Silicon Valley Bank crashes — and the shockwaves reach Stockholm

March 10, 2023
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on March 10th, 2023. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Silicon Valley Bank — an institution in the startup world — is being shaken by a crisis of confidence. Customers now fear a bank run, and the Stockholm Stock Exchange is falling.

Hope, as they say, is the last thing to abandon you.

“I would ask everyone to stay calm and support us just as we have supported you through difficult times.”

Those words were spoken by Greg Becker, CEO of Silicon Valley Bank, during a call with American venture capitalists on Thursday. The bank has since the 1980s been an institution in the tech world, and one of the few financial institutions that took on all the startups and unproven companies the big banks turned away.

It’s a moment that calls for keeping hope alive. SVB’s stock crashed a full 60 percent on Thursday. In after-hours trading it fell a further 66 percent before trading in the stock was finally halted. Reports now indicate that efforts to raise new capital are over, and SVB is instead looking for a buyer.

Greg Becker feels his bank deserves support from its customers now that the storm has well and truly broken around SVB. Instead, he received a considerable shove toward the abyss from the very customer base his bank has stood behind for over 40 years.

It all began when SVB surprised the market on Wednesday by announcing it would conduct a share issue and sell securities worth several billion dollars to shore up its balance sheet. Rising interest rates have made it more expensive to borrow money, and its customers — who are overwhelmingly tech companies — have been having an especially tough time.

A bank being perceived as unstable is never good.

But when its customers — including some of the most influential people in all of Silicon Valley — come out and warn against it, things get much worse very quickly.

Founders Fund, founded by venture capitalist Peter Thiel, immediately told its portfolio companies to withdraw their money from SVB. The incubator Y Combinator warned against keeping more at the bank than the deposit guarantee covers. Many others followed.

In Silicon Valley, this is the equivalent of people like Marcus Wallenberg and Christer Gardell jointly telling everyone to pull all their money out of a bank like Nordea. It creates enormous ripple effects that nobody is entirely immune to.

And the waves are already hitting companies.

SVB’s systems for processing transfers appear not to be functioning, blocking access to customer funds. A Swedish venture capitalist SvD spoke with said one of their portfolio companies currently cannot access its assets held at SVB. This comes just days after crypto bank Silvergate decided to wind itself down.

There are Swedish connections too. Last autumn, SVB opened an office in Stockholm, and Swedish occupational pension company Alecta owns around 4.5 percent of SVB — a holding that has already lost billions in value. The full extent of Swedish exposure is not yet clear, but Swedish bank stocks and stock markets broadly fell on Friday.

The market is therefore judging that the risks could spread — despite SVB being a relatively small and niche bank that isn’t particularly representative of the major banks in either the US or Sweden.

It’s worse for the tech sector, which now faces an extremely pressured situation.

The mere thought of a potential crisis is enough to trigger a bank run. If SVB were to collapse, it could wipe out hundreds — if not thousands — of smaller companies on its customer list. These are companies with both limited liquidity and limited financial expertise, and many have likely not diversified their capital at all. When the money runs out for a company — regardless of why — it’s also the end of the company itself.

The question now is whether SVB can survive this difficult situation without outside help. In all likelihood, all the major banks are looking at whether deals can be struck to increase stability. An acquisition or takeover, as occurred in the 2008 financial crisis, is a plausible scenario.

Silicon Valley Bank has — through its name if nothing else — been a hub at the center of the most dynamic industry of the past 20 years. The brand is strong. They have financed, lent to, and helped the companies the big banks consistently rejected.

One can understand why that feels ironic for CEO Greg Becker in a situation like this.

The bank that took on the risk for all these tech companies now finds itself shaking badly — not because the underlying companies are performing poorly.

But because its customers, the tech companies, have suddenly stopped trusting their own bank.

Frustration over Siri — but Apple’s AI ambitions are larger than they look

March 8, 2023
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on March 8th, 2023. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Apple is currently pressing its competitors hard with its focus on privacy. But there’s one area where the tech giant has a real problem: artificial intelligence.

The normally somewhat reserved Apple executive Phil Schiller was in excellent spirits when he stepped onto the stage.

He was about to present the company’s entry into artificial intelligence — the recently acquired voice assistant Siri. It was the autumn of 2011, and the tech press was gathered in a cultural center in downtown San Francisco.

The thoughts of those in the audience weren’t on Schiller, though — they were on someone else. On Steve Jobs. Earlier that year he had gone on indefinite medical leave. The day after the presentation, he died from cancer.

Jobs was the man behind the acquisition of Siri, made the year before. At the time it was an app that claimed to be a virtual personal assistant. Today it’s the foundation of Apple’s investments in artificial intelligence.

But there’s a great deal to suggest that Steve Jobs would not be particularly pleased with Apple’s progress in this area.

During the 2011 presentation, Schiller complained about having to learn a particular way of speaking to these voice assistants to get them to work properly.

Ironically, Siri has barely moved beyond that stage itself, over a decade later.

On the contrary, Siri has been seen — even by some employees who work on the product — as inferior to the likes of Amazon’s Alexa or Google Assistant.

Then Microsoft entered the picture.

ChatGPT has exploded in popularity and been integrated into Microsoft’s search engine Bing. Asking the same questions of ChatGPT and Siri yields near-parodically poor answers from Apple. This obvious weakness was something Jobs would have neither accepted nor tolerated.

