partner (SP) requests a specific innovative product. The Accelerator recruits and assembles a team capable and interested in developing the product. More often, however, a startup submits an investment proposal to the Accelerator who then seeks to make a match with a Strategic Partner. The Strategic Partner network includes both SK affiliates as well as other industry leaders who have committed to this model. A Strategic Partner is defined as an industry leadering company willing to invest at the seed stage and interested in potentially aquiring the startup when it matures. Seed investment is comprised of both working capital and in-kind services designed to accelerate the startups development to help ensure the startups success at Series A. Alignment with a Strategic Partner must be beneficial for the ecosystem of SK Telecom or affiliated SK entities. Projects are evaluated based on strategic fit with the Strategic Partner, technological impact, potential financial returns, and likelihood of success. Selection is made by the Innovation Committee comprised of the Head of the Accelerator, the Strategic Partner s key decision maker (e.g. CEO/CTO/ CSO), and a VC General Partner (if needed). The initial seed funding ranges up to $1 million provided to the company in the form of a promissory note. The Strategic Partner may also wish to participate financially. In some instances, the seed round may be syndicated barring any competitive conflicts. The seed funding is to be used as working capital, along with the professional services, state-of-the-art facilities and tools: Separate & dedicated fully furnished office space with secure access Independent wired/wireline LAN with broadband Internet access (100Mbps+) Shared conference rooms, a training room, a lab with rackspace, a media room, a kitchen with breakfast bar & snacks, and a receptionist Preferred pricing on legal counseling, accounting and finance Recruiting, and IT (e.g. phone, fax, printers, Cisco/ Polycom video conferencing systems) Development & Next Round Funding Support Business plan development experienced business development professionals work with startups to create a solid business plan and pitch deck designed to be appealing to both Strategic Partners and VCs Program management veteran program managers assist startups to develop project plans ensuring milestones and objectives are met Access to VCs formal introductions to SKTA s internal VC and other affiliated top tier VCs to secure Series A funding Technical and Marketing Resources Strategic Partners commit to provide startups with additional funding, the latest customer and market intelligence, in-kind services, related IPs (as required and negotiated), and mentorship Invitation to the Accelerator 6 SKTA Innopartners Innovation Accelerator 2014 SKTA Innopartners LLC. All rights reserved.
How the Model Works Seed Phase Operation During the Seed Phase of operation, the startup, together with the support team at the Accelerator and Strategic Partner, develops the product, business plan, milestones and metrics to produce the proof-of-concept required by Series A investors. During this phase, the startup also files patents, conducts necessary simulations, collects and analyzes data and builds and tests prototypes. The Seed Phase lasts for 6 to 12 months. At the conclusion of this phase, the startup raises a Series A round. Startup Phase Operation After receiving Series A financing, the startup continues to develop the technology in its own facility, outside of the Accelerator, to accommodate the expected headcount growth. During the Startup Phase, the startup will be on one of two paths: Spin-In or Traditional. The path is determined during the Series A negotiations by collaboration among the Startup, investors, and the Strategic Partner. The preferred path for the startups is to proceed down the Spin-In Path where the ultimate objective is for the Strategic EXIT PATHS 1. Spin-In: Acquisition by the Strategic Partner 2. Traditional: Funding from traditional capital sources with M&A or IPO as typical exits startup, strategic partner, and investors negotiate not only the Series A funding, but also the exit valuation range for a Call Option or, alternatively, a Right of First Refusal (ROFR). The exit valuation range is based on milestones achieved during the Startup Phase. The alternative ROFR allows, the Strategic Partner to match acquisition bids for a specified period of time. With the Call Option and ROFR both being time bound, the Startup has no commitment to the Strategic Partner beyond that time. To be clear, the Call Option and ROFR are but two examples of the type of arrangements that can be negotiated along with Series A financing. Others include: commerical agreements, branding, exclusivities, and licenses. Traditional Path On the Traditional Path, no exit valuation range is pre-negotiated. The Strategic Partner and startup have no special rights or obligations. Typical time to exit is between 5 and 8 years. Put simply, this path follows the traditional venture capital model where Venture Capital firm(s) continue to fund according to the milestones met and customer traction realized. The ultimate objective, for venture backed startups, is to be acquired (M&A) or go public (IPO). Partner to acquire the startup within 3 years. Spin-In Path The Series A funding for a company on the Spin-in Path should carry the startup to its exit. The Spin-In Path is time bound with an expectation of 2 to 3 years. There are a few options on how the exit valuation will be handled and what would constitute an acquisition trigger. For example, prior to proceeding on the Spin-In path, the Stage 1: Seeding Stage 2: Startup Stage 3: Scale up Strategic Partner Innopartners Entrepreneurs VC Startup Formation Create a focused startup through collaboration Continued focus on product development Startup + R&D Spin-In Acquired by SP M&A or IPO SKTA Innopartners Innovation Accelerator 7
