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 acquire 100 million users – an important milestone – more quickly than ever before. Enterprise companies are getting hold of exciting new technology at earlier stages in their development as well.
“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, 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 initial public offering. 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.
- Dan Bigelow/Photo courtesy of Goldman Sachs
Compare that with the IPO of the Israeli tech company Mobileye last year. Goldman initially invested with the Jerusalem-based driving assistant seven years before the IPO, according to Dees. The bank made a follow-on investment two years later, and it worked on a private placement in 2013.
By July 2014, Mobileye was worth $5 billion, and Goldman was able to help take it public.
Credit Suisse’s global cohead of tech, media, and telecom banking, David Wah, agreed that the time necessary to reach 100 million users, which is considered an important milestone for tech startups, had been accelerating.
He said that companies have been reaching that mark over the past three years at a rate almost parallel to Moore’s Law – an analogy from the semiconductor industry referring to something that doubles every two years.
- Andrew Burton/Getty Images
That means that most of a company’s value creation is happening before it goes public, not after. And that changes companies’ relationship with Wall Street.
Wah compared tech companies like Google and Amazon – which have gained most of their value since going public a decade or so ago – with companies like Alibaba, which came public at around $200 billion, having already created most of its value before its IPO.
The early value creation is a major reason so much capital is flowing into tech startups in their early stages.
- Credit Suisse
“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.
“That started the crossover investing platform,” Wah said.
Initial-public-offering activity, meanwhile, has dropped off. The value of IPO activity to date this year is about $32.72 billion, compared with $80.86 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 optimizing your model.”
That isn’t to say big-ticket IPOs in the tech sector are over. The 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 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.”