But the AI market is still in its early stages, and major changes at Apple could be closer than people think.

The clearest sign of this is found in Apple’s hardware — specifically the new M-series chips they’ve been using since the autumn of 2020.

These are custom-built chips used only in Apple products, which means their design and function tells us something about the company’s strategy for the future.

The M-series chips contain what’s called a “neural engine,” used specifically for machine learning and artificial intelligence. The M1 chip handles these types of tasks fifteen times faster than the Intel chips Apple previously used. The second generation, M2, is also 40 percent faster than its predecessor.

Apple’s custom hardware signals that a better and more powerful artificial intelligence is an internal top priority.

The tight integration between Apple’s hardware and software demonstrates this in a way that competitors can’t match. Google Assistant or ChatGPT run their computations in the cloud and work regardless of what hardware you use to access them.

Apple works differently — to a much greater extent keeping data on each individual user’s device for privacy reasons. A decision that has led to weaker results until now. But with new custom hardware, Apple may be able to correct this imbalance.

Apple is also investing heavily in building out its internal AIML team (“artificial intelligence machine learning”). At the time of writing, there are over 170 open positions to apply for in this area alone.

170 positions isn’t an enormous number given how many employees the tech giants employ in total, but it’s happening at a time when large layoffs are being reported almost daily. Apple is clearly moving in the opposite direction and hasn’t had layoffs in other units either — at least not yet.

“For decades we’ve been enticed by the dream of being able to talk to technology and get it to do things for us. But it never comes true. […] It’s such a disappointment,” Schiller said in 2011.

It has been a disappointment until now, in fact — for Apple and Siri in particular.

But everything points to Apple’s ambitions in this area being substantial, with internal resources to make world-class investments. There are therefore plenty of reasons not to write off Siri just yet.

Swedish startups could be next in the acquisition wave

March 5, 2023
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on March 5th, 2023. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

A weak krona and uncertainty in the tech world are paving the way for an acquisition wave targeting Swedish startups. For American venture capitalists, the conditions couldn’t be better.

Two million paying subscribers. That’s the milestone newsletter platform Substack reached recently.

The American company offers a newsletter service for writers and takes ten percent of their revenue as a fee. Based on this, they have an estimated annual revenue of around 230 million kronor.

The problem for Substack — like many Swedish startups right now — isn’t the revenue. It’s the valuation.

Two years ago, the company was valued at around 6.7 billion kronor — with substantially lower revenues. Today it would be extremely difficult to find investors willing to put in money at that level, let alone at a higher one.

It’s worst for the more mature companies, the ones closest to being able to go public. Valuations are set by comparison with similar companies, and preferably listed ones to get an accurate market assessment.

But when tech stocks crashed in 2022, they pulled the unlisted companies down with them. Two online healthcare providers in Kinnevik’s portfolio — Teladoc and Babylon Health — lost 60 and 90 percent of their market value over the past year respectively. When Swedish unlisted equivalents like Kry, Mindoktor, and Doktor.se are valued, those comparisons can’t be ignored — even if they’d rather not make them.

Having a lower, and perhaps more realistic, valuation isn’t a problem in itself. The trouble comes when more money is needed to run the business.

Many of these companies are still burning through cash at a rapid rate and depend on continuous capital injections.

Existing shareholders may be reluctant to approve new share issues that write down their holdings to — from their perspective — very low levels. Depending on how the agreements are structured, transactions can be blocked or complicated by certain owners, and the dilution of ownership can become very significant.

This creates a trap that is, to put it mildly, complicated for startups to navigate. Capital is needed to run the company, but not at any price. And given stock market valuations, that route is currently almost entirely closed.

The situation points toward a new type of market dynamic: more acquisitions.

Unable to finance their companies through either revenue or investment, many will have to sell.

What makes Sweden’s situation particularly exposed is the weak krona. Over the past several months, the dollar has been stronger against the krona than at any point in over twenty years.

That in turn means Swedish startups are cheaper than they’ve been in a long time. Venture capitalists SvD has spoken with confirm that inquiries about potential acquisitions have increased in recent months.

The interest rate environment in the US also suggests this situation will persist for quite some time.

The companies in the most difficult position are mature firms where growth may have started to slow or that are far from reaching profitability on their own. If the sector also faces structural challenges (e-commerce) or is exceptionally hot (AI), that can further make the companies attractive targets.

If one allows oneself to speculate, one plausible acquisition candidate could be Juni, which provides financial services to e-commerce businesses. The company was valued at 6.4 billion kronor in the summer of 2022 — a figure that may be very hard to reach in the current market. In 2021, their revenue was just over 22 million kronor, and their loss was 68 million.

Swedish data company Funnel could also fall into this category. In the autumn of 2021 they raised over half a billion in investment, but losses have steadily grown in line with revenues. In 2021 they posted a loss of over 180 million kronor on revenue of 214 million.

Other potential targets are the Swedish online healthcare providers, where losses have accumulated over many years. A strategic buyer from the US could see substantial value in the technology platforms they’ve built.

The same applies to large fashion houses looking to get better at e-commerce. The expertise built up at a company like Nakd could be applied across a broader portfolio of brands. Nakd had revenue of over 2.4 billion kronor in 2021, but also posted a loss of over half a billion.

