The recession no longer seems to be affecting the technology market, as growth opportunities abound for tech companies.
“We’re seeing a very healthy environment for technology,” says Dick Sweeney, senior vice president and manager of the Northeast Market Technology Banking Division at Bridge Bank. “Within our portfolio of clients, we’ve had a number that in the past six to 12 months were acquired or are in the process of getting letters of intent, with transactions being done at pretty healthy multiples of income.”
Smart Business spoke with Sweeney about the technology sector’s status and what small tech companies are doing to foster growth.
Are funds readily available for growth?
There’s a healthy ecosystem now, especially on the growth capital side. Companies that are a little more mature than a startup — they have decent revenue traction and customer adoption of products and services — are looking for additional resources to expand sales and marketing, or open up international operations. There’s no shortage of funding sources for them on the equity side. They are attracting money from strategic investors and doing so on favorable terms with multiple proposals.
On the debt financing side, there’s also a good deal of competition. Banks are supplying funds, as well as partnering with equity and mezzanine lenders. Mezzanine financing is a hybrid of debt and equity financing where the lender has rights to convert debt to ownership if the company doesn’t pay the loan back in time.
Right now is an ideal time for companies looking into executing a growth strategy by putting more capital to work or exploring exit opportunities.
Do any tech sectors particularly stand out?
There are premium valuations in the customer relationship management space. For example, ExactTarget was recently acquired, and Neolane sold for a revenue multiple of more than 10.
Reoccurring revenue is currently the focus of management teams and investors, and these companies are receiving valuations, whether that means their private equity or exit value. From an investor side, the company has a stable base that is predictable. From a company perspective, reoccurring revenue is attractive because it helps avoid white-knuckle situations where you’re waiting for a very large, one-time deal to go through at the end of a quarter. Whether it makes it in that quarter or happens a day later can really impact your financial performance.
Why is the environment so healthy?
It’s a combination of things. There are some large corporate buyers with a lot of cash on their balance sheets that are looking to fill product holes through acquisition rather than trying to build. The stock market is also pretty healthy — it’s near all-time highs — and that is translating into high valuations on the private side as well.
Companies are being rewarded particularly for building reoccurring revenue streams into their business models. That certainly shows in the public markets that are getting premium valuations. Also, banks are offering different types of financing structures based on multiples of reoccurring revenue. This rewards companies that get away from perpetual license sales and toward monthly reoccurring revenue. It’s an ongoing trend that’s not slowing down anytime soon.
Is there growth outside of companies with reoccurring revenue streams?
There has been explosive growth in mobile advertising, with rates not seen in other sectors. A big land grab is taking place, and some companies are growing rapidly as a result. There are no 800-pound gorillas nor is there a single, dominant incumbent, so that presents opportunity for new entrants. These are mobile ad targeting technologies, mobile ad exchanges and business intelligence that will target ads based on a consumer’s location or other attributes.
Are there any problem areas of the market?
Clean technology continues to be a difficult sector. A lot of investors have looked to exit after some high-profile collapses in solar panels and biofuels. Companies received significant amounts of capital and were not able to deliver. It’s made it very difficult for others in that sector to raise financing, but overall we’re seeing a lot of great companies that are growing rapidly.
Dick Sweeney is a senior vice president and the manager of the Northeast Market Technology Banking Division at Bridge Bank. Reach him at (617) 995-1310 or firstname.lastname@example.org.
Learn more about startups and the technology sector on Bridge Bank's website.
Insights Banking & Finance is brought to you by Bridge Bank