Technology, media and telecom industry outlook
Volume 7, Spring 2021
As the United States economy continues to gain momentum, technology, media and telecom companies have a particularly bright future. The sector continues to be an attractive target for investments, while a new federal infrastructure plan and the potential to capitalize on new innovations present opportunities for growth and process efficiencies. However, the industry is not immune to challenges, as supply chain disruptions have slowed semiconductor production and mobile gaming companies may have to amend their data collection processes.
Key takeaways from the spring 2021 technology industry outlook
- Technology companies continue to have a wide variety of avenues for raising capital
- The American Jobs Plan presents significant opportunities for technology and telecommunications companies
- Drought conditions in Taiwan create a supply crunch for semiconductors
- Artificial intelligence is becoming a key strategy to strengthen operations from the back office to maintenance, field service operations and security
- Apple’s planned change to customer activity tracking permissions could have a direct effect on mobile gaming revenue
Access to capital for the technology sector
The technology sector continues to be extremely attractive to investors, with activity reaching new heights even during the pandemic, and momentum continuing through the start of 2021. Here we analyze the current state of key technology investment vehicles, as well as their outlook for the coming months.
Venture capital: In the current environment, more capital is being deployed into fewer companies. VC-backed technology companies have largely been resilient so far in 2021 amid the continuation of the COVID-19 pandemic. Technology companies continue to have robust earnings and a continued track record to raise capital, particularly after series C. TMT industry sectors such as healthtech, ed tech and e-commerce continue to outperform others, as they have received tail winds as a result of the pandemic. Additionally, as a result of recent legislation, we expect that cybersecurity and clean tech verticals will perform well in 2021.
Late stage VC-backed tech companies (series C and beyond) continue to perform particularly well and many technology companies are raising $100 million and beyond in a later stage round of capital. A round of this size is commonly known as a mega-deal, and more mega-deals took place in 2020 than in any other year. In 2020, there was over $70 billion of capital deployed in over 320 mega-deals, which was largely a result of VC companies looking to deploy dry powder and double down on existing portfolio companies, while also leading new rounds of capital in new portfolio companies.
We expect this trend to continue into the last three quarters of this year. So far in 2021, several late-stage companies such as Roblox are raising large rounds and then exiting through a direct listing. UIPath and Databricks have also raised mega-rounds in advance of an anticipated exit. In addition to these three decacorns—startups with $10 billion valuations—these mega rounds will also mint new unicorns.
As of March 2021, there are currently 603 unicorns globally, according to CB Insights. Stripe is the largest U.S.-based decacorn, which raised capital in March 2021 at a $95 billion pre-money valuation. This valuation is nearly triple its previously reported $35 billion valuation from April of last year.
An increasing number of venture-backed technology companies are also raising debt. In fact, since Jan. 1, 2018, over $80 billion in venture debt has been raised by VC-backed technology companies, according to Pitchbook. Late-stage technology companies are tapping the majority of capital from debt facilities. More venture debt was deployed last year in late-stage companies than in any year on record, while early-stage venture debt deal counts and capital decreased from 2019. Within late-stage venture-backed technology companies, there has been a concentration on venture debt deals, as approximately 60% of venture debt deployed last year was in less than 40 companies.
Because valuations have been so favorable over the last three quarters, some technology companies have shortened the journey to IPO. Rather than looking for a Series E or F round, some tech companies have are lookeding at vehicles such as special purpose acquisition companies—SPACs, or a direct listing to take their company public. However, in other cases when an exit is not imminent, many middle market technology companies are raising capital to give liquidity to early investors who want to take some chips off the table.
Private equity: In 2020, 45 different private equity groups raised $63 billion in capital for investing in the technology asset class. 2020 saw record activity for global private equity investment in the technology industry, even amid the pandemic—but the first quarter of 2021 results have exceeded 2020. Private equity has spent $80 billion acquiring companies in the global technology sector so far in 2021, according to Bloomberg, representing an all-time high for a quarter and an increase of 141% from this point in 2020.