The shareholders of each company are ultimately the ones who decide whether a company gets sold. But count on the fact that anyone sitting on a pile of US dollars right now is running the numbers on possible deals. For the coming year, Swedish startups are on sale.

Northvolt wants to do for batteries what Musk did for EVs

February 25, 2023
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on February 25th, 2023. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Is battery maker Northvolt headed for the stock market? The answer may lie in the company’s history. Its CEO has learned a great deal from his former employer — Tesla.

Tall and distinguished, Peter Carlsson stood in the reception of Tesla Motors in Fremont, California, welcoming Svenska Dagbladet.

That was ten years ago, when Carlsson was head of supply chain at the now world-famous electric vehicle company.

“It’s a bit easier here now that we’re turning a profit. It’s easy to forget how tough things were for a long time,” he told SvD at the time.

Tesla’s journey would get both better and worse from there.

The small quarterly profit the company had posted for the first time was the exception, not the rule. But turning a profit wasn’t the primary goal for Tesla at that stage. They were going to grow — and the world was going to be electrified. The profit would come later.

Eventually the stock market came around to that thesis, though it took a little while.

Tesla’s stock was trading at around $12 back then. Today it sits above $200. The price climbed steadily before exploding upward around 2020, when the pandemic took hold of the world.

The market still believes in Tesla and its electrification plans — and believes in them far more than in the traditional automakers making a similar transition. Tesla is today worth roughly thirteen times more than Ford, or eleven times more than General Motors.

Today, Peter Carlsson is back in Sweden, at considerably more northerly latitudes than his California years. He is CEO and co-founder of battery company Northvolt, which is building factories in Skellefteå and Borlänge, among other places.

Reports surfaced recently — again — that Northvolt is planning a stock market listing.

It’s hard not to think about what the man in that Fremont reception learned there. About how he watched and worked at a company with large factories that managed to break free from every association attached to its own product category.

Tesla was not — and is not — seen as just another car company.

Northvolt, with a rumored valuation of around 200 billion kronor, clearly doesn’t want to be seen as just another battery factory either.

Can Carlsson do for batteries what Musk did for electric vehicles?

Creating your own product category is a well-worn strategy, whatever industry you’re in.

In the US there’s a classic pizza advertising slogan: “It’s not delivery, it’s DiGiorno.” Beyond the neat wordplay, it positions DiGiorno’s frozen pizzas as tasting like they were delivered fresh — but straight from your freezer. It’s not an ordinary frozen pizza. It’s something entirely different — it’s DiGiorno. A category of its own, if you take their word for it.

Among brand consultants in the early 2000s, you’d often hear about “blue ocean strategy.” A few hardy survivors still invoke it today.

The idea is to find a segment of the market where you can be perceived as entirely alone as a company — as opposed to a “red ocean,” bloodied by fierce competition between all the players. In a blue ocean, you don’t have to compete. You can instead position your brand or product as something entirely unique.

One immediate effect of this: no price comparisons. What should something cost that no one has seen before?

Apple did this with the iPad. It was an entirely new product category — a blue ocean — that admittedly resembled both a smartphone and a laptop, but was neither. Apple called it a “tablet,” but Swedish families quickly came up with their own name: “padda” — literally “toad,” a play on iPad. The product came to define the entire category, and for many years had free rein to set its own pricing.

That this works with a technology product is no coincidence.

Nowhere are favorable associations more readily given than in the tech sector.

A company can overnight be perceived as modern, innovative — and more highly valued — simply through that association.

Just shifting a business model to selling software via subscription — so-called SaaS (software as a service) — can automatically change how a company is valued on the stock market. One study found that SaaS companies sold on average for 71 percent more than comparable companies selling traditional software.

The Bessemer Cloud Index tracks how SaaS and cloud companies are valued. Despite a steep decline since 2021, the median valuation still sits at around 6.5 times the previous twelve months’ revenue. Compare that to Cisco, a more traditional hardware and software company, where the equivalent figure is around 3.7.

Associations therefore play an enormous role in how a company is judged and valued. What might look like cosmetic branding layered on top of a core business has proven to be anything but.

So how do you make sure you attract the right associations?

Let’s go back to Västerbotten and Skellefteå.

There you’ll find what Northvolt calls “Europe’s first home-grown gigafactory.” What is a gigafactory? Simply a factory that produces batteries for electric vehicles.

The term was coined by Tesla, which named its equivalent factories with a “giga” prefix early on. It’s now become a term others have adopted too. But the association with Tesla remains, of course. And “gigafactory” does sound better than “battery factory.”

Even in Northvolt’s vision statement, something larger than just batteries is implied. They talk about wanting to make “sustainable, high-quality battery cells and systems.”

The word “systems” almost certainly didn’t land there by accident.

It’s true that Northvolt does have software and artificial intelligence components among its products. And what they’ve built shouldn’t be trivialized in any way.

But they are — whatever the framing and sophistication — primarily an industrial company. They build factories that make batteries, plain and simple. And that’s perfectly fine.

The investments and orders flowing to the company make it abundantly clear that demand for exactly this is high. The more interesting question may be how you should value a company with that kind of business.

Speaking to Dagens Industri, Peter Carlsson played down the prospects of a near-term listing:

“Not right now, at any rate. That market is dead.”

But the addendum came quickly:

“We will need to do an IPO at some point to continue with our big expansion plan.”

