It’s been a disruptive year for the technology sector. As valuations plunge and even the largest tech giants struggle to retain talent, could this upheaval of the tech sector create fresh opportunities for emerging investors?
The tech sector’s pain is clearly visible in its most critical metric: valuations. Publicly-traded software companies like Adobe and Athlassian have lost up to 27 percent of their market value year-to-date. Private companies have been able to delay the pain but not avoid it altogether. Pitchbook data suggests that the median value of a software company backed by venture capital is down 23 percent from 2021 and 60 percent from its 12-month high.
Stock-based compensation (SBC) in the form of options and warrants account for an average of 6.8 percent of gross profit for most tech giants, according to the latest earnings reports of Apple and Microsoft. Meanwhile, smaller software companies like Snowflake pay up to 79.5 percent of gross profit in SBC.
“This type of compensation does a great job of aligning employee and investor goals of growing the company’s overall enterprise value,” says Vlad Besprozvany, a managing partner at Nexa Equity. “As valuations for large public and large private companies have come down, this has created a significant recruiting opportunity as employees of those companies have realized that their equity may be worth less than they initially thought.”
Put simply, the market correction has created fresh opportunities for employees, startups, potential acquirers, and emerging investors such as Nexa Equity. In fact, Besprozvany says some segments of the technology sector are so attractive that valuations are still “at or around pre-pandemic levels.”
He points out that sectors of the economy that are further behind on the software adoption curve as particularly attractive. “The current market environment presents a great buying opportunity as many founder-owned businesses are looking to take advantage of a less competitive recruiting market and potentially highly accretive add-ons,” says Besprozvany.
If valuations remain attractive, this strength in M&A activity could persist.