Access to capital remains abundant for the technology sector
INSIGHT ARTICLE |
The appetite for investments in the technology sector has grown stronger than ever throughout the last year. Similarly, the amount of dry powder within this sector continues to increase, indicating strong market demand for capital investments. From booming venture capital investments to the increasing popularity of special purpose acquisition companies, we don’t expect tech to cool off anytime soon.
Below, we look at some of the latest numbers and trends among the main avenues companies are taking to make deals and generate capital.
In 2020, venture capital firms deployed approximately $150 billion in capital, making it a record year, according to data from PitchBook. In the technology sector specifically, venture capital firms deployed more capital last year but across a smaller number of technology companies than in 2019. Venture capital-backed technology companies were resilient in 2020 even amid the COVID-19 pandemic, and some technology verticals, such as cybersecurity and health tech, received tail winds as a result of the pandemic. Late-stage investing (Series C and beyond) performed particularly well in 2020, and we anticipate that will continue into 2021. According to CB Insights, there were 515 unicorn startups globally in 2020, many of which will be prime targets for exits in the coming year. Some unicorns will choose to exit through initial public offerings, where they hope to achieve success similar to the exits we saw from companies like Snowflake, Airbnb and DoorDash in 2020.
Private equity has had an increased appetite for doing deals in the information technology sector. According to PitchBook, more than one in five private equity deals in 2020 was in the information technology sector, representing the greatest percentage in the last decade and an increase from 17.5% in 2019. Private equity firm Thoma Bravo continued to be very active in the technology sector, completing more than three dozen deals during 2020—four of which were in excess of $2 billion. We anticipate an increasing number of private equity groups to become active in the information technology sector as the asset class continues to perform well during the COVID-19 pandemic.
The largest cloud M&A deal in 2020 was the Salesforce acquisition of Slack at a purchase price approximately 25 times the company’s forward revenue. In 2021, we expect there to be increased regulation by the U.S. Department of Justice of the acquisition of middle market technology companies. For M&A deals receiving regulatory approval, healthy valuations coupled with the low cost of credit will enable technology companies to structure deals with a combination of stock and debt. According to Bloomberg, a record number of M&A deals were announced in the last two weeks of December, and we predict that the technology sector will continue to be a target for M&A in the first quarter of 2021.
Special purpose acquisition companies, direct listings and initial public offerings
SPACs have been growing in popularity. These blank-check companies accumulate investments through IPOs and acquire companies to reverse-merge into their shell companies. SPAC IPOs were the most popular IPO vehicle in 2020, and many SPAC IPO registrations are expected to continue targeting technology companies in 2021. We also expect more companies to go public in 2021 via direct listings, a less common route historically for companies to debut. The success of the Palantir and Asana direct listings will have far-reaching implications for how technology companies will choose to debut as public companies in the future. Moreover, many technology companies will continue to choose an exit through a traditional IPO. Some companies that are reportedly eyeing a 2021 public debut are ZipRecruiter, Instacart, UiPath and Roblox.
As tech continues to be one of the strongest segments of the economy, we anticipate that this trend of abundant access to capital, high multiples and strong exits will continue in the near future, especially as the pandemic continues to fuel the need for remote work and related tools. Given the continued appetite among investors for opportunities in the tech sector, companies in this space should assess what this could mean for research and development investments or overall business strategies.