The IPO market is undeniably dead right now. In the Nordics, listings fell 77 percent in 2022 compared to the year before. But it’s also in the nature of things that you don’t talk openly about your capital-raising plans until you’re ready to launch them.

Listen carefully to what Carlsson is saying and you can hear clearly that Northvolt needs to get ready for a listing — they just want the macro environment to be a little more favorable when they go out.

If the Reuters report of a target valuation of around 200 billion kronor is accurate, the market conditions may matter somewhat less. We’re talking about high valuations by any measure.

The company’s last major funding round was in 2021, when the valuation stood at around 124 billion kronor, and they topped it up before summer with a convertible bond worth an additional 12 billion.

Building industrial capacity takes enormous capital. Going public is one way to solve that financing challenge. And when you’ve watched, up close — as Peter Carlsson has — how a public company can take on a life of its own with the right associations, the logical next step is clear. If he can bring some of the tech world’s luster and Tesla mystique into the stock, it’s hard to see this as anything other than an inevitable move in the near term.

A company with factories producing electric products for a world in the middle of a green transition. Whose valuation has become quietly astronomical compared to its competitors. Why not? It’s happened before.

In a place Peter Carlsson knows well. In Fremont, California.

A record in the making — Truecaller’s earnings show the way

February 22, 2023
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on February 22nd, 2023. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Truecaller has long been stalked by short sellers. Now comes something harder to defend against — bad results.

There’s a well-known industry truth that when a company is doing well, it’s because their product is fantastic. When things go badly, it’s because the marketing is lousy. If you work in marketing, you can never win.

Something similar applies to the “macroeconomic environment” that all companies reference constantly. The explanations listed companies offer for their poor numbers often point to a weak economy.

When things go up, on the other hand, that’s down to their own merits.

You could call it “Schrödinger’s economy” — it exists only when it benefits the company’s story.

It’s through that lens that you can read Truecaller’s Alan Mamedi’s CEO statement from Wednesday’s quarterly report, in which he describes how weak global advertising demand has pressured both prices and margins. He also hasn’t seen any signs of a turnaround so far this year.

That’s bad news for a company whose business model is selling advertising and services to mobile users.

Profitability measured as adjusted EBITDA margin fell from 50 to 30.6 percent in the latest quarter.

The share price fell sharply the moment the market opened. By early afternoon it was down around 24 percent.

Advertising markets going up and down is nothing new. It’s therefore interesting to look at Truecaller’s other revenue streams — subscriptions and so-called B2B sales (business-to-business).

That market generally moves less. But even there, there are reasons for concern. Revenue per user (ARPU) in the key market of India declined compared to the same quarter last year. Subscription revenue growth was flat from the previous quarter. On top of that, the entire segment is still too small to offset weak advertising revenue.

Truecaller’s numbers are indicative of a complicated and difficult-to-read market. Tuesday was the worst day on US markets in two months, with the S&P 500 index falling two percent. The tech-heavy Nasdaq fell 2.5 percent.

Inflation has slowed slightly in some markets, but interest rates are still rising — if anything at a slightly slower pace than before. Meanwhile, US unemployment figures are at their lowest level in 53 years.

The signals are contradictory. But thinking we can put 2022’s market collapse completely behind us looks like wishful thinking.

Even when things go badly on the stock market, there are winners. This is especially true when it comes to Truecaller, which is one of the most shorted stocks on the Stockholm Stock Exchange.

In October last year, Viceroy Research released a report calling the company a “Swedish advertising and spying app” and announced they had shorted Truecaller’s shares — that is, taken a position speculating that the stock would fall in value.

Viceroy’s objections had nothing to do with advertising market dependence, however. Rather, they claimed that Truecaller was breaking GDPR, among much else — allegations the company denied.

With the share now in freefall, the short sellers are looking good. The largest current short position belongs to Yiheng Capital Management LP, which according to Sweden’s Financial Supervisory Authority has increased its position several times since the start of the year.

Beyond the short sellers, it’s hard to spot many clear winners in this market environment. Many tech companies are working frantically to pivot from growth to profitability — a process that’s complex even in good conditions. In worse times, it’s likely to take longer, which could erode confidence in the sector as a whole.

In the US, there are signs that several tech companies need to cut costs further. Communications company Twilio laid off 11 percent of its staff in September 2022. Fast forward to February 2023, and they were forced to cut another 17 percent. Many Swedish companies are probably having similar conversations right now.

Truecaller is already profitable, though. That’s a good start. But expectations, as they say, are everything. When profitability falls by nearly 20 percentage points, those expectations have been shaken up significantly.

TikTok is challenging the American tech giants

February 20, 2023
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on February 20th, 2023. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

The business models of America’s tech giants are under real pressure. They’re being challenged not only by ChatGPT, but also by China’s TikTok. Now they may be forced to open Pandora’s box.

If you want to find out where the nearest swimming pool or shoe store is, you do what almost everyone in Sweden does. You Google it. We know this because Google has a market share of around 90 percent.

You can look at the search market a bit more broadly than that, though.

The world’s second-largest search engine — one that doesn’t even show up on market share lists — is probably YouTube, which is owned by Google’s parent company Alphabet.

There, many people search for entertainment or practical things — how to fix a product, for example.

That’s how the search market has looked for over a decade.

Now there are signs that this may be starting to break open.

Microsoft has taken a position by integrating ChatGPT into its search engine Bing.