Private equity has spent $80 billion acquiring companies in the global technology sector so far in 2021, according to Bloomberg, representing an all-time high for a quarter and an increase of 141% from this point in 2020.
We expect this activity to continue into Q2 of 2021, as now is the time when many companies will be evolving as organizations through the adoption of digital technologies. This transformation will help companies evolve their offerings to customers and streamline back-office functions. Beyond private equity investors such as Vista, Thoma Bravo, Francisco Partners and Silver Lake, which have invested in the technology asset class for years, the pandemic has an increasing number of private equity groups interested in the technology sector.
As companies continue to journey through digital transformation, there are many ripe B2B opportunities for private equity groups. Rather than just acquiring a technology company directly, the Q1 trend of private equity groups funding SPAC IPOs has increased from 2020. So far in 2021, there have already been 298 SPAC IPOs that have raised $97.3 billion in capital, according to spacresearch.com.
But recently, the market has changed. April has brought a slowdown in SPAC IPO activity and an SEC warning that some special purpose acquisition companies may have improperly accounted for warrants issued or sold to their investors.
M&A: In 2021, we expect there to be increased regulation by the Department of Justice over the acquisitions of middle market technology companies, especially in sectors such as fintech. 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. Public technology companies have been trading at valuations not seen since the dot.com boom, and these valuations are expected to continue to benefit the exits of middle market companies in the coming quarter.
MIDDLE MARKET INSIGHT
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. Public technology companies have been trading at valuations not seen since the dot.com boom, and these valuations are expected to continue to benefit the exits of middle market companies in the coming quarter.
In 2019 and 2020, there were 2,337 and 1,948 North American M&A deals in the information technology sector, with transaction values that amounted to $376.9 billion and $315.4 billion, respectively, according to data compiled by PitchBook. While the economy is still coming online in the second quarter of this year due to the COVID-19 pandemic, we expect that the technology sector will continue to be a target for M&A.
One island nation’s weather and what it could mean for semiconductors
Relentless global demand for microchips during the pandemic and an expensive, painstakingly detailed manufacturing process have left semiconductor customers with few choices when seeking out suppliers. Now, the worst drought Taiwan has seen in decades is resulting in water supply cuts on the island nation that is home to one of the global leaders in semiconductor manufacturing.
Most revenue over the last two years from semiconductor plants—also called foundries—has been generated by a few industry leaders. The top four foundry companies account for almost 90% of total foundry revenue, and the top two account for almost 75%. The leading company in the space is Taiwan Semiconductor Manufacturing Co. (TSMC), which has four such foundries in Taiwan. The country’s government recently issued its first red alert on water supply in six years, and “reservoirs in several parts of Taiwan are dangerously low,” Bloomberg reported in late March.
If environmental conditions remain turbulent in Taiwan, TSMC could experience prolonged production disruptions and prices can be expected to rise as the company explores alternative sources of water, which is crucial in the development of semiconductors.
If environmental conditions remain turbulent in Taiwan, TSMC could experience prolonged production disruptions and prices can be expected to rise as the company explores alternative sources of water, which is crucial in the development of semiconductors. “TSMC says it plans to increase the amount of water it uses from tanker trucks but the new restrictions would not affect operations,” according to Bloomberg.
The supply crunch is the result of a range of factors, some related to the pandemic. Foundry shutdowns aimed at curbing the spread of COVID-19 last year contributed to a reduction in chip supply just before global demand for consumer electronics, gaming consoles, automobiles and other products requiring such chips went soaring. Over the last few months, semiconductor supply chain disruptions have stalled production of the Ford F-150 at two U.S. plants, reduced the supply of next-gen gaming consoles such as Xbox Series X and PlayStation 5, and even delayed the launch of game company Intellivision’s highly anticipated Amico console by almost a year and sent shocks through other sectors as well.
