22.04.2021

ENTREPRENEURSHIP: ROMANIAN STARTUP UIPATH HAS ACHIEVED A $ 29 BILLION ESTIMATE ON WALL STREET

Romania-based UiPath managed to make its largest initial public offering (IPO) on Wednesday to a US-based startup. The software company was listed at an estimated $ 29 billion.

In the last round of private funding, UiPath was even valued at $ 35 billion. Banks may have agreed on a lower market capitalization target as interest in cloud services on stock exchanges has recently waned.

Thus, a rapid rise in the share price was expected, and it actually happened: in a short period of time, the shares rose by 20 percent and even left the trade with a plus of 23.2 percent. In addition to CEO and co-founder Daniel Dinesh, German financier Earlybird in particular can see the IPO as a huge success.

UiPath is a software robot specialist. Technology automates the repetitive activities of people on the computer - so corporations save labor and money. According to analyst firm Gartner, the market is expected to reach $ 1.89 billion in 2021 and continue to grow at double-digit percentages until 2024.

Banks, retailers and the healthcare sector use UiPath software today. In the case of insurance companies, this software can automatically process claims. The company managed to increase its revenue last year by 81 percent to 607.6 million dollars, while reducing its net loss by 80 percent to 92.4 million dollars.

But just a few years ago, it was not clear when so-called robotic process automation (RPA) would be needed - and who could become the market leader. The fact that a small company from Bucharest succeeds shows the complexity of the venture capital business in its new global scale.

The idea is that a digital army of bots can handle repetitive, time-consuming tasks for a fraction of the time and cost, allowing companies to connect different systems and freeing employees from tedious activities and resources to perform more. significant, strategic work.

Companies are increasingly digitizing operations, but in silos, Rich Won, a partner in the Silicon Valley venture capital firm Accel, an early investor in UiPath, told WSJ. The real efficiency, he said, comes from companies that can connect these digital islands.

UiPath estimates the current market opportunity at over $ 60 billion. "And we're in the first or second stage of this process," Won said.

UiPath CEO Daniel Dinesh, who is one of the company's founders, said that "Covid has only accelerated the digital transformation, and automation is the cornerstone of digital transformation services."

Earlybird founder Hendrik Brandis has been telling an anecdote from December 2015 in recent months.

UiPath boss Daniel Dinesh personally presents his startup. "I'm glad you only invested a million dollars," said an investor in Brandis's trust fund. This company was about to close. No one understood "what this man was doing."

Now this million from Earlybird has multiplied at least 1813 times according to Handelsblatt's calculations. Return dream.

Startups in Romania are self-financing - at least initially

In retrospect, trends in venture capital businesses often seem difficult to predict. Brandis also admits that only his colleagues were able to make him understand: UiPath software does the stupid and repetitive office work that industrial robots do in the factory. The mathematician Daniel Dinesh, however, expresses this in a much more technical way.

Under the rules of the US Securities and Exchange Commission, investors are not allowed to give interviews during an IPO. That's why a number of media talked to them earlier - about the beginning of UiPath.

"Daniel was not a great presenter," Dan Lupu, a Romanian and one of Earlybird's four Digital East partners investing in Eastern Europe and Turkey with an independent fund, told Germany's Handelsblatt. He was largely responsible for the venture capital firm still investing in UiPath.

In Germany, many founders see themselves as sellers. In many segments, it all revolves around the question of who can convince investors. In Romania, on the other hand, start-ups are usually self-financing. "The whole region is suffering from a chronic lack of institutional capital," Lupu said. If you want to finance, you need to look for someone: he found out about UiPath in 2014 through an acquaintance.

The company started as an outsourcing service provider in 2005 under the name Deskover. Then Daniel Dinesh thought about the topic of process automation. "When we first met for coffee, ten people were sitting close together in the office in an apartment building," Lupu said. "There was no product, no commercial model - just a very simple demonstration."

14 months until the founder and investors reach an agreement

The investor knew that such ideas were born several times - without much success. But he sees potential. The big technology companies had not yet shown interest in the market. He believed that competitors with an annual turnover of ten million dollars could be overtaken by a serious infusion of capital.