But even closer to home is another familiar source of anxiety for Western tech companies: China’s TikTok.

At a conference last year, Prabhakar Raghavan, a senior Google executive, said their internal research showed that nearly 40 percent of young people used TikTok or Instagram as a search engine when they needed to find a nearby lunch restaurant.

That’s something of a revolution in a market where Google alone generated around 444 billion kronor in revenue during 2022. An app that doesn’t even position itself as a search engine has already changed consumer behavior for millions of users.

TikTok’s success is pressing the tech giants in other ways too.

YouTube’s “Shorts” format — which, like Instagram’s “Reels,” is nearly identical to TikTok — recently changed its business model to better meet the new competition.

To attract creators to post content with them, YouTube now offers 45 percent of ad revenue on Shorts to selected creators. They’re also lowering the entry barrier for accessing the money — you only need 1,000 subscribers to qualify. TikTok’s equivalent threshold is 100,000.

YouTube has had a similar setup for regular video views for a long time. For Meta, the parent company behind Facebook and Instagram, the question is more sensitive.

According to The Information, the idea has faced strong internal opposition, including from former chief operating officer Sheryl Sandberg. The temporary payouts currently in place for Reels could therefore remain just that — temporary.

The concern is reasonable. Paying your content creators is a bit like opening Pandora’s box — once you’ve started, it can be hard to stop. For a company like Meta, where advertising accounts for almost all revenue, it’s a difficult line to draw.

On the one hand, Meta needs to create incentives for users to post content with them. On the other, they can’t cannibalize their entire business by giving away too large a share of revenue.

It’s hard to imagine this situation arising if it weren’t for TikTok.

TikTok was the world’s most downloaded app in 2022, and creators want to be on the platforms that reach the most viewers.

But as the services increasingly resemble each other — short vertical videos — there’s nothing stopping users from posting the same content on all of them simultaneously. That way, you can earn money in three places with no extra effort.

Getting people to do things by paying them might seem like a historically well-proven method. Most people would call it a “salary.” But several social media companies have for many years not needed to pay anything of the sort to the people who created the single biggest reason for visitors to show up in the first place — the users themselves.

With newfound competition from TikTok, those old certainties have now been forced into question.

There’s a certain irony of fate in American giants needing to pay salaries to creators whose primary publishing platform is a Chinese app.

And in that same app reshaping what was once the highly lucrative search market.

Expect the next few years to be very stressful for Google, YouTube, and Meta.

The dynasty: how is Stenbeck’s Kinnevik doing?

February 13, 2023
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on February 13th, 2023. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

SvD’s podcast Dynastin reveals that Cristina Stenbeck has left the country and no one else in the family is stepping in. Björn Jeffery sees an investment company that looks to be having an identity crisis.

Few expressions bear the unmistakable stamp of tech companies quite like “transformation” and “disruption.”

It sounded familiar, then, when listening to Georgi Ganev, CEO of Kinnevik, present the company’s latest quarterly results in early February.

“We have completed the fifth year of our transformation,” he said.

It has certainly been a transformation. The part Kinnevik calls its “growth portfolio” now accounts for over 70 percent of its holdings — compared to around 10 percent in 2017.

Calling something a “growth portfolio” is symptomatic in itself.

Around 2017, growth was exactly what the tech market demanded. Kinnevik made a series of investments in unprofitable but fast-growing and successful private companies. Familiar names like Pleo, Mathem, and Vivino entered the portfolio.

That changed quickly in 2022. Being unprofitable and fast-growing is no longer as acceptable as it once was.

Now profitability is what’s valued. And when fewer investments are being made, you have to value your companies by comparison with listed peers — which has become difficult, as many of them have crashed. The holdings that formed the foundation of Kinnevik’s transformation have become something of a burden.

“Applying more mature, publicly listed valuation levels to our young, fast-growing private portfolio requires a lot of thought and deliberation,” explained Kinnevik’s CFO Samuel Sjöström.

That deliberation could extend further than how to value the companies. It could also include the question of why those companies are in the portfolio at all. That’s arguably the more important question Kinnevik needs to answer — to both existing and prospective shareholders.

What kind of company do they actually want to be? What is it they’re supposed to be transforming into?

Historically, Kinnevik was strongly owner-driven by the Stenbeck family. The late Jan Stenbeck was a provocateur and entrepreneur who launched telecom and media companies at the edge of what was both legal and possible. That’s how both commercial television and commercial mobile telephony were introduced in Sweden. Taking big risks grounded in technological development has long been part of Kinnevik’s DNA.

The foundation of the business at that time was Korsnäs — the forestry company that merged with Billerud in 2012. It delivered stable, reliable cash flows that Kinnevik could deploy into new investments.

In one sense, Kinnevik’s transformation began the year after, in 2013, when the Billerud Korsnäs shares were sold by then-CEO Mia Brunell Livfors and chairwoman Cristina Stenbeck — one of Jan’s daughters. It looked like the start of something new: a rejuvenation of the investment company. The collaboration with Rocket Internet had begun four years earlier, alongside the enormously successful investments in e-commerce giant Zalando.

It was a reinvention of the company — swapping out large legacy holdings, with a third generation appearing to launch a third era for the family business.