The private sector and government have been working to ease the shortage. In January, The Wall Street Journal reported that TSMC announced plans to increase capital expenditures on R&D and additional plant capacity to between $25 billion and $28 billion in 2021, and in March, it announced plans to increase capital expenditures to $100 billion over the next three years. Also, Intel Corp. announced plans to spend $20 billion on two foundry facilities in Arizona, according to Bloomberg.
In February, President Biden signed an executive order calling for a review of America’s supply chains. The Secretary of Commerce was charged with preparing a preliminary risk assessment and policy recommendations to address identified risks to the semiconductor supply chain within 100 days and delivering a more detailed and comprehensive report within one year.
MIDDLE MARKET INSIGHT
Over time, more companies are expected follow Intel’s lead and move into or reenter the semiconductor manufacturing space. That could lead to higher industry manufacturing capacity and more choices for semiconductor consumers. Still, climbing vaccination levels and the desire to return to normalcy may be contributing to misplaced optimism about the semiconductor industry’s ability to rebound.
In today’s business environment, the pressures to be agile and profitable remain in constant escalation. Most middle market companies lack the purchasing power of large global technology and automobile manufacturers. "Always have a backup plan,” advises Tommy Tallarico, CEO at Intellivision. “Having contractual agreements with a primary supplier is important, but having a secondary or even tertiary agreements with other suppliers reduces your risk and dependencies of getting a product out. The process of identifying and vetting potential manufacturing partners can lead to delays which last months." Having a backup plan always seems like wasted time, until it’s needed.
Mobile gaming apps could see ad revenue hit after Apple iOS update
As Apple prepares to make a shift in the way it allows consumers to opt out of having their data tracked within mobile apps, companies in the mobile gaming sector need to brace for what could be a devastating fallout—especially for those that use a “freemium” model.
Apple plans to make an iOS update by mid-2021 that will make it easier and more transparent for users to opt out of having their app activity tracked with what’s known as an identifier for advertisers, or an IDFA. Tech companies use this identifier to collect consumer information while keeping the user’s actual identity anonymous, and that data is then used for ad targeting. If more Apple users start opting out of having their information tracked, companies will have a harder time getting their ads in front of the right eyes within mobile apps.
From e-commerce to social media, this would have implications for virtually any company that has a mobile app. But the extent to which freemium models are used within mobile gaming could mean companies in this space take a more dramatic hit if they don’t figure out alternative ways to gather data on their users.
Here’s how it currently works: Freemium gaming apps don’t charge a user to download and play the game, but that means they see ads during their gaming experience. The hope is that the gamer will eventually “pay to play” to unlock premium features and become a prized customer who could spend hundreds of dollars a month on the app. It’s worth it to advertisers to spend money targeting those ads, but without in-depth information about users, it might not be.
Now take into account the fact that so many free gaming apps are geared toward so-called hypercasual gamers and the potential for major disruption becomes even clearer: “Hypercasual is one of the most talked-about genres in mobile gaming,” this VentureBeat piece explains. It took off in 2014 “and has remained a leading category in terms of downloads ever since.”
It will be important for consumers to understand that by opting out of this iOS tracking, it doesn’t mean they will have an ad-free experience. It simply means their information will not be shared to better target advertisements to their devices. Many consumers feel that if an ad impression is heading their way anyway, it might as well be meaningful. Perhaps those users won’t opt out of the IDFA tracking.
And the consumers who do opt out of this data tracking should expect to see companies pursue new routes to gather information about them. Maybe that will involve an app asking a user to input personal data such as their gender, birth date or location when they sign up for an account. Whatever the path, consumers will likely have to relinquish some information about themselves, in some way. Mobile gaming companies should start preparing for this shift now—if they haven’t already—in order to minimize disruption or declines in ad revenue.
The emergence of artificial intelligence in the telecommunication industry
The demand for reliable and fast speed internet has reached a new high. This trend will continue with the emergence of 5G, the Internet of Things and the growing number of organizations shifting their data processing toward edge computing solutions. The infrastructure is growing, billions are being invested and competition is increasing.
