There is one simple measurement for how ubiquitous technology has become in recent years. Today, seven of the ten most valuable companies in the world by market capitalisation, originate in the tech industry, compared to only three in 2014. There are several reasons for this phenomenal growth, including a revised definition of which companies are classified as “technology”. Netflix and Spotify are entertainment companies, and Amazon and Alibaba are some of the largest global retailers.
The key factor is that technology is essential to what they provide consumers. Technology enables these companies to provide their services, and while a few years ago these services were new and disruptive, they have now become the standard and expected by consumers. This sustained and growing demand from consumers goes hand in hand with increased attention from investors. They bank their money on technologies and companies they see as spearheading the ongoing revolution in the way we consume, work and live, which is known as digital transformation.
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Consumers and businesses want vindication that a technology works or can improve their business no matter the scale of investment, some believe due to the increased competition out there. However, once a technology has ‘proved itself’, money follows transformation when it’s working. This applies both in public as well as in private markets and technology is no exception here: in the past years, companies with strong brands and pricing power have achieved above average yields.
As a result, the Nasdaq Composite Index over the last several years has been stronger than any other major US index. For years, the Close FTSE Techmark Fund – a passive computer-run fund – outperformed most of Britain’s most successful actively managed funds. The UK remains the European leader in private investment in technology companies, with a 255% increase over the past ten years. Last year, venture capital investment in the UK’s technology sector attracted nearly £3 billion. Promising technologies and their commercial availabilities, strong brands and relatively cheap money has created a perfect storm for tech investment, accelerating the sector’s growth.
However, we saw one trillion dollars wiped off the collective value of the top five ‘FAANG’ technology firms (Facebook, Apple, Amazon, Netflix, Google/Alphabet) over the course of the summer. When large tech companies miss the revenue estimates, we immediately note the turbulence. And with a news agenda that is littered with negative sentiment and commentators highlighting tumbling tech shares, private tech companies considering taking the plunge and going public will likely be wary.
Technology stocks sell-off gives way to wider share falls
The collapse of Tintri only a year after going public, serves as a reminder of the risks that lay in the shadows of the tech giants. Spotify, Dropbox and Eventbrite have all taken the risk this year – and they all battle with subdued investor confidence. Their shares soared directly at IPO, only to plateau and then drop below issuance price within months. This will have delayed the decision of some tech giants to delay or slow down their IPO ambitions, including Uber and Pinterest.
Brexit will only further complicate the situation, in particular for UK companies. We have already seen that 2018 was a more challenging year for UK companies compared to 2017.
According to EY’s quarterly IPO Eye from August 2018, deal volumes in Q4 2018 declined by 44% compared to Q3 2017. This demonstrates a lack of investor appetite for IPOs, limited by a volatile and uncertain market combined with a low value of the British pound, which is not expected to change any time soon. The uncertainty around the UK’s future relationship with Europe and the rest of the world also makes it hard to predict how investor sentiment will develop in the coming months and years. From newly listed companies being priced at the bottom of their range, to IPOs being delayed or called off, anything can happen. It is clear though that there will be intense scrutiny and pressure on companies across all industries to deliver, prosper and succeed. And as many tech companies are the engines that power the future development of the UK’s economy, the pressure on them will be particularly high.
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In many ways, IPOs are a double-edged sword. If managed well, the financial gains to be made from going public can transfer businesses into the upper leagues, with the prospect of exponential growth. This in turn can accelerate the digital transformation of businesses and nations. Microsoft’s growth has been fuelled by the cloud, demonstrating how a potential threat posed to a legacy tech company can be used as a transforming factor – visionary leadership and an eye for disruptive technologies have made this possible. NetApp is another example of a company that turned the cloud into a key business driver.
At the same time however, IPOs can achieve the opposite: loss of trust and reputational value, and a negative knock on effect on the wider economy. For listed companies, customers and partners all share in risk, as we have seen from Tintri’s fallout. The company — a smaller tech company itself — appealed to some 2,000 smaller and medium-sized businesses. Caught in an unfortunate position throughout the course of a tumultuous year, these businesses now need to team up with vendors that will get them running back to their normal state. They need to start planning for their data migrations and utilise the expertise at hand. While this will consume time and budgets, it is in everyone’s interest to cushion the crisis.
So as the volatility in the tech market rumbles on, these are reminders to all stakeholders to manage expectations and prepare for every eventuality. Creating a ‘worst case scenario’ criteria to steer your business through vendor bankruptcy will not only alleviate concerns, but it could prevent business critical disruptions.