But since then, the Stenbeck family has increasingly stepped away from operational involvement. SvD’s acclaimed podcast series Dynastin revealed that Cristina Stenbeck no longer sits on either the board or the nomination committee of Kinnevik. She has also left the country, now living in London with numerous personal investments outside of Kinnevik.

It’s an unusual model for a major owner — especially in this context. It’s almost unthinkable that the Wallenberg family would not be actively involved in Investor. That the Stenbeck family would not hold positions of trust in Kinnevik would, historically, have been equally inconceivable. But here we are.

A strong brand, but without a clear steer from the ownership level. The associations still exist, though — and they’re used in the marketing. The founding families are often referenced approvingly, for example.

Looking back one year, the share price has fallen over 36 percent. Before that, Kinnevik had distributed the successful Zalando to shareholders with near-perfect timing. That was both elegant and profitable. But the question now is where the growth to replace Zalando is supposed to come from.

Looking at the listed holdings, there’s no obvious successor to the throne.

Healthcare company Babylon Health has lost over 90 percent in the past year. Telemedicine provider Teladoc is down 60 percent. Global Fashion Group — one of the few remaining companies with a connection to former partner Rocket Internet — has also shed over 66 percent. Tele2 stands stable, but it’s alone in that regard. And that investment was made in 1993.

Former Kinnevik companies included Metro, MTG, Billerud Korsnäs, and Millicom. Who can name the equivalent companies in the portfolio today?

The center of gravity has shifted away from listed companies toward unlisted investments, with fewer connections to companies that originated within their own orbit. With the exception of Tele2, which steadily generates dividends, Kinnevik today looks more like a venture capital firm than a traditional investment company.

It’s management-driven and focused on four very different investment areas: software, health, climate, and platforms and marketplaces. These are all areas that are on trend, but they have very little to do with each other. Becoming a good investor in one of those areas is a challenge. Succeeding in all four simultaneously will be difficult.

The venture capital model is about financing companies that, through speed, innovation, and decisive action, manage to challenge the establishment. Traditional players have experience and brand recognition but are often seen as struggling to adapt to new times. It can be hard to let go of the past, and the old culture can cling to the walls.

After talking around with various players in the Swedish investment ecosystem, the question arises whether Kinnevik itself has become stuck in the traditional. A picture emerges of a top-down company that negotiates hard and is still run like a traditional corporate entity where the CEO and CFO call the shots.

That stands in contrast to the venture capital world, with its partner structures and its increasingly vocal positioning on the entrepreneur’s side. Whether that positioning reflects reality varies of course, but founders’ experience is that there’s a big difference between talking to investors and talking to large companies. Kinnevik seems to fall somewhere in between.

Investing in high-risk, technology-based companies is a proven method — for Kinnevik as much as for anyone. The tech boom of the past decade has generated billions in returns for both entrepreneurs and investors with this thesis. But with the air now out of the tech market, the heavy exposure to this sector is becoming increasingly awkward.

And unlike the many competing venture capital firms, Kinnevik must continuously explain and justify to the stock market how it’s thinking and why returns may be delayed. There are reasons why you rarely find this type of operation in a listed environment. Perhaps the stock market has itself become a burden for Kinnevik?

Answering that question requires going back to the fundamental one — what kind of company do they want to be? From the outside, the mix of investments spanning everything from fossil-free steel to e-commerce, digital healthcare, fintech, and food delivery looks scattered and a little unfocused. There may be a strategy that isn’t visible to an outsider. But it resembles a company going through an identity crisis.

Historically, the answer would have been found on the inside. Jan Stenbeck was an unusual, polarizing, and highly successful businessman. But no one seems to describe him as unclear. The vacuum after him was filled by Cristina Stenbeck and a transformation of the investment company began.

With the Stenbeck family now having stepped back from positions of power, something seems to be missing: a crystal-clear direction and identity. And without the presence of the major owners, that will be hard for anyone else to supply.

Kinnevik’s board

James Anderson, chairman — British, formerly a partner at fund manager Baillie Gifford, which is Kinnevik’s largest shareholder by capital at 11 percent. Susanna Campbell, board member — board professional and former CEO of investment company Ratos, which also co-owns companies with Cristina Stenbeck. Harald Mix, board member — founder and CEO of private equity firm Altor, and chairman of H2GS where Cristina Stenbeck has invested. Charlotte Strömberg, board member — board professional and former CEO of real estate advisor Jones Lang LaSalle. Cecilia Qvist, board member — head of Lego Ventures, the venture capital firm controlled by the owning family behind the Lego group. All board members are described as “independent in relation to the company’s major shareholders.” CEO: Georgi Ganev — previously CEO of Dustin and Bredbandsbolaget.

Kinnevik’s largest shareholders by votes

1. Verdere (Cristina Stenbeck): 19.1% — 2. Alces Maximus (Sophie and Hugo Stenbeck): 11.6% — 3. CMS Sapere Aude Trust (Cristina Stenbeck): 6.6% — 4. Baillie Gifford & Co (British fund company): 5.5%

Microsoft’s big advantage — they have nothing to lose

February 8, 2023
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on February 8th, 2023. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Side by side in Seattle. OpenAI founder Sam Altman stood alongside Microsoft’s CEO and unveiled what is genuinely a real innovation. SvD’s tech analyst Björn Jeffery answers three questions about what it means for you.

At an event that brought Apple product launches to mind — think visionary CEO on stage in a long-sleeved garment that isn’t a suit — albeit in Microsoft’s version (think the Office suite) — the new Bing was unveiled.