Strategic Rationale The Innovation Accelerator model works because it offers something that does not exist in the current startup funding ecosystem providing benefits to entrepreneurs, strategic partners, and venture capitalists. Entrepreneurs Given the lack of funding flowing to core technology startups, entrepreneurs have the most to gain. Not only do they receive funding, but they also receive additional benefits. First, entrepreneurs receive professional services, space in state-of-the-art facilities and necessary development tools. Entrepreneurs focus their time and energy on product development rather than necessary, but unproductive, activities associated with setting up a new company. Second, prior to being invited to join the accelerator, a Strategic Partner (an industry leading company), commits to provide additional funding, technical/marketing assistance and in-kind services to the Startup. The Strategic Partners role is to assure their sponsored Startup is working on the minimum viable product and targeting the right market segment. Third, entrepreneurs may be offered a de-risked exit path through a Call Option with a set exit valuation range for completing the milestones negotiated prior to beginning the Series-A phase after graduating from the Accelerator. Alternatively, the entrepreneurs may negotiate a Right of First Refusal to increase the Series A funding they receive or other in-kind services. Many other de-risking agreements are possible: these are but two examples that may be provided to Startups participating in the Spin-In Path. Venture Capitalists The Innovation Accelerator model offers venture capitalists access to significantly de-risked deals and faster returns on those deals. Typical venture investment is approximately 5 to 8 years for core technology startups. The Spin-In Path is a mere 2 to 3 years and is significantly de-risked, thanks to the efforts of the Strategic Partner and influence of Innopartners. Therefore, the velocity of capital with shortened time-to-exit provide for healthy returns in-line with LP expectations. SUMMARY The SKTA Innopartners Innovation Accelerator concept is a revolutionary way to fund and accelerate core technology development. Entrepreneurs focus 100% of their time and energy on product development and may receive a guaranteed exit valuation range as a reward. Strategic Partners may secure the option to acquire tailor made startups on an accelerated development timeline with low up-front costs. Similarly, Venture Capitalists get access to lower risk investment opportunities with a shortened time-tomoney. For startups acquired from the Spin-In Path, the entrepreneurs will likely continue leading and growing the business at the Strategic Partner. Strategic Partners The benefits to Strategic Partners are both nuanced and quantitative. At the most nuanced extreme, reinvigorating core technology startup innovation benefits the entire industry. More specifically, the ability to secure custom-tailored innovative technologies in a low-cost, compressed time-to-market model provides a competitive advantage and quantifiable benefits in time saved and profits earned. Even if the Strategic Partner ultimately elects not to acquire, the potential exists for that startup to dramatically influence the industry to the Strategic Partner s benefit and financial gain. 8 SKTA Innopartners Innovation Accelerator 2014 SKTA Innopartners LLC. All rights reserved.
Social & Education Programs Mixers (Monthly) - Monthly Mixers offer heavy appetizers, soft drinks and beer for a fun and socializing time. Our mentors and advisors are invited to join us because the best conversations happen in more informal settings. Birthday Celebrations (Monthly) - Once a month, we celebrate people who were born that month. Join us for a time of cake and socializing. Lunch and Learn (Quarterly) - We know how important it is to make the best use of your time. That is why we have lunch and learn sessions. These informal sessions take place once a month at lunch so we can eat together while gaining valuable knowledge. During these sessions, startups may present their technology or product and receive feedback from other entrepreneurs. Alternatively, the Accelerator team and industry veterans lead discussions on startup funding, industry trends, pitch development, business plan development, and other topics of interest. Conferences/Seminars (Monthly) - Knowledge is power. Once a month we invite our attorney bench, accountant bench, expert bench, and others to make formal presentations and answer your questions on relevant topics. Meetups (Quarterly) - We host Meetups at the Accelerator for ecosystem building with VCs, entrepreneurs, and industry leaders. Demo Days (Annual) - Demo Days provide a platform for our portfolio startups to pitch on a voluntary basis. We invite advisors, interested VCs, Strategic Partners, and other resident entrepreneurs to provide feedback allowing the startup to gauge readiness for Series A fund raising and the industry s interest in their technology. Mentorship (Ad Hoc) - Dedicated mentors with decades of experience guide startups and entrepreneurs on the path to success. We align our mentors expertise and the startups needs. A Startups participation is purely voluntary and completely free. Tailgates (Ad Hoc) - Who doesn t like a little rivalry in sports? For select sporting events, we organize a pre-game tailgate followed by a game watch on the bigger than big screen in the training room. SKTA Innopartners Innovation Accelerator 9
Advisors 10 SKTA Innopartners Innovation Accelerator 2014 SKTA Innopartners LLC. All rights reserved.
Friends & Partners Innopartners relies on the following entities to ensure the Innovation Accelerator excels in every facet from selecting the entrepreneurs to fund to accelerating the startups. SKTA Innopartners Innovation Accelerator 11