Will 2011 Be a Breakout Year?
[Editor's note: This post was co-authored by Moss Adams partners Ken Salgado (based in Southern California) and Derek Dowsett (Silicon Valley).]
It’s early in the year, and although there are a number of positive trends building, it’s hard to make overly optimistic predictions. But based on the data we currently have, 2011 could be a very strong year that marks a major milestone in the economy in general and in the technology sector in particular. The chief expectation right now is that the IPO markets will return, mergers and acquisitions will continue their upward trend, and investors and entrepreneurs will get rewarded with increased valuations.
Before we look too far ahead, though, it’s important to note that we’re in the middle of a moderate recovery that must continue for a robust forecast to play out. The momentum began to take hold in the third and fourth quarters of 2010, with increased deal flow, merger activity, and a strong transaction pipeline going into 2011. Transactions were completed at a hurried pace, and valuations are trending upward. We’re seeing increased inbound interest from strategic acquirers, oversubscribed venture rounds, and a long list of IPO hopefuls with registration dates pegged between the second and fourth quarters of 2011.
The technology sector continues to lead all industries in terms of post-IPO performance for new listings in 2010, and we expect this trend to continue and even increase, given those expected to file in 2011 and 2012.
There’s still lots of money on the sidelines, and while more of it will be put to work in 2011, it will continue to be at a cautious pace and with intensive due diligence. And it’s important to note that even a slight negative connotation in the global economic landscape could bring this to a halt.
A number of companies are in registration today. In addition to LinkedIn’s recent filing, the potential IPO pipeline includes big brand-name companies such as Groupon, Zynga, Facebook, and Twitter. If successful, these market leaders will allow the next tier of companies to enter the markets, making 2011 truly a breakout year. We’re seeing an unprecedented number of pre-IPO technology companies aligning themselves to enter the markets in 2011—but will their efforts be rewarded with an open window? It appears so. Even in the down economy of 2010, in terms of IPO activity technology was second only to the financial services industry.
Early-stage funding should continue to increase in 2011, but we’ll also see later-stage deals with large values. Many investors are passing up modest returns offered via M&A and are instead increasing their investment in companies they believe can become long-lasting enterprises. Still, M&A activity will be greater in 2011 than in recent years simply owing to pent-up supply and demand. This is good for the investment community and those seeking to raise new funds in 2011 and 2012.
Much of this positive activity will be centralized in a host of attractive areas in 2011—areas where we’re seeing the largest amount of deal flow and interest within our practice. Cloud computing, for example, has clearly reached a tipping point in the enterprise. By 2020 both Google and Microsoft figure to be dominant in this world. In the meantime they’ll continue to acquire a slew of companies to help them grow in the cloud computing space.
Infrastructure IT will continue its upward march, particularly for products and solutions that increase efficiency and effectiveness and for those solutions, such as Web-based services, that are scalable with enterprise needs in real time. We also see strength in cradle-to-grave solutions that bundle software, services, and infrastructure. Market leaders continue to seek and acquire tuck-in technology that fills a hole or enhances traditional product lines. Companies that understand how they fit into their product ecosystem can strategically position themselves to be acquired by market leaders.
There are several key growth areas that will touch the consumer markets in 2011 as well. Mobile commerce solutions, long popular in Europe and Asia, are finally being adopted in the United States. This will also open up the mobile advertising solutions that have been a start-and-stop proposition with investors. Google TV and other Web-based TV solutions will trigger increased innovation and adoption in this area both in terms of hardware, delivery mediums, and security-enabled transmission as content owners and studios see the increased market opportunity.
In addition, with many IPO hopefuls, such as Foursquare, in the social media and Web content space, the notion that Web traffic can be monetized is now back in play. And it’s important to keep an eye on the move toward consumer-device connectivity, which will provide seamless integration between devices at home and in the office and link one’s social network, entertainment, business, and personal interests. In the past these had been segregated, but convergence continues to take place, hinted at by increased interest by investors and acquirers across traditional technology sectors.
The bottom line for the next year is that there will be plenty of innovation, lots of deals, and a good amount of investor confidence. The question, of course, is how this translates into upside. And only time will tell.
Ken Salgado chairs Moss Adams’ Technology & Life Sciences practice and provides audit, internal control, M&A, and IPO guidance to public and private companies in the technology, manufacturing, and venture capital industries.
Derek Dowsett is a partner in Silicon Valley overseeing the firm’s services provided to public and private technology and life sciences companies in Northern California.