The tech giant’s search engine received a substantial upgrade powered by new artificial intelligence from partner OpenAI. The launch was somewhat expected — several screenshots had already leaked, and the day before, Sam Altman, CEO of OpenAI, had posted a photo alongside Microsoft’s Satya Nadella.

Traditional search results will now appear side by side with more detailed and comprehensive answers generated by the AI.

Microsoft also launched a new version of its browser Edge, which competes with Google’s Chrome and Apple’s Safari.

The new Bing can already be tested with a limited set of questions, while the full version will be released in the coming weeks.

Competitor Google, which presented Bard — a similar product — on Monday, is still testing it internally.

After many years of stagnation in the search market, we are now starting to see some genuine innovation. We’re all used to “googling” things every day, but over time most of us have also learned how to do it well.

Finding factual information — what year something happened, or where the nearest Japanese restaurant is — is straightforward. But how do you find out which shoes are on trend for spring? Or how to write a truly great speech for an 18-year-old’s birthday?

This is where AI technology could make a real difference for ordinary users. The next generation of search engine lets you “ask a question” rather than “perform a search.”

The results are immediately different, and you can also ask follow-up questions — something that doesn’t work at all today. “I want the speech to rhyme” or “write it as a haiku” are examples of how you can refine the answers you get. It feels more like a dialogue than a traditional search.

Those who have tried ChatGPT are already familiar with the concept. What has been missing there are mainly two things: the ability for everyone to do unlimited searches, and more recently updated information.

With Microsoft’s search engine Bing, both of those things are solved. And even though Bing has a very small market share, it still has a substantial number of visitors — estimates put it at over one billion visits per month. That’s modest compared to Google, but a solid base for testing things at scale.

When talking about new challengers, it’s worth remembering that Google has a market share of around 93 percent — a position it has earned over many years by having the best product for searching the internet.

Google’s brand recognition is enormous, and few companies have had their name become synonymous with a verb that describes an entire category. That’s a major advantage that isn’t going anywhere soon.

Microsoft’s advantage is almost the opposite — they have nothing to lose. When the market leader is so much bigger, the strategy becomes almost obvious: try something different.

Investing the equivalent of 100 billion kronor in OpenAI to gain access to its technology looks, in that context, fairly logical — if bold. Microsoft needed to do something new to disrupt the status quo. And they have now done exactly that.

As a side effect, this has also woken Google up. After CEO Sundar Pichai declared six years ago that the world would be AI-first, those of us using his services haven’t seen much of it. Until now — when competition suddenly comes calling.

For ordinary users, the search market is about to become more interesting than it has been in a long time. And in a few years, we might even stop “googling.”

Apple, Amazon and Alphabet all beat earnings — what comes next

February 3, 2023
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on February 3rd, 2023. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

Apple, Amazon, and Alphabet all reported the quarters everyone had been dreading. Not even the very biggest can stand against the macro environment.

Thursday started so well for stock traders.

The Nasdaq Composite surged and recorded its best start to a year since 1975. The S&P 500 was up and pushing toward its highest point in five months.

Was this the moment the tech market would turn upward again?

Because even though individual stocks showed strong gains, really only three names mattered on Thursday — Apple, Amazon, and Google’s parent company Alphabet. All three chose to report quarterly results on the same day, offering a collective picture of how the tech giants are faring.

The tone was set by Alphabet CEO Sundar Pichai, who opened his presentation to investors in grim terms:

“It’s clear that after a period of significant growth in digital spending during the pandemic, the macroeconomic environment has become more challenging.”

A translation without all the corporate polish would go something like: “it was fun while it lasted, but the party seems to be over.”

Revenue from Google’s search ads fell for only the second time since the company went public in 2004. YouTube revenue also fell, causing Alphabet to come in below market expectations. Alphabet’s share price, which had risen alongside the general optimism earlier in the day, immediately reversed course.

Apple’s numbers arrived shortly after, and they didn’t exactly lift the mood.

Apple posted a 5 percent decline in sales — its biggest drop since 2016. Production problems in China, the strong dollar, and the aforementioned “macroeconomic environment” were all cited as contributing factors by CEO Tim Cook. The company also missed analyst expectations on both revenue and profit. It was the first time in seven years Apple had done so.

“We had record revenue in markets like Canada, Indonesia, Mexico, Spain, Turkey, and Vietnam,” Tim Cook said at the start of his presentation on Apple’s results.

All credit to those markets, but the company has had to dig deep to find optimistic signals when countries like these are being cited in this kind of context.

Two countries were absent from the list — the US and China. Apple’s two most important markets by a wide margin. Successes in Vietnam or Spain cannot compensate for weakness there.

The third tech giant, Amazon, fared somewhat better than the others.

But that was partly because it had already absorbed the blow in the previous quarter, when it gave a weak forecast heading into the crucial holiday season — and the stock fell 20 percent. The latest quarterly figures were more or less in line with expectations, but one concern was that growth in the important cloud services unit AWS slowed sharply. That may signal growing cost-consciousness among businesses and fewer new investments.

The three companies are often seen as competitors — Amazon and Google both sell cloud services, for example — but they are also partners. Apple sells products on Amazon, Amazon buys enormous amounts of advertising from Google, and Google pays Apple billions to be the default search engine in Apple’s Safari browser. Even the tech giants aren’t big enough to be completely independent of each other.

