Aimed for space — crashed on the stock exchange

April 5, 2023
by Björn Jeffery
SvD Näringsliv

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

Virgin Orbit is filing for bankruptcy. The story of how the company was listed on the stock market is part of a larger tale about a financial instrument that created enormous expectations — and has now largely collapsed.

Richard Branson said that he started an airline to fund his dream of building a space company. The airline was Virgin Atlantic; the space company, Virgin Galactic.

Between them came Virgin Orbit — a rocket company whose innovation was launching satellites from a converted jumbo jet. The idea was that a plane could carry a rocket to altitude and release it midair, reducing the cost and infrastructure needed for launch.

In January, that mission failed. A rocket launched from a modified Boeing 747 over the Atlantic failed to reach orbit. The company now has around 85 employees left after mass layoffs, and has filed for bankruptcy.

The fact that Virgin Orbit ran out of money is partly explained by the January failure. But the underlying story involves a type of financial structure that became extremely fashionable and is now — just as rapidly — falling out of favor.

Virgin Orbit went public through a so-called SPAC — a Special Purpose Acquisition Company. A SPAC is a listed shell company with no operations of its own; its purpose is to find a real company to merge with, thereby taking that company public without a traditional IPO process. Virgin Orbit merged with a SPAC called NextGen Acquisition Corp in 2021, at a valuation of $3.7 billion.

For some time, SPACs were seen as a smarter and faster path to the stock market. The SPAC raises capital first, then hunts for a target — effectively a blank check with a deadline. High-growth companies that might not yet meet the requirements for a traditional IPO could instead merge with a SPAC and arrive on the market with relatively little scrutiny.

If SPACs sound like a phenomenon from an era of cheap money, there’s a simple reason for that. Back in 2020 — when tech stocks were still sky-high — analyst Byrne Hobart called the entire category a “call option on hype.” In a low-interest-rate environment where everyone was chasing yield, SPACs — even without knowing which company they would eventually merge with — were exactly that: an option on an opportunity that would materialize somewhere down the line. In 2021, 791 SPAC vehicles were listed. In February this year, the equivalent number was 10.

The problem with SPACs, however, isn’t just the growth — it’s that the promised future arrives on a tight schedule. Most SPACs must find an acquisition target within 18 to 24 months of listing. If they fail, the vehicle can be liquidated and investors repaid. So far this year, 70 SPACs have been forced to do exactly that. That list will grow longer as the 24-month windows from 2021 come due.

Among the companies that did manage to find a partner and reach the stock market, the next blow came anyway. In 2022, tech stocks crashed across global markets, and many newly listed SPAC companies fell with them. News site BuzzFeed, for example, has dropped a full 80 percent in a year. It is far from alone. Electric vehicle company Faraday Future is down 93 percent.

In an era of both high inflation and high interest rates, SPACs are unlikely to make a comeback. Neither the structure itself nor the results of those that went through with it show much success to point to. The SPAC chapter can therefore be considered closed for this cycle.

But before it’s fully shut, there’s still some clearing up to do. The hundreds of companies that have already listed still need to either complete a deal or return the money to investors. One SPAC — unwilling to pay its bills — is now being sued by its law firm after the deal fell through. Expect a similar wave of claims from contractors, employees, and investors.

Listing quickly and easily sounded too good to be true. Perhaps it was. And perhaps there was a very simple reason why these companies weren’t publicly listed in the first place. They just weren’t ready for public markets. Not yet — and in some cases, not ever.

There is an urgent problem with AI — and it isn’t what the open letter says

April 4, 2023
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on April 4th, 2023. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

When 50,000 researchers and business leaders warn against AI development, the uproar is enormous. But the truly serious problem isn’t the development itself — it’s that a handful of companies hold all the power.

“Humanity swallowed by its machines — body, mind and soul — and civilization poisoned to its encroaching death.”

The illustration showed a person being sucked into their own sausage-making machine.

That was the New York Times in 1921.

The website Pessimists Archive has compiled examples from every decade since, dystopian visions of how machines, robots and computers will replace us and take all our jobs.

Now it’s 2023. This time it’s AI that will obliterate the workforce and destroy the world. Plus ça change.

Few things seem to unsettle a society quite like a technological shift. The sudden availability of new, well-developed AI language models has unleashed an explosion of creativity, entrepreneurship — and anxiety.

