Here we’ll be taking a closer look at how the huge increases in private-equity backed technology funding is impacting the sector as a whole.
Whilst huge merger and acquisition deals involving big players in the technology sector like Cisco or Microsoft often grab headlines, there is now a far more powerful trend that accelerated throughout 2018 and looks set to stay in 2019. Quietly, the tech industry has become private-equity backed seemingly overnight.
Tech companies both in the US and across the pond in the UK are now turning to the world of private equity investment as a serious and in most cases preferable exit strategy. Would you be surprised to hear that in 2018 over 75% of the most active ‘buyers’ of large-scale technology companies were private equity firms? Today’s most active tech buyers are now private equity firms, not Facebook, Google or Amazon.
In the last few years we have seen a wholesale shift of tech into private equity hands, which is set to have profound implications for the industry’s future. With private equity firms managing tech companies differently to the average venture investors, investment is now completed at a far slower pace, with a reduction in risk appetite for new innovations.
Strategic buyers now outbid by private equity firms
2018 was the year we saw strategic buyers outbid for the first time by private equity firms. Private equity firms are now sitting on a huge amount of money just waiting to be invested. In fact, many private equity investments can also be leveraged up to 4-5x using debt. This means that a starting $1 billion investment can become an eye-watering $5 billion in cash.
Whilst many of the top private equity firms won’t focus solely on the tech industry, they are investing in this industry more than ever before. This is mainly due to the impressive average growth rates of 10-20%, which is far higher than the large corporates which are growing slower at 5-10% year on year.
Is this increased profitability at the cost of innovation?
It’s important to remember that a private equity backed technology sector will have significant implications for entrepreneurs, investors and analysts. One of the main (and most pertinent) changes private equity investment could bring is that these new investors will be looking for start-ups to reach profitability as soon as possible.
As a result of this change of pace, entrepreneurs will need to think strategically about positioning their companies for the new private-equity led world, rather than a simple sale to one of the tech giants. This means the overall focus will need to shift and there will need to be a stronger focus on financial discipline, KPI’s and overall expense control.
Ready to delve into the world of private equity?
If you think private equity investment is a great opportunity for you, we definitely recommend getting expert advice. Goodwin is a nationally recognised growth equity practice that can offer a complete understanding of the business ecosystem in Silicon Valley. Their strong market and industry knowledge will help you to secure deals and build equity value.