Despite their different business models, they operate in the same markets and are affected by the same macro factors.

None of them — not even Apple, which has held up best on the stock market among the largest — can resist inflation, supply chain disruptions, pandemics, and a potentially approaching global recession. Thursday’s reports make clear that even the biggest players struggle to manage a volatile world.

When the giants stumble, the consequences reach far beyond their own balance sheets.

The largest tech companies have for many years acted as locomotives for both the tech sector and the stock market as a whole. These three stocks — Apple, Amazon, and Alphabet — together account for nearly 11 percent of the entire S&P 500 index. They weigh heavily in most people’s fund portfolios, whether or not they have actively bought the shares.

How they perform also affects tech companies around the world. There isn’t a CEO anywhere who isn’t watching these numbers and drawing conclusions about what they might mean for their own business.

Being a tech giant is a privileged position. For many years they have shown total dominance in their respective markets, with metrics that most other companies can only dream about.

But after a long stretch of seemingly endless gains, we are now seeing signs of weakness. For the first time in many years. You may be giants — but no one is bigger than the macro.

The party is over — and the activist investors have arrived

January 29, 2023
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on January 29th, 2023. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

A philanthropist as owner. World-class artists like Alicia Keys, Foo Fighters, and U2 at the massive company party. Now everything may be about to change — activist funds have set their sights on tech company Salesforce.

In a large grey-blue hulk in San Francisco’s Mission Bay district sits the city’s newest hospital, UCSF Benioff Children’s Hospital. Standing below and looking due north, you see an enormous skyscraper — the tallest in the city — with rounded corners and walls of glass. That’s Salesforce Tower, an office building that also features a landscaped rooftop park with trees and shrubs, and a bus terminal.

The man behind both buildings is one and the same — Salesforce CEO and founder Marc Benioff. He funded the hospital, and the skyscraper is his new office.

Benioff is a well-known philanthropist in San Francisco, and the imprint of both him and his company is visible across the city. Since 2018 he has also been the owner of the storied magazine Time.

A busy man, in other words.

And perhaps a man who no longer has his full focus on delivering value to shareholders. At least that’s what activist funds Elliott Management and Starboard Value appear to believe.

They have recently taken billion-dollar positions in Salesforce because they want to see change. Over the past year the share price has fallen more than 30 percent, and high-profile acquisitions like the communications platform Slack look — in times like these — very expensive.

The equivalent of 283 billion kronor was paid for Slack in January 2021. That purchase can probably be seen as marking the absolute peak before tech stocks began their fall to earth.

Activist funds are nothing new for either the stock market or tech companies. But it’s harder to build momentum for a major change campaign when companies are already doing very well. The low-interest-rate environment during the pandemic benefited tech companies enormously. Stock prices surged and they hired tens of thousands of people.

Google, or Alphabet as the parent company is called, is a clear example. At the end of 2019, Google had around 119,000 employees. Two years later that number had grown to over 156,000. Today it’s around 200,000. The layoffs of 12,000 people last week should be seen in this light. It’s a modest pullback — not a real cut.

Now there’s a different momentum in the tech market, and that creates the potential to come in and drive change at a faster pace. This is where activist funds play a clear role. Unsentimental, numbers-driven, and with an iron grip on corporate governance. There may well be layoffs, a new board, and new management before they’re done.

Salesforce is in many ways a perfect candidate for this. Through a series of acquisitions, Benioff has over the past fifteen years transformed what was otherwise a fairly dull sales-support company into a giant that does everything from internal communications to marketing.

And they’ve done it in grand style. The offices are one thing, but you also can’t forget their annual conference — Dreamforce.

Salesforce books world-class acts and shuts down entire blocks of San Francisco for it. Metallica, Stevie Wonder, and Red Hot Chili Peppers have all performed — as have Alicia Keys, Foo Fighters, and U2.

But grand style often comes at a cost. Something shareholders may accept in a bull run, but which can stick in the eye when things go the other way. This year’s edition of Dreamforce is planned for September, though no artists have been announced yet.

Another thing that points toward change is the ownership structure. Benioff is the public face of Salesforce, but he owns only three percent of the shares. That makes him a large shareholder for an individual, but very small relative to the company as a whole.

Look at Spotify, for example: they have so-called dual-class shares, meaning different voting rights for different classes of stock. That means even though Daniel Ek and Martin Lorentzon own a minority of shares in the company, together they hold a majority of the votes.

The model is familiar from the US. Companies like Snap, Alphabet, and Meta all have a similar structure.

In practice, it means a handful of individuals control the company’s entire future by themselves, despite other large shareholders. Salesforce does not have this structure — and that’s exactly why it’s a strong candidate for activist funds.

The last time Elliott Management was involved in a major tech company that lacked vote control, there was change at the top.

That was Twitter — before Elon Musk bought it — and Elliott Management was a contributing factor in the departure of then-CEO and founder Jack Dorsey.

Now that tech stock prices have been pushed down substantially, many companies — in the US and in Sweden alike — are stuck with habits and a cost structure that feel out of place.

It’s probably only a matter of time before Swedish tech companies also receive a visit from a type of owner they haven’t had to deal with before. Companies like Truecaller have protected themselves by keeping control with the founders. The rest have every reason to keep a close eye on their new shareholders.