08 Dec 2022

Across the world, tech M&A and financing deal volume is down. While certain pockets demonstrate resilience (as our recent Cyber and DataTech reports show), the overall market seems to be quietly bracing for a chaotic Q1. At least that’s what a lot of our Silicon Valley conversations are revealing.

When I speak with strategic acquirers, many are saying that their focus is on maintaining their own customers right now, sometimes in the face of pullback in buyer spend. Others are still eyeing M&A, but more selectively evaluating targets that are closer to their core businesses rather than deals that explosively expand their TAM or move them into new markets. A select few are biding their time, waiting for valuations to depress further before pouncing on desirable targets.

VCs and growth equity are on the same page. Many are telling hyper growth, heavily cash burning companies to rewrite their strategies before they’ll consider investing. One such investor told me that they are looking for the ‘rule of 40’ to start favoring bottom line improvement rather than top line growth at all costs. Another mentioned waiting for interesting companies to execute on RIFs and other cost saving measures, to get those plans behind them before they would invest in the company.

Across the board, the most common question I’m asked, and that I am asking of investors and acquirers, is this: "What are you seeing?" No one for sure knows what will come, but most of us on this side of the pond are seeing the same thing and coming to a shared conclusion – the first quarter of 2023 will be a pivotal period that shapes how M&A and fundraisings for the rest of the year (and perhaps the following year) will look. We’re all expecting that a growing number of companies will be racing toward a shrinking number of opportunities.

As this is the season of predictions and guidance for the new year, here are ICON’s thoughts on what companies seeking capital or an acquisition should do to get ahead of this chaos:

• Focus on burn: Not just on cutting costs, because that could become a self-fulfilling prophecy that chokes growth and innovation, ultimately dooming a company. Instead focus on what is included in your burn. Marketing a company for a financing or acquisition is financial artistry. Finding adjustments to raise pro forma EBITDA is one way to improve your margin story.
  
• Get noticed: According to Pitchbook, more than 17,000 tech companies raised venture capital this year. Nearly 8,000 more have been acquired by strategic players or financial investors. Rising above the crowd is difficult, but critical. Start building strategic relationships now so that when the time comes and your name is mentioned, the response isn’t “Who?” It’s a strategy I call 'strategic business development'.
  
• Be prepared: Many companies are still operating like it’s 2021. For many, it seems hope is still in the air. I was once told that hope isn’t a strategy. Many companies will certainly fight through this potential upcoming recession, and many will come out ahead. But the best companies will have well thought out strategies for how to persist, which should include a mix of operational, bizdev, and corporate development options.

Bytes from the Bay brings insight and intel from ICON’s tech dealmakers based in the Silicon Valley. Stay tuned for a monthly download of M&A musings, fresh from the global heart of high technology and innovation.