"Oddly enough, we were the only option for UiPath," says Lupu. "But they do not fully trust the system for accepting investor money. Why do investors want to give us money? How do they want to help us?"

It takes 14 months until the founder and the investor reach an agreement. Lupu was also looking for co-investors, with only one in 15 venture capital firms wanting to participate. Then Credo Ventures from the Czech Republic persuaded Seedcamp from London to join.

One of the first agreements between investor and founder: UiPath has to move to New York. The Romanian domestic market did not provide an appropriate test area for the products. Global business could not have developed better for UiPath: "Immediately after our investment, the market gained momentum and there was a real influx of companies that wanted to test and implement RPA technology," says Lupu. International customers have brought the breakthrough - from Japan, from India, especially from the United States.

The fact that the famous American fund Accel found out about UiPath at an early stage and according to the stock exchange prospectus holds most of the shares (along with Earlybird) is related to a Romanian. Accel's then-partner Luciana Lixandro decided to visit his homeland to look for key people in the venture capital business there.

Until then, she had never been involved in the Romanian scene, Alexandru told Handelsblatt. "I asked around and someone introduced me to Dan Lupu." That's how she first heard about process automation - coffee. A few months later, in early 2017, Accel led the first major round of UiPath funding (Series A) for $ 30 million.

In September 2018, UiPath wrote on Twitter that it now has annual recurring revenues of one hundred million dollars. This was the year the startup became a unicorn. That's what startups with a valuation of one billion dollars are called. At the end of 2019, UiPath even became the first in Europe "Decacorn" with a valuation of ten billion dollars.

Apart from the lack of profit, one of the biggest risks is the growing competition from the so-called No-Code companies, which are similar to UiPath.

Eastern Europe benefits from a strong education in mathematics, information technology and engineering

In retrospect, Luciana Lixandrou believes that two things were decisive. First, the small company from Romania has developed a special image for itself. "On my first visit, I was wrong to say, 'Wow, it would be so great to invest in a Romanian company.'" Someone replied, "We're in Romania, but we're a Silicon Valley company," said the manager, who now works for a competitor of Accel - Sequoia.

Second, large international companies quickly realized that the further development of UiPath could transform their own business model. She reports on an early-day client event where experienced managers said to themselves, "If this works on a large scale, we will be able to run our business very differently."

Luck is part of the venture capital business. However, the Romanian startup miracle is not a product of chance. Rather, the region is underestimated. Under Soviet influence, the education system took shape in scientific and technical dominance, which was an advantage for Eastern Europe, according to Earlybird. In the spring, the venture capitalist launched his second fund, Digital East, with a total of 200 million euros.

"To develop innovative, destructive technologies, you no longer need great infrastructure, you need smart people," says Hendrik Brandis. The venture capital industry has not yet fully understood this.

According to Luciana Alexandrou, UiPath founder Dinesh is now a role model for many founders, especially outside the big cities. He once said of the start of his startup: "I didn't even know that the idea for startups was: borrowing money from investors, validating ideas, developing a product to enter the market, and only then a strategy."

IPO: how to calculate the profit of investors

To understand how IPO proceeds will pay off for investors, industry-specific assumptions must be used in addition to publicly available data on amounts and funding estimates. Accordingly, the circle of Seed investors should have acquired about 20 percent of UiPath in 2015, and Earlybird should hold 12.5 percent.

As a result, the effects of dilution must be taken into account. Any capital increase in which the investor does not invest at least in the ratio in which he has participated so far reduces the share. This option quickly runs out for a small fund.

If the UiPath case is calculated, the share of first investors would be halved by a maximum dilution by the time the company goes public. The multiplication factor for these investments is 1813. However, through subsequent investments totaling $ 9 million, Earlybird probably retained a stake of just under ten percent and amassed a total of $ 2.9 billion. During the IPO, however, the company will sell only five percent of its own shares - an indication that it expects some increase in value.

These calculations ignore the fact that Earlybird and other investors may have already sold very small amounts of shares at an early stage to reduce their risk.