When an open letter signed by 50,000 researchers and business figures calls for a thoughtful six-month pause in AI development, it adds more fuel to that anxiety.

The fact that signatories include serial entrepreneur Elon Musk and Apple co-founder Steve Wozniak amplifies it further. They want development of the next generation of language models — what would be called GPT-5 — to pause for six months while society considers the risks.

But a pause in development is unlikely to materialize, regardless of how many signatures are gathered.

The letter references a set of principles drawn up by AI enthusiasts at a conference in Northern California in 2017. Those principles were created as a form of self-regulation within a field that, at the time in particular, almost entirely lacked laws and structure.

Following principles is, as we know, voluntary. And without all AI developers simultaneously making the same voluntary decision — including Russia and China — we won’t have added any thoughtfulness to the process. We’ll most likely have done nothing more than hand a head start to those with arguably worse intentions.

The question of how this should be handled — and potentially regulated — is not uncomplicated. Sweden’s EU Council Presidency is a reminder that nascent legislation is emerging from Brussels to try to bring order to the field. The AI Act and the AI Liability Directive are two relevant initiatives, for instance. Sweden appears to have delegated the question there.

Looking at the EU’s history of regulating technology companies, however, there is reason to be skeptical. It took them over 20 years to create laws preventing monopolistic behavior among the largest tech companies.

When they set out to protect our data, we got GDPR — which for the average person has mostly resulted in an endless stream of cookie consent boxes on every website, and the disappearance of class lists from schools.

At a time when Europe essentially lacks any major tech companies on a par with Apple, Google and Meta, it’s hard to imagine that regulation will do more than worsen the continent’s ability to compete.

The most significant AI development is already happening outside the EU. Laws there therefore risk being a swing at thin air. It would be like Sweden imposing strict rules on viticulture — well-intentioned, but largely meaningless in the bigger picture.

If legislation isn’t sufficient and voluntary principles aren’t followed — what’s left? In these technophobic times, one seemingly radical idea would be: optimism.

Instead of only worrying about the end of the world, let us also consider how we can distribute these superpowers fairly and equitably across the world.

If AI development creates the productivity boom that is widely predicted, this is an excellent opportunity not to recreate the kind of de facto tech monopolies that the Western world and China live with today.

Emily M. Bender, one of the researchers whose paper the open letter references, says her conclusions have been misread. Rather than warning about a hypothetically dangerous AI future, she argues, the real and far greater risk is that too few people will be able to access its benefits. It is about “the concentration of power in the wrong hands,” she writes, among other things.

It is therefore of great value that we discuss the future of AI. But an optimistic and pragmatic version of that discussion would focus on how we ensure that as many people as possible can benefit from the productivity-enhancing capabilities being developed.

Do we want the world’s leading AI development to happen and be controlled by a handful of privately owned companies? As things stand, Microsoft (through its investment in OpenAI), Google and China’s Baidu are among those at the frontier.

They don’t just control how the models are built — they also control what data those models are trained on.

That is the really hard nut to crack.

The most important question, therefore, is not binary — whether we should pursue AI development at all. The question is rather how we ensure it is done in a way that benefits as many people as possible.

The Pope’s viral puffer jacket raises a bigger question about AI

March 27, 2023
by Björn Jeffery
SvD Näringsliv

This analysis was first published in SvD Näringsliv, in Swedish, on March 27th, 2023. This piece was translated from Swedish by Claude. Some phrasing may differ from a human translation.

The Pope’s new puffer jacket became a sudden viral hit on the internet. The explosion of new AI tools is making it harder than ever to tell what’s real and what isn’t.

Dressed in a very long, white, and elegant puffer jacket, the Pope is caught on camera. The jacket could just as easily have been worn by Kim Kardashian, and he looks like he’s walking a fashion runway.

The image went viral over the weekend and Twitter flooded with tributes to the apparently oddly dressed religious leader.

There was just one problem — the image was fake, created by the AI service Midjourney.

The person who started spreading it, Nikita Singareddy, apologized for having accidentally created a viral hit around something intended as a joke.

The commotion points to a larger and more interesting question than the Pope’s possible winter wardrobe. How do we know what’s real and what’s fake, when AI-generated content is starting to get this good?

