Technology companies are evolving at an incredible rate — and Wall Street investment banks are having to adapt to keep up with them.
Consumer technology companies can hit the 100 million user mark – an important milestone – in no time at all. Enterprise companies are getting hold of exciting new technology at earlier stages in their development too.
“Technology companies are gaining scale and value much more rapidly and at earlier stages in their lifetimes, so to speak, than ever before,” Dan Dees, who is Goldman Sachs’ global head of tech, media, and telecom banking, told Business Insider.
That is changing what it means to be a “tech banker.”
The first interaction with a company could be advising on an early fundraising round, rather than an IPO. A company could need help going global or in branding as a private player long before it is interested in a sale.
It’s a stark contrast from how things used to be. Take Goldman’s work on the Microsoft IPO back in 1986. According to Dees, Microsoft had no need for banking services until the IPO stage, so that’s where its relationship with Goldman began.
Compare that with the IPO of Israeli tech company Mobileye last year. Goldman initially invested with the Jerusalem-based driving assistant seven years prior to the IPO, according to Dees. Then the bank made a follow-on investment two years later, and worked on a private placement in 2013.
By July 2014, Mobileye was worth $US5 billion and Goldman was able to help take it public.
Credit Suisse’s global co-head of tech, media, and telecom banking, David Wah, agreed that the time it takes to reach 100 million users — an important milestone — has been accelerating for many tech companies.
He said the past three years are almost parallel to Moore’s Law in terms of how quickly companies are getting there.
That means that most of a company’s value creation is happening before it goes public, not after. And that changes the companies’ relationship with Wall Street.
Wah compared tech companies like Google and Amazon — which have both gained most of their value since going public a decade or so ago — with companies like Alibaba, which came public at around $US200 billion, having already created most of its value before its IPO.
The early value creation is a major reason why so much capital is flowing into tech startups in their early stages.
“I think we saw this coming four or five years ago,” Wah told Business Insider, “when some institutional investors were reaching out to us and they were talking about how they’re creating a pre-public investing capability.”
As early as 2010, companies like Fidelity, T. Rowe Price, and BlackRock started calling banks like Credit Suisse and asking how to develop an investing network, Wah said. “That started the crossover investing platform.”
Initial public offering activity, meanwhile, has dropped off. The value of IPO activity to date this year is about $US32.72 billion, compared with $US80.86 billion in the same period last year, according to Bloomberg. Even if you subtract last year’s Alibaba megadeal, the gap is still huge.
The reason, according to Goldman’s Dees, is simple.
“It’s been facilitated by the fact they can raise large amounts of money at reasonable valuations which has made it attractive to stay private longer,” he said.
“The public markets are oftentimes less forgiving of trying to find your way and optimising your model.”
That isn’t to say big-ticket IPOs in the tech sector are over. Mobile payment startup Square is expected to go public by the end of the year, despite recent market volatility.
Dees said there are a few reasons why we will eventually see more tech IPOs.
“I think over time real liquidity — for pre-IPO shareholders, for employees, for ongoing capital raising for companies — will really be best facilitated in the public markets,” he said.
“That will cause some companies to go public. Others have liked, historically, the valuation of the public markets … and others like the discipline imposed by the public markets.”
Credit Suisse’s Wah agreed: “Whether it is to create the necessary liquidity in their stock, a currency for their M&A strategy or as a compensation tool — the public market still is an outcome that has to happen for most companies,” he said.