Companies requiring capital to finance growth are being confronted with a difficult valuation environment. We offer three strategies to help.
As we near the halfway point of 2023, it is a great time to reassess the business valuation landscape, specifically for the technology sector. Our review last year indicated substantial impact from inflationary trends and the Federal Reserve pumping the breaks via rising rates and efforts to remove liquidity. This had material knock-on effects in the technology space that impacted valuations across the lifecycle. Companies that required capital to finance future growth were confronted with a more difficult funding and valuation environment relative to the low-rate environment of 2021.
Fast forward to mid-2023, and the tightening trend holds true; however, the high-level indicators show more of a mixed bag. This potentially indicates an opportunity for a shift back to more upside potential in the market. Nonetheless, risks remain elevated.
On the upside, the NASDAQ 100 has actually been a market engine year-to-date, with a total return of over 32% as of June 1, 2023. This rapid ascent has multiple factors, including continued rapid growth in blue chip tech revenues, increasing perceptions that the Fed will stop tightening, and, most notably, the ascent of artificial intelligence and other tech enablement factors (e.g., high-powered semiconductors) as a key driver of market strength.
Despite these positives, the recent failures of tech-finance stalwarts Silicon Valley Bank and First Republic Bank — fundamental institutions in the venture funding ecosystem — will likely continue reverberating across the tech sector. Additionally, inexpensive access to capital has today been replaced by higher-cost financing across the risk spectrum. These forces have created headwinds in the venture technology space, in spite of the recent rally in public tech valuations. So, while the landscape shows signs of strength, challenges remain material and, in many cases, acute. To help you navigate the current environment, we offer three recommendations for your growth-stage tech sector business to remain resilient as we await the return of more robust market conditions and valuations.
1.) Remain prepared for public market exits in case the IPO window reopens.
For many tech sector businesses in the expansion stage, a primary focus should involve staying ready even if the initial public offering (IPO) window is temporarily shut.While the current focus in the marketplace is on profitability, resulting in valuation challenges in the expansion stage, the flip to growth can happen fast. Being IPO ready, however, is not a quick flip – it takes time and extensive professional preparation. While intelligent cost optimization always makes sense, growth businesses should avoid going into a proverbial shell. Being IPO ready (or at least a stone’s throw from it) will help with diligence in the event that a bridge financing is required. If too many corners are cut in accounting and finance, that will show up in the diligence process.
In that scenario, failure is far more likely than if the finance organization remains prepared and well-organized. Continuing to prepare for an IPO will help, regardless of the transaction outcome, and certainly will be critical when public markets shift back towards a more welcoming IPO marketplace.
2.) Staying organizationally optimized.
Organizations need to shepherd their existing capital and apply it in the context of good decision-making. This frequently involves:
- Investing in the right products and services for your core geography.
- Identifying technology, including AI applications, that will assist your organizational optimization.
- Selectively recruiting, hiring and retaining personnel (and reliable third-party relationships) that are essential to sustaining and growing your business.
For organizations looking to increase their valuations and capital market readiness, this optimization is critical.
3.) Being proactive.
Proactive action and planning are more critical than ever to succeed in this evolving economic environment. Simply playing defense will not suffice in the ever-dynamic technology landscape. To put it simply: you are either evolving or dying. Being proactive may have a wide range of meanings, but some of the more dynamic areas of activity that may help optimize business clients include:
- Selling off a part of the business in a “spin-out” – or, conversely, proactively looking for “spin-outs” to acquire.
- Identifying and preparing for bridge investments or assessing whether a SPAC merger is the right next step.
- Evaluating the back-end technology and systems stack, including your enterprise resource planning (ERP) solution. · Assessing the ability to leverage internal data through analytics.
Providing near-term guidance required by the tech sector
While we have seen a slowdown in deals and reduced valuations over the last twelve to eighteen months, market history tells us that this phase will not last forever. The economy and financial environment will continue to evolve, and technology has proven it will lead the way when markets shift back to growth mode. It is just a matter of when the tech sector will be back in full swing. To help with your evolution at every stage of the growth lifecycle, BPM’s Business Lifecyle Center has been developed to help guide our clients through any stage and economic backdrop. Our services focus on remaining organizationally proactive to help leadership avoid falling into the trap of stagnation.
We invite you to contact us and explore our Business Lifecycle Center to see how we can support your organization’s evolution.