While COVID-19 caused all kinds of business and organizational issues, one positive spin is that technology is saving our butts. In many cases, it allowed us to continue business as usual during social distancing and work from home initiatives. While many businesses faltered in 2020, tech companies thrived, and investors are taking another serious look at technology as the next growth market.
There was a time when many invested time, energy, and the last of their savings to create a technology startup, thinking that if they could attract and engage high-end employees, contractually lock down some key industry players, and show a positive return, one of the giants would surely be interested in an acquisition. Over time, the cost of entry to this market skyrocketed, and being in the business of supplying tech resources no longer met the benchmark for acquisition. But then, 2020 happened.
Investopedia reports that in September 2020, tech stocks outperformed the market with as much as a 30 percent higher return. This is fabulous news for the technology sector. In an age driven by a saturated market, mergers and acquisitions are pretty much the only remaining way to increase market share. But what exactly is it that investors look for? And if you happen to be looking to divest, what do you need to know.
What do investors want in a tech company?
Ultimately, investors are looking to achieve one of four things via a tech company acquisition:
- To acquire a larger market share
We live in a very consumer-driven society. The luxury is that as a consumer, we can pretty much purchase anything we want, given that we have the need and the budget, and sometimes we don’t even worry about establishing the need. However, as a retail or service provider, the news isn’t quite so rosy. The market is saturated with suppliers who are eager to provide consumers with goods and services. This means that unless suppliers have an idea or a product that no-one else has yet thought of, they have major competition. In order to grow, they need to invest in acquiring companies that have already built up a market share.
- To enter a new market
Every market has barriers to entry. These include regulatory compliance, large investment in research and development, specialized training, and even the ability to acquire employees who are educated and experienced in a unique skillset. These barriers can be difficult, if not impossible, to maneuver. It can be much more cost-effective and less risky to acquire a company that is already productive and is leveraging their lessons learned into the bottom line.
- To remove a fierce competitor
Often known as a hostile takeover, sometimes the only way to remove competition is to take it over. Enough said.
- To acquire a new technology
Trademarks and copyrights and intellectual capital. If someone beats you to the finish line with any one of these little irritants, sometimes all that you can do is throw some money at the problem and continue on your way.
You have to look pretty on the first date!
While there seems to be very good business reasons for investors to consider acquiring tech businesses, they are not in the business of impulse or random purchases. If you want to be courted by prospective buyers, you need to be aware of these four important details that investors look for.
- Vacation carryover is a liability
Simply put, investors look for acquisitions with low liability, and vacation carryover is the first place they look. There was a time when we would hoard our vacation time and covet it like a hard-earned war medal. But if vacation time accrues, it sits there in the books as a liability. If we do some simple math, 100 employees making $65 an hour who carryover one week of vacation time equals $260,000. This is a liability that is not desirable as the control does not rest with corporate leadership.
Investors look at potential acquisitions that show evidence of momentum. One of the most valuable concepts I have studied is the mathematical concept of the sigmoid curve. Displayed as an S-curve, the sigmoid curve can be used to represent the lifecycle of, well, anything. But in this case, we will use it to represent the lifecycle of a business. The rule is that in business, we should not ride out a successful wave. Rather, when everything is going perfectly well, and the sales are flowing through the door, and we are attracting the best talent, this is when we need to instigate the next growth wave. If we wait until sales ebb, it is too late. Remember: Nobody bought Blockbuster.
Investors know this. There is the ongoing Dragon’s Den joke about One SKU Lou. SKU is the acronym for stock-keeping unit, and it is a scannable code for tracking inventory. It represents, you guessed it, one unit of stock. The Dragons never invest in a company with only one SKU. So, if you are thriving on one item that for a period of time shows promise, you may not be able to attract the attention of investors. Your time might be better spent researching other avenues for distribution.
- Thought leadership
Have you been published lately? Do reporters contact you for comments or quotes? This is a big deal. There are probably hundreds of thousands of small startups vying for position as a potential acquisition. Investors want those that distinguish themselves, and they want potential customers to notice when they attract the best.
- Online presence
It’s no secret that there has been a shift from physical presence to online presence, and first impressions are everything. Investors spend a lot of time looking at companies online. In fact, they pretty much spend the majority of their time looking at companies online. That first impression needs to grab and keep their attention. Further to that, once you have their attention, the data on the site has to be accurate, effective, and littered with statistics. For good measure, add a recent quote published by a recognized source that can be verified. Remember that investors are people too, and like the rest of us, if a site takes too long to load, they will most likely move on.
It’s always exciting to live in the world of technology
Even when the market ebbs, we have only to wait it out because we know the next wave is just around the corner. The 2000s were an exciting time for tech startups because investors were binge shopping. The result was behemoth tech companies with the leadership and the clout to invest in research and development while still showing massive profits. While many waited anxiously to witness the next success story that resulted from being acquired by one of the Big Boys, the wave lost momentum, and eventually, we stopped watching. But then, 2020 happened, and while academics will be trying to explain this one for the next century, startups need to dust off their suits and learn to speak Dragon.
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