Consumers have more options than ever. In order to remain competitive, organizations are investing heavily to proactively address the needs and challenges that lie ahead. The IDC has predicted 63.5% of telecommunications companies are making new investments in artificial intelligence systems. The focus of these investments continues to be on robotic process automation and end-to-end automation solutions to help streamline back-office operations, save costs and free up employee time to focus on more value-added tasks.
Additionally, artificial intelligence through the use of autonomous drones, low-cost sensors and predictive analytics is improving infrastructure maintenance and field service operations including tower maintenance tasks. Organizations are beginning to proactively diagnose and anticipate failures so they can fix problems before they occur. They are also leveraging these developments to further improve the security of their infrastructure equipment. Development in this field is still at the early stages but we expect investment will continue to ramp up as high-speed internet connectivity becomes increasingly commoditized and as ubiquitous as electricity.
How the technology and telecom sectors will benefit from a broad infrastructure plan
On March 31, the Biden administration released the details of the American Jobs Plan, a $2.25 trillion dollar investment plan to create millions of American jobs, rebuild the country’s infrastructure, and re-position the United States as the global leader in infrastructure quality and technology innovation. Within this plan, budgeted dollars are called to be deployed into climate resiliency, mobility electrification, building improvements, digital infrastructure and broadband internet accessibility, among others.
Within every key focus area of this plan, technology companies have an opportunity to play their role and contribute to building a better America.
MIDDLE MARKET INSIGHT
Key components of the American Jobs Plan specifically call for hundreds of billions of dollars for technology innovation and America’s startup ecosystem, and middle market businesses should position their products and services to benefit from this once-in-a-generation investment plan.
- The issue: Innovative technology is finding its way into every aspect of today’s modern world. The goals of the infrastructure plan should further support the development and adoption of technology solutions in industries like energy, transportation, health care, construction and education.
- The plan: The plan calls for a $180 billion investment to expand research and development of technologies of the future, focusing on advanced energy technology, advanced communication technology, computing, biotechnology and semiconductors. Proposed funding includes $40 billion for upgrades to research infrastructure in U.S. labs, $35 billion for clean energy and climate-focused research, and $30 billion for R&D investment that would bring new jobs to rural communities. Additionally, $30 billion of funding has been designated for programs that would bring credit, venture capital and funding for small businesses, start-ups and underserved communities.
- The road ahead: The Biden plan comes with the promise to reestablish the United States as the global leader in research and innovation and create opportunity for jobs of the future and equitable access to the technological advancements that have been made over the past few decades. Beyond the specifics laid out previously, the technology ecosystem will have the opportunity to participate in over an estimated $1 trillion in spending over the next eight years as a part of the outlined investment plan.
- The issue: In January, the Federal Communications Commission reported that an estimated 14.5 million Americans still lacked access to high-speed internet at the end of 2019. However, an independent BroadbandNow Research study found that the methodology used by the FCC appears to underreport the issue and it is estimated that the number of American’s without access could be as high as 42 million.
- Bipartisanship agreement: Over the past year, lawmakers on both sides have called for the expansion of broadband internet and highlighted the need to improve access in rural and urban areas across the country. The role of government and how best to tackle this challenge remains a highly debated topic.
- The plan: President Biden’s $2.3 trillion infrastructure plan has carved out $100 billion dedicated to expanding broadband access. Details of the plan and how it will be dispersed among public and private entities are still unclear, but we expect additional funding will flood the telecommunications industry later this year.
- The road ahead: Biden’s plan promises to bring affordable, reliable and high-speed broadband internet to every American. In the plan, the administration called broadband internet the new electricity and directly compared this plan to the 1936 Rural Electrification Act that brought electricity to nearly every American. The plan prioritizes building “future-proof” broadband and supports networks owned, operated or affiliated with local governments, nonprofits and co-operatives with a focus on promoting transparency and competition. Beyond traditional broadband, we expect high-speed satellite internet such as the beta service currently offered by SpaceX’s Starlink to also play an important role fulfilling Biden’s goals.
Get data-driven economic insights and outlooks on a variety of middle market industries provided by RSM US LLP senior analysts.