Record amounts are being raised by tech venture funds with $151 billion committed in the first three quarters of this year, exceeding any prior full year. But given the current macroeconomic outlook, venture investors are broadly using existing funds to consolidate the existing wave of technologies and looking with new money as to where to place their bets for the next upturn.
So, in the meantime, the focus for acquirers turns to technologies that increase efficiencies or scale in existing infrastructures or business models and not furious economic `land grabs` based on new technology platforms.
To that extent, we are in a period of `slack water` before confidence returns and the massive amount of `dry powder` gets deployed. Consequently, the current investment market is very tight indeed with companies fighting very hard for every investment dollar, pound or euro with a resulting downward pressure on exit valuations.
Many tech firms are finding themselves running out of financial runway and are coming under pressure to find new strategic and PE investors. For some it’s a brutal choice between fire sale or administration.
Consequently, what has become ever clearer in recent months, from investment to exit, is that the ability to generate recurring revenues and repeatable margin in the current generation of startups and scaleups is everything – both to attract growth investment and/or to exit.
So, unless you have some unique technology that an acquisitor can’t do without to survive the economic storms to come or an investor can’t resist funding, act now to make any adjustments you need to give yourself a fighting chance. Areas such as headcount, product development roadmap, and marketing spend so that you can demonstrate predictable and consistent growth and margin numbers from your business going forward.
Most of all, though, investors and acquisitors are less bargain hunting than looking for value in well run companies with teams that have created clear potential to flourish further or attain Category leadership with fresh investment or under new ownership. After all, research shows Category leaders accrue up to 76 per cent of the value in any market.
That’s good news for you if you are in that position but a lot less so if you are not. So, if an exit isn’t an immediate or forced requirement, you should look carefully at your company’s strategy and whether it will bring sufficient value to a future investor or acquirer and at what Category creation opportunities tougher times reveal. Are you merely better than your competitors or are you different enough to attract the right investor or acquisitor at the right price as market conditions improve?
As Winston Churchill was working to form the United Nations after WWII, he famously said, “Never let a good crisis go to waste”. That applies to tech too. Tech Category leaders including AirBnB, Electronic Arts, IBM, Microsoft and Uber were all founded during recessions and others launched right before major economic meltdowns. Google and Salesforce were founded just before the dot-com bubble burst and Facebook shortly before the subprime financial crisis.
And, right now, with investors and acquirers looking for headache remedies rather than vitamin pills, history shows there’s never been a better time to start the Category journey.