Don’t worry, startup world is doing well — despite what some people say
You hear a lot of negativity about tech startups these days. Overvalued companies, saturated markets, a dangerous deal-making plateau. Headlines that make sweeping statements about the health of the whole sector based on single examples.
The truth is that the startup-tech world is very healthy. It continues to innovate and create value — and the facts are there for all to see in 2016’s technology M&A numbers.
On the surface the numbers looked normal, or even negative. Overall tech M&A volume last year was $467bn, up only slightly on 2015’s value of $460bn. At the same time, the aggregate value acquired by tech buyers fell 23 per cent to $269bn in 2016 from $350bn in 2015.
But look at the number of non-technology companies acquiring tech startups. This is where you see an interesting, and surprising, trend. These values are up, and they are up massively.
These values are up, and they are up massively
Look at established firms, like Verizon in telecoms, Ford in automotive, and Walmart in retail. Established behemoths entering the tech M&A market, demonstrating that the startup market has grown both wide and deep enough to help large corporations scale, adapt and transform their business models over time.
Non-tech acquisition-deal values double in one year
The total value of deals in the non-tech M&A transactions category doubled from $54bn in 2015 to $108bn in 2016, representing massive growth of 101 per cent over the year. The average deal values also doubled, growing from $353m in 2015 to $687m in 2016.
Meanwhile, the total number of deals between non-tech and tech companies held steady over the year, showing that the tremendous growth was driven mostly by non-tech companies willing to pay large amounts for the right technology company acquisition.
In the past, non-tech companies were curiosities in the technology deal market. They were minority players, and their acquisitive activity was largely ignored by VCs and tech founders alike. When I spoke with startup founders about a potential exit, the same tech-giant names came up again and again: Google. Facebook. Microsoft. Salesforce.
Non-tech buyers now account for a significant segment of all market activity
But the data shows that non-tech buyers now account for a significant segment of all market activity. In 2016, non-tech buyers acquired 23 per cent of all-deal aggregate value, up from 12 per cent in 2015.
This trend applies across startup sectors. Non-tech buyers made up 26 per cent of disclosed value in Advertising and Marketing; 33 per cent in Payments and Financial Services, and 38 per cent in the Internet of Things segment.
Over the last 18 months, I’ve detected that more and more founders were positioning themselves for exit to non-tech companies. This data now backs that up. For tech startups, it’s now eminently sensible to target exit to an established retail, energy, automotive, or ad giant.
Non-tech companies are driven to transform their business, right now
There is a commonly held view that this growth is driven by tech and non-tech companies alike getting carried away with themselves. Foolishly paying over the odds for startups. Driving up the price of the market. Creating an impossible tech bubble.
Many of these transactions and their values actually make perfect sense
Yes, the figures may sound high, but on closer inspection, many of these transactions and their values actually make perfect sense.
Analysts can be prone to lapses in memory. We forget the hysteria around the price Google paid for YouTube ($1.65bn) back in 2006, and the price that Facebook paid for Instagram ($1bn) in 2012. At the time, people said these prices were extraordinarily high, comparing them to the trade sale prices of decades-old companies, as a way to justify their scepticism.
Most people aren’t even aware that Android was an acquisition by Google back in 2005 for a reported $50 million, which may have seemed like a lot at the time.
However, many of these sceptics looked at the purchase prices of YouTube and Instagram and other targets in isolation — away from what really matters. They didn’t look at the vision that drove these acquisitions. They didn’t factor in the transformative impact that these acquisitions could — and did — have on the companies that bought them, and the value that they’ve unleashed.
Facebook wasn’t only deflecting a competitive threat when it acquired Instagram. It wasn’t only acquiring Instagram’s technology, photos, UX and users. Instead, Facebook was buying the opportunity to transform itself, or at least part of itself, into a photography-image-mobile social network. The acquisition constituted a fundamental shift in the identity of Facebook.
I’m as cautious as the next banker or analyst about rash valuations that raise eyebrows. There are certainly companies in the market at the moment that are overvalued, but that doesn’t apply across the board.
For non-tech companies, a billion dollars is cheap to ensure survival over the long term
Generally speaking, when executed properly, prices that non-tech companies pay for technology companies make sense. After all, if the acquisition gives the non-tech company what it needs to survive, and thrive, in the next 10, 20 or even 50 years, and drive growth, a valuation of a startup in the billions of dollars is comparatively cheap.
When GM acquired autonomous tech company Cruise Automation for more than $1bn last year, or Ford pledged to invest $1bn in Argo AI last month, they showed the world that the established automotive companies are serious about the future of transport; that they’re more than willing to transform their company, and business model over time, as well as their relationship with consumers. They are playing to the future.
Many large corporations just don’t have the agility to build new technology-based solutions in-house fast enough
Markets are moving incredibly fast for many non-tech companies today, faster than ever before. Disruption is upending business models, changing consumer demands and behaviour, and transforming customer expectations. Many large corporations just don’t have the agility to build new technology-based solutions in-house fast enough. In this context, a tech company acquisition is a good option — either to complement in-house development or replace it.
This does not mean, of course, that all technology acquisitions will be priced correctly, or deliver value in the long term. Companies can, and do, get it wrong. But I expect several of them to be successful. If done in the right way, and if growth-focused, non-tech companies can manage to squeeze the maximum strategic value from an acquisition, then they can save themselves from a Kodak or Blockbuster-like death.
I expect non-tech deal-making activity to increase again this year — possibly faster than ever. It is the new driving force of growth in the technology sector. The first growth-focused non-tech acquirers in various sectors have left the starting blocks. Many will need to follow over the coming years.
Paul Cuatrecasas is founder and CEO of Aquaa Partners (http://aquaapartners.com), a specialist M&A and corporate finance advisory firm. It specialises in advising growth-focused traditional companies on acquiring tech companies.