It’s easy to see how AI development — exciting as it is — could create considerable disorder. Previously, conspiracy theorists and others with a particular agenda had to rely on interpreting existing images in ways that served their perspective. A simpler route now would be to just generate the material you need. Images of world leaders in compromising contexts? That’s now just a few clicks away.

Of course, you can also use the tools without bad intentions. Sometimes laziness seems to be the motivation. Recently, Donald Trump posted an AI-generated image of himself kneeling in prayer. The image could reasonably have been produced with a regular camera — had the event occurred in reality.

The problem isn’t entirely new — it’s been possible to create and manipulate media for some time. The difference now is one of scale and quality.

Tools like ChatGPT, Stable Diffusion, and the aforementioned Midjourney do more than just edit existing material — they create text and images that are entirely new. The AI tools have been trained on existing information from the internet, but what they create is meant to be unique. What counts as unique is, however, a question headed for the courts. Image library Getty Images has sued Stable Diffusion, arguing that the service used their images — without compensation — to train its model.

Access to AI tools has never been easier or cheaper than it is now. What is called generative AI — tools using artificial intelligence to create content of various kinds — has existed for several years. But it hasn’t been available to the public in the same way until now. And creativity breeds creativity. Already — just four months after ChatGPT launched and took the world by storm — there are daily examples of how the new AI tools can be used.

Back to the question of what’s real and what’s false. There’s a certain irony in the fact that what is difficult for the human eye to detect as fake may be relatively easy for AI to spot. To catch students cheating on essay assignments, OpenAI launched a tool that could determine whether a text had been written by a machine or not. The methods aren’t perfect, but they point in a direction for how these questions might be handled. Technology makes some problems larger, but can also help provide some of the solutions.

That framing is useful for AI development as a whole. Rather than seeing how AI replaces jobs, you could think about what jobs that use AI might look like. Computers may have replaced a few typist positions, but they created far more jobs of a different kind. Choosing to use new technology to enhance your skills could produce a workforce with superpowers rather than unemployment.

Or to put it more simply: at first glance, it may be hard to know whether the Pope has bought a stylish new winter jacket or not. But a reasonably skeptical person working with an AI tool can probably find the answer very quickly.

And unfortunately, it wasn’t true — this time.

The next big games deal is being struck in the hotel bar at GDC

March 20, 2023
by Björn Jeffery
SvD Näringsliv

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

When the gaming industry’s most important conference, GDC, opens its doors this week, there’s only one question on everyone’s lips: who is going to buy whom?

Going to GDC? That’s the most commonly asked question in the games industry at the start of every year. This week sees the single most important trade event in the sector — the Game Developers Conference. It takes over the convention halls at Moscone Center in downtown San Francisco, and is a mandatory stop for all the major games companies.

Those who’ve been before know you don’t actually need a ticket. The most important meetings don’t take place on the conference floor, but in hotel bars and rented meeting rooms in the blocks around it. That’s where the foundations of all the big deals are laid.

And there have been many deals. In 2022, games companies were acquired for a combined 1,340 billion kronor. Yet there’s much to suggest the consolidation wave will continue this year — in particular when it comes to mobile games.

There are three main reasons for this.

First, mobile games companies are operating in a market that shrank 5 percent in 2022 and is forecast to have a tough 2023 as well. The pandemic years were a boom for the entire industry, and lifting the restrictions became a challenge. Driving organic growth — meaning increasing revenue and profit under your own steam — is difficult when the market headwinds are strong. One solution is not to bet on organic growth at all, and instead buy up competitors. Many games companies are sitting on well-filled war chests after several good years.

The second reason is Apple. They dropped a bombshell on the mobile games market around 2021–2022 with a software update that was said to increase the protection of individual users’ personal privacy. The result was that virtually all mobile advertising performed worse and became harder to measure. Getting around the problem requires larger investments — and if you have more game studios to spread them across, you get better returns on that money. It’s now more advantageous than it’s been in years to be big. And if you can’t get big on your own, you have to join forces with others.

The third and final reason is price. It’s simply become cheaper to buy games companies now than it was when the market was at its hottest around 2020. You can also add in certain currency effects that have put those with US dollars in a better position than they’ve been in for many years — and the reverse for those holding Swedish kronor. American companies can effectively buy at a discount just by relying on their currency.

