Business

Morning Report: Yield-Hungry Tourists Are Driving A Tranche Of The Tech Boom

Morning Report: 2016 was a tough year for tech. By the end of the year, however, we circled back to good. What changed?

Early 2016 was a difficult time for public tech companies. Valuations fell, repricing revenue and discouraging IPOs. The startup narrative, gyrating in sync with public comps, flipped to a raise now story.

As you know, of course, by the end of the year, the public markets had recovered. In 2017, we have seen fresh market highs, tech’s Big 5 nearly crack the $3 trillion mark, a return to an active-ish IPO cadence, and strong funding marks.

What changed between the two time periods? A recent Bloomberg report has part of the answer, I think. Three quick quotes make the case. We’ll start with the big trend:

Funds tracked by Bank of America Corp. own the highest percentage of technology stocks on record compared to their benchmark. It’s a sector that’s carried U.S. stocks to new highs[.]

Here’s what that looks like in practice:

Rarely ones to shun the herd, active funds are now 71 percent overweight in the FANG [Facebook, Amazon, Netflix, Google {sic}] companies after making the biggest move from value to growth since 2008, according to Bank of America.

And the results from the shift in investing patterns:

The tech-powered rally has catapulted the sector to a price-to-earnings ratio of 24.4, or 41 percent above the 10-year average.

You can quickly see our argument when it comes to what has changed since 2016.

Part of the “Return to Good” is likely built on tourist money piling into public tech shops, driving returns north. That leads to stronger multiples and a more active IPO window. In turn, this boosts liquidity for private-market investors, freeing up capital and driving cash-on-cash returns. Some of that money recycles into new startups, and the more of it there is, the more competitive the funding environment becomes. In response, valuations rise.

What matters more for us today is what happens in reverse. The above set of factors, as we have variously noted together for years now, can create a positive feedback loop. The opposite is also true. Falling public valuations can trickle backward into the world of private startup investment, ossifying active movement from rapid fire to glacial. Valuations will then fall in response.

This sums up to the following: If we can attribute a decent tranche of 2017’s gains to money that is only chasing yield, we can infer that when that money leaves, the market will cool. And the money is only here when the tech space is still going up.

From the Crunchbase Daily:

Outcome Health raises $500M

  • Outcome Health, a provider of digital healthcare content for patients and doctors, has raised $500 million at a pre-money valuation of $5 billion. Investors include Goldman Sachs, Alphabet’s CapitalG, and a long list of others. Though it was founded in 2006, Chicago-based Outcome has not previously raised a venture round.

Vista Equity Partners buys Lithium Technologies

  • Lithium Technologies, a provider of tools for managing brands on social media, announced that it is being acquired by private equity firm Vista Equity Partners for an undisclosed sum. San Francisco-based Lithium previously raised around $200 million in venture funding.

IPO pops are best when moderate

  • The number of tech IPOs is way up year-over year, sparking renewed debate over the pros and cons of a first-day stock price surge. Many say an initial “pop” makes for good publicity, but it also represents money left on the table. That leaves at least one expert advocating that companies aim for a moderate first-day pop of 25 percent to 35 percent, Crunchbase News reports.

Stay up to date with recent funding rounds, acquisitions, and more with the Crunchbase Daily.

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