Last year, cloud unicorn, Qualtrics, was acquired by SAP for US$8 billion. The sale came days before the Qualtrics IPO, with SAP stumping up $8 billion in cash in the final stages of the Qualtrics investor roadshow.
Not bad for a business started in a Utah basement 16 years ago and run by Ryan Smith, a guy who told Fortune that he hopes he’s a good dude and that his kids like him.
Co-founders Ryan and Jared Smith are evidently both smart dudes. Qualtrics is not typical of the tech start-up journey; it has always been cashflow positive and bootstrapped, resisting early-stage investment for many years before striking a deal with Accel and Sequoia Capital. But this has been a typical trend we have been seeing for tech businesses: to stay private for longer and shun the public markets. More and more tech businesses are now taking advantage of vast sums of undeployed private equity and growth capital. Indeed, Ryan Smith claims he had no financial reason for going public and in the end, money aside, the deal the brothers struck with SAP was far more valuable for strategic reasons.
Ryan Smith also says that while the SAP valuation of their business wasn’t the decider in accepting the offer, it is clear that Qualtrics and other tech companies are attracting growth capital on better terms off market. The volatility of the public markets for unprofitable high-growth companies, the readily available private equity and growth capital, and the appeal of an acquisition where the whole is greater than its parts – as was the case of Qualtrics and SAP – all make IPOing both unnecessary and unappealing for many tech companies. For these reasons, it may be some time before we see the likes of Uber and Airbnb going public.
The trend for tech companies to reject public markets is also suiting global investors. The volatility of some tech stocks, largely due to perceived uncertainty about whether these companies can maintain their earnings, is leading such investors to seek out a slice of the unlisted tech pie.
Larger US pension funds are increasing their allocation to unlisted tech businesses and we will see more of this in Australia as the super funds also follow this lead, increasing allocation to the technology sector through direct investments. Ten years ago, there was one tech company in the top ten publicly traded companies by market capitalisation. Now, there are seven! Investors realise that unlisted tech companies will eventually list, most likely at hefty valuations. And they know that tech will continue to be of fundamental importance to the world’s economies.
We are also seeing good exit opportunities for investors like ourselves as growing tech businesses are keenly sought by secondary private equity and growth capital investors, and multinational tech businesses. The recent sale of one of our portfolio companies, TrademarkVision, is a great example. This business was acquired by a private equity-backed US tech company, in what was a fantastic opportunity for TrademarkVision’s co-founders Sandra Mau and Cameron Mitchell to accelerate growth into global markets, and for us to make a healthy return for investors from our first venture capital fund.
With the proportion of investment into tech businesses running at about 72 per cent of total investment globally, new tech startups are springing up to feed this investment beast. We expect this investment trend to continue for the next decade or so. Ultimately, this is a win-win scenario for both investors and tech start-ups alike.
Benjamin Chong is partner at venture capital firm Right Click Capital, investors in high-growth technology businesses.
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