TechCrunch noted a week ago that an investor in Coupa was sounding the alarm that the software company might be sold to private equity for a price below what the money manager felt was fair. The plea went unanswered, with Coupa selling for a discount to what the investor had demanded as a minimum, we reported this morning.
That the deal happened so quickly after the warning is not surprising. The investor in question wouldn’t have tried to make unseemly public noise unless something was imminent. That the deal got done at the price it did, however, is notable. How come? Because private equity has more money than god and tech is cheaper than it has been in ages.
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The combination, in light of the Coupa sale, makes us wonder if tech is about to discover itself amid a fire sale — a situation where the balance of power is not in its hands. This could apply to public tech companies and those that have yet to pull the trigger on an IPO for one reason or another. Neither cohort is in great valuations shape, making them similarly vulnerable.
As we close 2022 and look ahead to 2023, it’s tempting to make hard predictions about the future. I try not to do that, apart from having a little fun with friends. But if I were in the business of guessing what might happen, I’d prognosticate that an ocean of PE cash is about to flood tech companies currently treading water.
Buy low
Two concurrent, conflicting things are happening. First, tech valuations are in the basement. Second, private equity is richer than even Elon Musk. Observe:
- Presently, the median public software company is worth 5.1x its next 12 months’ revenue. That figure is down from around 20x at the height of the 2021 asset bubble.
- Simultaneously, dry powder in the private equity world is north of $3 trillion, a figure that PitchBook claims is actually a little bit understated. While there is some concern that private equity fundraising will slow in a higher interest rate environment, TechCrunch recently reported that “private equity firm Thoma Bravo announced that it has raised a record $32.4 billion to be spread across three separate buyout funds.” The capital is still piling up.
(I note at this juncture that TechCrunch’s parent company is owned by private equity; that fact doesn’t impact my writing in any capacity, but it does feel worth noting in case you were worried I was trying to conceal the fact.)
Tech valuations are below not only their 2021 highs but also under the valuations we saw in the years before COVID shook up the stock market. Meantime, private equity has hella deep pockets. The result? Deal volume, we reckon.
Given that private equity has been rich for some time, and tech valuations didn’t collapse overnight, why haven’t we seen a lot more Coupa-esque deals in recent quarters? Because capitulation takes time.
To accept a price that would have been laughably low in 2021, your optimism must be ground down to a thin paste. Founders and investors like control and money. Selling to private equity at a price that you would have scoffed at a year ago means giving up control — and a mountain of paper, or at least temporarily misplaced wealth. That’s hard to do.
Case in point: Coupa traded as high as $366 per share in 2020 and $369 in 2021. To see the company accept a price of $81 per share in 2022 is shocking, even if the sale price represents a winsome premium compared to its recent trading range.
It just isn’t easy to accept such a low exit point compared to recent worth, even if it is a bump up from where the market currently pegs your value. But Coupa did it! Even when one of its major shareholders was screaming for it not to! That sort of mindset is going to allow other deals through.
So how many tech companies can PE consume while prices are low? We are going to find out in 2023.
Finally, unicorns: There are a lot of former tech startups generating roughly $15 million to $50 million per year in revenues that are stuck between venture capital and an IPO. What will happen to the hundreds of unicorns that cannot exit thanks to their scale and market conditions? (Unicorns that, mind, also cannot raise more capital at a tolerable price thanks to inflated valuations bestowed upon them in 2021.)
Perhaps some of that private equity money will be put toward rolling up competing unicorns into a single entity that can eventually go public. That would be a somewhat ignominious end to many sizable tech companies that were supposed to inherit the future.
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