The technology deal market is down, but not out

How things change. Over the past decade, historically low interest rates created a favourable market for technology founders seeking to sell assets. Tech stock valuations soared and competition in bidding processes was intense. Sellers called the shots; investors had limited room for negotiation.

2021 was a record year for deals, despite a short blip during the pandemic. 2022 proved a good year for M&A and venture capital too.

And then, towards the end of 2022, interest rates started to go northwards, deal volumes and activity began to slow, and framework conditions for deal making became much more difficult. The era of cheap money was over.

At Simmons & Simmons, Fabian von Samson continued to see deals come through. “But there were broken deals; some investments collapsed altogether, and conditions became more difficult,” he says. “Processes took longer, and investor due diligence became more detailed and rigorous. If something didn’t quite fit, investors would pull out. There were more restructurings, as investors wrote off their investments and sought to exit with as little pain as possible.”

Reversal in fortunes

2023, for tech founders and sellers, marks a reversal in fortunes. Companies that had raced to very high valuations, and rode the hype wave, may now struggle to secure subsequent rounds of investment. Liquidations are likely to increase.

At technology advisory and investor firm GP Bullhound, Julian Riedlbauer reports a rather gloomy global outlook. “Investors, who kept their powder dry when valuations were high, have reserves, and can be more selective,” explains Julian. “But those who invested when prices were inflated may be unable to sell their stakes any time soon.” Investment funds, meanwhile, must demonstrate portfolio returns if they are to secure future investment.

Talking stats

“The funding wheel has slowed massively,” says Julian. At the end of 2022, there was a sharp decrease in bothM&A transactions and funding activity. Contrast it with 2019, the year before the hype, and 2022 doesn’t look quite so bad. However, set against 2021, when vast amounts of money flowed into the tech and start-up sectors, performance has come crashing down.

Corporate buyers, Julian believes, will keep the wheel turning, albeit more slowly than before. “As venture-capital-backed start-ups begin to downsize, low prices and opportunities to take over entire tech teams will give corporates and strategic buyers much-needed access to talent.”

Yet even though deal volumes dropped significantly in Germany in 2022, and the current market environment is unpredictable, financing for start-ups did not fare too badly. Julian reflects: “It won’t be such a bad thing if start-ups have to become more capital efficient, refine their offerings and innovate to avoid duplicating other players in crowded markets.”

Europe lags behind the US on AI investment

Leaving Microsoft’s US$10bn in OpenAI out of the calculations, the US is bounding ahead of Europe on AI funding volumes and technology adoption. In March 2023 alone, there were 221 deals and US$2.3bn investment in the US, dwarfing 130 deals and US$0.7bn investment in Europe.

Talk of a US$100m deal in Germany, though impressive, does not begin to narrow the gap. Julian is concerned that Europe could lose out on the next platform technology that comes along, and that US dominance in AI will escalate.

“We can regulate AI as much as we like, and restrict its use as much as we want, but the problem is that we don’t own the technology. And that means we don’t get the productivity gains here in Europe,” he asserts. “If we impose legal restrictions, fewer providers will want to come here, and that ultimately benefits US competitors in the AI space.”

Julian urges investors, corporates and legal providers to back AI development in Europe, by funding it, placing orders and using the technology to give Europe a chance of catching up and keeping up.

For now though, investors are cautious and are exercising restraint. These days, the number of investors that Bullhound approaches with funding opportunities has more than doubled. But the results — offers on the table — remain unchanged. “Times are not good, but they are not hopeless either,” Julian concludes.