Owners of emerging tech companies in the IT services, software and digital media spaces might find that there is much more to running a business than they had initially expected. Beyond simply developing new software solutions or finding new ways to integrate SAP and Oracle into client workflows, they often find themselves needing to understand investor jargon when communicating with private equity and venture capital groups. Some terms, such as a “bubble” (an overvalued market), or a “unicorn” (a billion-dollar start-up) are common knowledge among those familiar with finance and can be found in business news shows, websites and newspapers. Yet, other terms are buried in investor and buyer pitch decks and term sheets. Below are some terms that regularly arise in mergers and acquisitions, and capital investment negotiations in the IT services, software and digital media sectors.
Though commonly associated with Bitcoin, blockchain startups are now common across a variety of sectors, including legal and financial services companies. Blockchain offers a decentralized and secure method for storing transactions and data in a way that allows for scalability and speed. The technology is causing a sea-change in the way that digital payments are handled.
Companies that are able to produce their products more cheaply than their competitors have what is called a cost advantage. Cost advantages are important for outlasting the competition in any type of business and can arise from cheaper sourcing, cheaper processes, a more skilled workforce, greater efficiency, or some type of superior technology. Investors love cost advantages because they make businesses more profitable over the long term.
Fintech (financial technology)
Financial technology, or the implementation of technology into financial systems and corporations, has been a powerful trend in the tech industry lately. Financial technology companies have introduced many solutions for mobile and online banking, including changing the way money is transferred, introducing lower interest loans, reducing commissions and fees, and using advanced technologies such as blockchain to streamline workflows and enhance security.
Fragmentation refers to an industry or niche sector that does not have a dominant player or monopoly. Many tech company investors and private equity firms look at this as an advantage, and they might buy multiple players in a single fragmented space and then merge them together to create a dominant player. Fragmentation often breeds volatile competition among investors.
IoT (Internet of Things)
The Internet of Things refers to networks between devices for improving user quality of life. IoT technology is unique because it does not require human intervention to function. Instead, the technology relies on sensors for collecting data. By communicating among each other, sharing data, and creating deeper, individualized, real-time analytics, IoT devices are changing how humans interact with the world, whether through smartphones, home automation, wearable technologies, and even self-driving cars.
Pre-money / post-money valuation
Post-money valuation is the value of a company after outside financing or additional capital has been added to its balance sheet. The pre-money valuation is the company value before the new equity investment is made. Post-money valuation is therefore the pre-money valuation plus any new equity financing received from outside sources. It is a common measure used by venture capital investors in calculating the percentage ownership that they will have in the business after the capital injection. More often than not, the previous owners’ stake in the company will be diluted. However, as the company grows the value of their stake will increase.
In the past, a tech company might have received its first investments from angel investors. However, as early stage software companies are being forced to raise larger amounts in initial rounds of financing, angel investors have become less helpful. In addition, they offer little of the business advice tech company entrepreneurs crave, causing many to turn to pre-seed rounds for raising capital. Pre-seed rounds are exactly what they sound like – rounds of financing before the seed round. Pre-seed rounds are often resplendent with industry insiders and investor expertise.
Following multiple stock market drops in the year of 2015, many tech companies found themselves at an odd spot. The IPO market was stale, yet companies needed cash and investors were looking to cash out. Because the public markets were unforgiving, as evidenced by plummeting stock prices, many tech startups looked to private IPOs as a solution. Private IPOs are simply larger rounds of financing for companies that are no longer startups. Private IPOs proved vital in guiding a large amount of company growth. In 2015, many software companies exchanged stakes in their companies for cash for product development.
Proprietary technologies are technologies exclusive to a single company, providing that company an inherent advantage over the competition. Venture capitalists and investors like proprietary technologies because they offer protection of value. A proprietary technology can be as simple as a better workflow or approach, but it often requires legal protection through patents and licenses. For tech companies looking to increase their valuations, being able to explain proprietary technology to investors is key.
Scalability is a company’s ability to grow its business model and rapidly increase its user base and revenue without increasing costs at the same rate. Scalability might refer to the ability to rapidly expand geographically or to dynamically increase sign-ups on a website. Investors often examine scalability to see how quickly and easily a business can grow with minimal capital investment.
One relatively new type of industry and trade is becoming known as the sharing economy. No official name has yet emerged but other names include the gig economy, platform economy, on-demand economy, peer economy, and according to the United States Department of Commerce, digital matching firms. Companies in the sharing economy sector provide platforms for connecting different groups of people: one that has something and another that desires it. Uber, a service for connecting drivers to consumers, and Airbnb, a service for connecting residency owners to consumers, are examples of companies in the space.
Venture capital and private equity firms often emphasize stickiness when evaluating companies because they are interested in the longevity of the companies in which they invest. A company is said to benefit from stickiness if users of the product would not want to switch to a different product because of either how good the product is or how hard it is to switch to a competitor’s product. Switching costs can refer to the inconvenience of moving large amounts of data, or they can refer to large financial expenditures that might be necessary for ensuring compatibility with a different product.
Solganick & Co. provides specialized M&A advisory service to companies in the technology and digital media industries. We use our expertise in these industries to provide a customized advisory services. We can help you understand current market trends and valuations while leveraging our industry experience to offer guidance in business transitions.
If you are interested in or are considering exploring your tech M&A options, get in touch with our advisory team at Solganick & Co.