Private equity continues to flow big money into the technology sector, creating a funding environment for technology-related companies that is growing at a fast clip.
Fundings may drop slightly this year over last year’s record pace, but are still quite robust, according to Pitchbook Data Inc.
Through June, VC activity was on pace to reach 2012 levels, which would mark an end to five years of increasing activity, the research firm said. 2Q saw an influx of late-stage funding — $11.2 billion — a significant but not record-breaking number, Pitchbook reported in its 3Q2015 U.S. Venture Industry Report.
This robust environment for the tech sector was very evident during this spring’s M&A International meeting in San Jose, Calif., which featured CEOs from dozens of innovative companies who presented before M&A International members, including Dallas-based Capital Alliance.
The CEOs shared information about their companies, their technology and why they think they will be successful in today’s highly charged technology marketplace.
We see a lot of promise in the tech sector going forward, with a few trends worth noting.
One key trend is that venture-backed technology companies are remaining private for much longer than in the past. This is a good thing. During the tech bubble of 2000/2001, companies were going public at a rapid pace, whether they were profitable or not. Some of these companies were booming and then busting in short order, taking public investors to the cleaners when the industry experienced a significant downturn.
Now companies looking to go public are receiving multiple rounds of private funding to grow and mature their companies before an initial public offering or an acquisition. These successive stages of funding have brought more private equity funding into the tech space in recent years.
Waiting longer to go public allows a company to become more financially secure and more operationally mature. The downside, for the investor, is lower potential returns on investments because of the many successive rounds of private financing prior to the public exit. Once the tech firm reaches an IPO under this scenario, it has already been valued and revalued several times and its upward trajectory for growth is likely not as steep, comparatively, had it gone public sooner.
A related trend is private tech companies with astronomical valuations. Companies such as Uber and Airbnb have valuations of $50 billion and $25 billion, respectively, as private equity and VC funds get plowed into such companies in multiple rounds.
Several segments have taken in significant amounts of funding — more than $100 million per individual funding. These segments include social discovery applications, E-signature transaction solutions, cloud security companies, software as a service, and online human resources software.
Even with the big money flowing into these sectors, talk of a bubble is fairly muted, and the reason is what we’ve discussed already, with companies being held private longer. To be sure, there is some talk of a funding bubble, with some concern about the astronomical values a few companies are garnering.
On the positive side, there’s still plenty of innovation underway, and investment banks at the M&A International conference spent considerable time talking about how to advise technology companies about their options.
Investment banks that belong to M&A International often collaborate to put together a deep team of experts to guide these tech companies as they work through their opportunities, whether it be more funding, a merger or acquisition or a public exit. For some, the sky is the limit.