In a guest post for the Financial Times, Victor Basta, managing director of boutique investment bank Magister Advisors and a specialist in the technology sector, examines the surge in private equity-backed late-stage technology funding, and the implications for the sector.
“A wholesale shift of tech into PE hands has profound implications for the industry’s future. PE firms manage tech companies differently to venture investors, balancing growth with profitability, meaning investment is done at a slower pace — both in people and technology — with a reduced risk appetite for major new innovations. Also, PE firms often use debt to part-fund deals, which can only increase tech’s business risk once we head into the next downturn.
“A PE-backed tech industry will have major implications for investors, entrepreneurs, and analysts. Perhaps most pertinent for a tech industry focused on revenue growth rather than profits, PE investors will be aiming for start-ups to reach profitability sooner. It’s unsurprising that private equity firms rarely buy fast-growing companies that are losing a lot of money.
“As a result, entrepreneurs will need to be thinking about positioning their companies for the PE world, rather than a sale to a tech giant. This means a focus on key performance metrics, financial discipline, and expense control. It will also steer fast-growing companies away from blue sky investments: PE buyers seek to support thoughtful but incremental investment, rather than groundbreaking initiatives.”