Looking Past the Unicorns to the Middle Market – The Sweet Spot

Dec 14, 2015

Looking Past the Unicorns to the Middle Market – The Sweet Spot

In the News, Valuation , , , , 0 Comments

A quick look through today’s business headlines and you’ll see reports of massive capital raises and eye-popping valuations for some of the so called “Unicorns” – young, fast-growing, privately held (VC-backed) technology / technology-enabled companies valued at $1 billion and above. Some of these firms are very impressive, growing more than 100% per annum and raising hundreds of millions from private investors. Some are working on finding an appropriate way and time to give investors liquidity at a suitable value. Few this year have found strategic buyers: Lynda.com (LinkedIn) and Virtustream (EMC), for example. According to CB Insights, through Q3’15 more than $42 billion was invested in US tech companies, while only $26 billion was realized from a liquidity event. This is the first time in recent years that funding inflows have outpaced exit values as many tech companies choose to remain private for longer:

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A few Unicorns have managed to go public – at impressive values – although some are now valued at less than their most recent private valuations.

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The real opportunity is in the middle market.

While the Unicorns have been getting the lion’s share of media attention, M&A for middle-market technology companies, our core area of focus, has been more robust – if less reported. Perhaps the reason for this is simply that it’s not that easy to actually invest in a Unicorn at a reasonable value anymore; perhaps the exit opportunities are too scarce; perhaps the downside risk is too high. We prefer to believe that the real drivers are the strong investment and acquisition opportunities in the middle market.

So far, in 2015, there has been more than $40 billion worth of transactions reported among tech companies valued at $100 million – $1 billion, and the activity for firms valued at less than $100 million is equally impressive. According to PitchBook, the Q3’15 value of mid-market tech M&A transactions exceeded $16 billion, 31% over the last three year mean:

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Middle market tech M&A transactions are at a three year high, with nearly 200 transactions closing in Q3’15, roughly double levels seen in Q1’13:

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For the last several years, growth rates and values have been strong in the mid-market, but not at the stratospheric levels of the Unicorns. There are many other reasons for the rational exuberance being shown by both financial investors and strategic acquirers for the mid-market tech sector, ranging from the abundance of cash on balance sheets, to low interest rates, to recognition that buy often wins in a “buy vs. build” analysis – even at strong prices – given the reduced execution risk, faster time to market, and lessened competition. As a leading advisor to buyers and sellers of mid-market technology companies, we are quite pleased with the current environment and look forward to the continued strength in 2016!

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