Over the past couple of weeks I have been speaking to many corporate buyers and investors in the Valley to get their views on the impact of COVID-19 on their transaction appetite and strategy. With things moving so fast, weeks are like quarters and this is a developing situation. A number of deals are still being announced, although most of these will have already been a long way down the process before Covid-19 hit. We are however hearing that pipelines are fast drying up, mostly down to sell side processes being pulled, rather than lack of buyside demand.
But what, so far, can we tell about the outlook for M&A and investment in 2020 in tech? And which sectors are likely to emerge as winners?
Across the board investors have been busy making sure portfolio companies have enough liquidity, and are implementing hiring freezes and taking advantage of government programs where possible. However those that have dry powder generally view the current situation as an opportunity, with valuations lower than they have been in the recent past, and opening up potential scope to invest in deals that might not have been available to them in the past. One private equity investor mentioned ‘it’s a good time for both tuck-ins and platform investments, especially SaaS.”
The reactions amongst corporates has ranged from ‘we‘re holding off on M&A and focusing on our core business’ to ‘we’re open for business as usual and hungry for deals’. The majority of the most active tech buyers are saying that they expect to continue to be acquisitive, although it does depend on the sector. For European deals, there is a unique challenge in getting deals done given travel restrictions, so we do expect that while conversations and even negotiations will progress, it will be hard to complete deals until face to face meetings are possible again.
As you might expect, digital health, healthcare, and fintech companies are in good shape. In fact, sectors like financial services are expected to see an acceleration of digital transformation in a post-COVID world. For example, social distancing is enabling a surge in the use of contactless payments and mobile wallets, while online lending is also surging. Security is also doing well, buoyed by more staff having to access sensitive and critical systems remotely. We’re also seeing a renewed interest in e-commerce and logistics, as online purchases soar.
Some notable relevant deals announced in the last couple of weeks include:
- Fintech: Stripe announced an additional investment of $600m from existing investors Andreessen Horowitz, General Catalyst and Sequoia, that values Stripe at an estimated $36 billion.
- Health: SilverCloud Health, a digital platform for mental and behavioral health services, secured a $16 million Series B funding round led by MemorialCare Innovation Fund.
- Health: New York-based Tyto Care, a company that performs remote medical exams on demand, has raised $50 million in a growth round co-led by Insight Partners, Olive Tree Ventures and Qualcomm Ventures.
- Security: Austin-based Living Security, a provider of security awareness software for enterprises, has closed on a $5 million Series A funding round led by Silverton Partners.
- E-commerce: Swedish logistics tech company Instabox has closed on $39 million in a fresh financing round backed by Swedish investor Creades and London-based credit specialist CORDET. The company handles logistics for e-commerce retailers, offering same-day delivery through its network of last-mile smart delivery lockers.
- E-commerce: Shippo, a shipping and order management platform for growing ecommerce businesses, announced that it has closed $30 million in a Series C round led by D1 Capital Partners. The San Francisco-based company’s stated goal is to make shipping “as easy as sending a text message.”
- Emergency services: Austin-based AlertMedia, a developer of tools for mass notification to communicate during critical events, has raised $15 million in a Series C financing led by JMI Equity.
In these extraordinary times we don’t know yet how things will play out. Economically we know the elevator is going down – but we don’t know what floor it’s going to stop at or when it will start to rise again. In summary, the view from my conversations with buyers and investors is that transactions in Q2 and Q3 will be slow, before a likely rebound in early 2021. There’s an appetite for quality deals, especially where there is limited impact from COVID on the sector or the business model, and the demand for smaller tech tuck-in acquisitions remains good. Higher risk deals, or ones outside core strategic focus, are less likely to complete for the time being.
We appreciate these are unprecedented times, and each company has a unique set of challenges and opportunities so these generic observations may not be directly relevant. If you’d like to talk to us about your specific circumstances to see if we can help, then please do get in touch.