The technology sector has had its ups and downs. With every boom there has been a bust. But tech is still the VC darling. Why?
It’s an important why. Because many chattering techies have been questioning whether the current tech boom/bubble is sustainable.
Tech is having a crisis because the current valuation hike seems to be sustained – to some extent at least - by mega IPOs or trade sales that cause huge ripples right down to seed funding. In short, mega-deal IPOs (like Facebook and Twitter) also result in mega-deal acquisitions, like the eye-watering WhatsApp valuation of £19Bn (by Facebook). In short, the value placed on businesses (that have some desirable IP) by mega-rich corporations, is very different to the valuations we might see in a more normal market. So people are beginning to ask if the market is about to normalise.
The other feature of the current tech market is a relative lack of real innovation – akin to the types of innovation we saw after the launch of various flavours of micro-computer in the 1980s. The three decades after Bill Gates did his DOS-deal with IBM created a phenomenal increase in computing power, a transformation of data storage, the creation of the World Wide Web and the arrival of true, pervasive connected computing with the dawning of the smart phone. The organisations and individuals behind these innovations focused on very difficult tech – requiring new methods of computing, electronics and data transmission. The companies that grew fastest during this period were extraordinarily innovative – companies like Intel, IBM, and Seagate – as evidenced by patent filings and PhDs employed.
However the current big valuation wave is dominated by companies that have, by comparison, less obviously ‘difficult’ intellectual property – companies like Facebook, Twitter, and WhatsApp. Indeed some would argue that these companies’ fixations on user generated content results in companies that are little more than aggregators of trivia. Moreover, they have inspired a sub-generation of entrepreneurs dazzled more by the valuations associated with these firms than by the underlying tech that drives them. Hence we’re seeing absurd valuations again for firms that create ever more niche social networks or ‘communities’. In short, it’s beginning to feel a bit like how it felt before the dot-com bust.
There’s another consequence arising from the current strange valuation wave. The expectation, on the part of some VCs, for quick win exits, has also created a phenomenon known as the A-round crunch. Many of the most prominent Sand Hill Road VCs are more likely, these days, to invest at the seed round rather than at later rounds. There’s an expectation that if a company hasn’t developed a community of tens of millions of users within months of seed-round there’s little hope of a valuable exit. Big social networks need to augment their communities more than they need tech. This mind-set potentially stifles the types of businesses that take time to develop game-changing technologies.
Hence we’re seeing the emergence of a new breed of entrepreneur that relies less on venture capital than on innovation. Indeed, historically, some of the world’s most successful tech companies were boot-strapped – companies like Microsoft and Qualcomm.
In the UK we’re seeing significant growth in alternative funding sources that support these types of entrepreneur who may, indeed, be more technically brilliant, and more focused on creating compelling and sustainable businesses based on intellectual property. PwC works with Funding Circle – a new type of funding market for businesses (and not just technology businesses) that need money but have chosen to take a route other than venture capital. To date, Funding Circle has helped more than 5,500 businesses borrow £370 million through its marketplace. Funding Circle is now the sixth largest net lender to small businesses in the UK. PwC’s My Financepartner will refer small business clients seeking alternative sources of finance to Funding Circle.
These and other alternative funding sources show that venture capital is not the only way. For many business owners the alternatives also represent a means of financing the business that also creates more self-reliance and a greater sense of independence. These are two things that some of the most visionary entrepreneurs need to retain.
This article was written by Suzanne Houghton of My Financepartner – PwC’s new accounting service for growing private companies.