But not everyone is happy with this development. The sudden political interest in competition law is now hitting the games industry directly.

Microsoft’s blockbuster deal to acquire Activision Blizzard for $68.7 billion is currently stuck with regulators in the UK, the EU, and the US. Negotiations are ongoing about what kinds of concessions Microsoft may need to make to get the deal approved — and whether they’ll still want to go through with it if they do.

Most conceivable deals are substantially smaller than that, but the games world is still watching the outcome of this process closely.

What we haven’t seen much of yet is the geopolitical dimension of games ownership.

In recent days, the White House has reportedly been threatening to ban the app TikTok. The risks of valuable data being shared with the Chinese state are considered too great.

But TikTok’s parent company — the Chinese firm ByteDance — is also a major games owner. Reports this summer indicated their annual revenue from games was around 10 billion kronor.

Then there’s Chinese tech giant Tencent. The company is one of the world’s largest owners of gaming properties, and is, for example, a major shareholder in Ubisoft.

For now, games companies don’t appear to be considered a threat to national security. But the industry has long been misunderstood and underestimated by policymakers. If it took until 2023 to regulate social media, it’s a reasonable assumption that the games industry could be next in line.

Until then, the deals — with and without Chinese involvement — will keep flowing. In the hotel bars around GDC this week, the acquisitions we’ll be reading about in the coming months are getting started.

The Silicon Valley Bank crash is a wake-up call

March 13, 2023
by Björn Jeffery
SvD Näringsliv

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

The collapse of Silicon Valley Bank is a financial wake-up call for the tech industry. In 48 hours, the lowest-priority questions shot to the top of the agenda.

“Move fast and break things” was one of Facebook’s old mottos. It was printed on posters that hung around their offices.

Over 48 dramatic hours, Silicon Valley got to experience that speed and involuntary destruction aren’t always a good thing. When Silicon Valley Bank was halted from trading on Friday, the entire tech world received the basic finance course most of them had never had.

Around half of America’s venture-capital-backed companies had some connection to SVB. And unlike the largest tech companies, most startups have a poor grasp of financial matters. These tend to be prioritized much later in a company’s development. What founders spend their time on is getting money into the business — not how that money is then managed and risk-minimized once it’s there.

In practice, that meant thousands of companies had received millions of dollars each in investment and simply parked it in an account at SVB. They then used the account with the same simple logic as a private customer — you spend the money until it runs out, more or less. Many startups had no diversification, no redundancy — nothing but a regular bank account. That suddenly became inaccessible.

SVB had lending arrangements that worsened the situation for many companies. In its lending to businesses — a substantial part of the bank’s operations — companies were often required to move all their other banking relationships to SVB as well. It resembles how many banks negotiate with homeowners — you get a certain discount on your rate if you also start saving with the same bank. Structures like these also made it harder for companies to spread their financial risk.

Timing played a large role here. Americans get paid twice a month, and the next payroll is due this Wednesday, March 15th. Which means it has to be sent on Monday to arrive in time. Garry Tan, CEO of the well-known incubator Y Combinator, stated that 30 percent of the 40,000 small businesses banking with SVB would not be able to make this payroll if their funds remained frozen.

Not receiving a paycheck is obviously devastating for employees. But it can also hit the people behind the companies hard. In California, there is a law stating that if wages are not paid out — even if a company goes bankrupt — individual executives and owners can be held personally liable. This applies regardless of why the payments were missed.

The heated rhetoric from many American venture capitalists over the weekend had its reasons, in other words. They almost certainly had their own money at SVB, but also risked having to personally cover their portfolio companies’ payroll costs.

Now it’s the American authorities that are picking up the tab, while what remains of SVB is potentially sold to other industry players.

For the tech world, the collapse of both Silicon Valley Bank and Signature Bank comes as a financial wake-up call. Questions of liquidity and access to capital have long been taken for granted and treated as low priority. A reasonable assumption in many ways, it should be said — who expects their bank to fail? But today there isn’t a tech CEO who doesn’t need an iron grip on these questions. Especially as the pressure continues to build on other similar banks.

Trust takes a long time to build but can be lost very quickly. Silicon Valley Bank took over 40 years to establish its position. It took half a week to destroy it. And for tech companies, things will never be the same again.

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.