The Market Conditions That Affect Investment

What do investors look for when considering whether to fund a business? There’s more at play than your elevator pitch and how you plan to carve out a unique position in the market. Your knowledge of the market conditions that could affect a would-be partner’s appetite for investment also plays an integral role in your fundraising success.

IPO ACTIVITY

With increased market volatility, IPOs are one of the riskiest securities. In fact, the stock market is giving many of Silicon Valley’s most promising startups a lackluster reception. If this continues, private companies could begin to feel the fallout of these events, making it difficult to recruit and pay employees, as well as threaten their future interest in startup funding.

dollars

11 OF 49

VC-backed U.S. technology companies held IPO events traded below the per-share value in 2015

GOING PUBLIC

Potential buyers demand better odds

IPOs are appealing for investors who believe the potential reward outweighs the incremental risk

Source: The Wall Street Journal

UNICORN TROUBLES

Unicorns are highly sought after by investors for their growth prospects, management, and market value of assets. But often, by the time a company is ready to go public, the valuation it received from venture capitalists does not align with its balance sheet. The success, or failure, of these giants has great influence over the market, and the tech bubble that looms over it.

22 SOFTWARE UNICORNS

Have a combined valuation of nearly $40BN

$63.5BN

in unicorn IPOs alone, if unicorn companies float 25% of their private valuation through IPOs over the next two years

14% HIGHER

than the average total volume of IPOs, regardless of sector, over the last two decades

Sources: The New York Times and Dealogic

MUTUAL FUND MARKDOWN

Mutual fund markdowns have surprised the venture community. Venture capitalists value companies at what they paid for them; but recently, investors have been discounting their companies after subsequent review of market conditions and performance. These markdowns indicate uncertainty from investors and may stagnate the growth of this fast-growing market.

-25%

Snapchat discounted

-31%

Dropbox devalued

dots

HGOAX carrying preferred shares of 10 privately held companies below its original cost bases through June 2015

Source: Fortune

CONCLUSION

When looking for investment opportunities, investors may be hungry for software companies, but companies are competing with the best of the best. Here are some trends affecting the software industry.

A CLOSER LOOK AT INVESTMENTS IN THE SOFTWARE INDUSTRY

  • EARLY-STAGE M&A – Activity is affected by interest rate increases and conflicting economic growth signals. Many fear the 5.6% growth in Q3 2015 is not sustainable
  • MARGINS & CASH FLOW – Companies with high results will receive firmer valuations
  • UNICORN RISK – Will continue to rise in 2016, if the gap between pre-IPO and IPO valuations narrow
  • DIFFERENTIATING FEATURE – Businesses rooted in cloud and Saas need to define a differentiating feature of their software to pull ahead of the competition
  • IT SPENDING PROJECTED TO FLATTEN – In 2016, resulting from revenue pressures from multiple industries. Cuts may occur to alleviate resources for other initiatives, like software application

Vista Equity Partners Management, LLC (“Vista”) is an SEC registered adviser. This document is intended to provide general information regarding Vista’s private equity investing expertise and not for the purpose of soliciting investors for any Vista Fund. Under no circumstances should the information provided be considered an offer to sell, or a solicitation to buy, any security. Such offer or solicitation may only be made to accredited investors and qualified purchasers pursuant to the current offering documents of the relevant Vista Fund. The information provided is strictly confidential and may not be reproduced or disseminated to any third parties without the written consent of Vista. The past performance of previous Vista Funds and portfolio companies is not necessarily indicative of future results. Investors in Vista Funds may lose investment capital. There can be no assurance that any future Vista Funds or portfolio companies will achieve comparable results. ©2018 Vista

Download PDF

Share

Stay Up To Date On The Latest Vista Insights