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The state of tech: From seed investment to IPO

What’s on the minds of technology executives and investors?

INSIGHT ARTICLE  | 

What’s in store for middle market technology companies related to fundraising, investing, growth and exits, from mergers and acquisitions (M&A) to initial public offering (IPO)? Will we finally see exits from some of tech’s unicorns who have raised billions privately or from other high-profile tech businesses in 2019? These questions and more were on the minds of technology industry executives and investors at several recent RSM Tech Connection events held in Boston, New York and the Washington, D.C., area. What follows is a summary of key takeaways from the discussion.

State of the market

Steven Pipp, vice president of research at Silicon Valley Bank, who is based out of the bank’s Silicon Valley offices, provided a venture-focused, middle market technology industry analysis. Highlights included:

  • A decade of prosperity following the recovery from the global financial crisis has left both traditional and emerging investors flush with cash for technology company investing. Thanks to risk-incentivized investors and their surplus of cash, capital raises at every stage have more than doubled since the beginning of this decade.
  • While still the epicenter for venture, California’s Bay Area is no longer alone in accessing start-up and growth capital. Sizable funding rounds are not uncommon for startups across the country, including New York, Boston, the D.C. region, as well as many Midwestern and emerging cities, including Austin, Denver and Seattle, to name a few. One critical factor contributing to this is that qualified labor is no longer just centralized in the Bay Area. Companies are finding talent elsewhere, and sometimes in less expensive markets.
  • Before the flurry of private capital began in 2015, the average venture-backed tech company would raise $100 million in private capital ahead of its $100 million public offering. Of the current crop of U.S. unicorns, more than 90 percent have already raised at least $100 million in a single private financing, indicating the abundance of venture and growth capital.
  • Further illustrating this abundance of capital, for some tech companies, Series A fundraising is the new Series B, as Series A companies are now raising more than Series B companies were at the beginning of the decade. Likewise, Series B companies are raising almost twice as much as Series C companies did in 2010.
  • Venture-backed startups have more than doubled their average revenue base at IPO this decade. However, this scaling has come at the expense of profitability, and few have demonstrated significantly higher revenue growth at their debut. In addition, public investors have largely agreed with private investors when it comes to unicorn valuations. Seven of the top 10 billion-dollar valuations in 2018 priced and remained above their last private round.
  • After employing workarounds in secondary markets, a number of high-profile tech IPOs are anticipated in 2019. Many do not need the capital, but feel pressure to cash-out early investors. Pressure to access public capital remains secondary: two-thirds of U.S. unicorns raised private rounds in 2018.
  • Listings from startups in China and Europe far outpaced those of the United States during 2018. And while much of the paper-value backlog has been realized in those regions, private investors still hold nearly 90 percent of aggregate U.S. unicorn value from the start of 2018. Venture capital is increasingly finding a home outside the Bay Area. More than one in four deals from the most active U.S. investors in 2018 was international. American investors have helped boost megarounds to new heights around the globe.

The following chart provides a technology venture outlook for 2019.

Panel insights

In addition, panel discussions were facilitated at the various Tech Connection events. What follows are some summarized salient points from panelists.

From technology chief financial officers:

We have increasingly thought about competition, and I would say that’s not a driving factor in the raise. It’s a piece of it, but it’s more around, what’s the next milestone for us and how do we make sure we’re funded between here and there? – Bart

We raised three times in three years and they’ve all been preemptive. That said, it does take your eye off the ball on a lot of other things. And so one of the big things this time around that we really wanted to do with these dollars, was not really have to go out again for a long time, and actually have that luxury of putting our head down for a while. That was pretty important for us for this time. – Isaac

We did two rounds. There’s just a lot of execution, putting the dollars to work in an effective way and making sure you can build something that’s repeatable, predictable and there’s sales motion. I would say that it’s been very interesting over 2018 to see how the market rewards business progress. We’re in a space where we think we’ve made better progress than others and so we’ve attracted outside attention. That’s just a self-reinforcing positive cycle that people want to do more and better, and get to the next stage. It’s not like we’re salivating for the next round, but the market is rewarding companies that do that. – Scott

From technology investors:

We are finding things in places like Salt Lake City. I would never have predicted that would be a bastion of software start-ups, but we found some good opportunities there. We’ve got things in Boston;;New York, D.C.; Atlanta; Austin, Texas; Colorado; Chicago; Minneapolis; Portland. There is a broader funnel than there’s ever been. I think for us, we’re looking for things with some amount of customer traction, but that are still pretty early stage. – Steve

You can start a software company anywhere. We’ve done deals in places like Bentonville, Arkansas. You don’t have to be near the infrastructure like you had to be ten years ago. That means there are many more startups, but it also makes the needle harder to find, because the haystack keeps getting bigger and bigger. – Carter

My general sense is, to really entertain an IPO and accelerate, it would be north of $100 million in revenue, and either profitable or growing quite rapidly. So we don’t tend to entertain that until we have companies at that scale. Short of the IPO route, you have the M&A route. And for whatever it’s worth, we have more companies that are engaged in M&A discussions right now than I can ever remember. – Steve 

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Steve Ingram  
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