After a buoyant 2019, strategic and financing activity within tech has taken a hit from COVID-19, with Q1 2020 year-on-year deal values down by 26%.1
Against this backdrop, Robert Peck, Chairman of Global Internet Investment Banking, considers how the coronavirus pandemic compares to past crises that affected the tech sector, its immediate impact now, and possible trends that may rise from it to shape the future.
The two natural comparisons to the impact of COVID-19 on the tech sector are the dotcom bubble in the late 1990s and early 2000s, and the 2008 global financial crisis. There are some similarities among all three, but there are also significant differences that should be considered when looking for lessons about what the tech sector is experiencing today.
The dotcom bubble was, in essence, a tech sector-specific event where extreme overvaluations led to sudden contraction, whereas at the heart of the 2008 financial crisis was a shaking of confidence in global economic viability. Tech M&A volume and deal counts showed dramatic declines through both the dotcom and financial crisis recessions, albeit less dramatic in the latter.
Initial public offerings also dropped significantly both during and after the dotcom and global financial crises. As the data show, IPO issuance resumed more quickly and at more robust levels, both during and after the global financial crisis.
Therefore, the economic situation created by COVID-19 is more similar in nature to the global financial crisis, albeit much more widely spread across sectors. In retrospect, the uncertainty in 2008 also acted as a catalyst to produce innovation and growth in areas such as remote communication, the sharing economy, and other tech-enabled services, which may also happen now.
With global economies in various stages of lockdown, tech companies and platforms that cater to activities such as travel, transit and co-working are seeing their business models challenged. On the other hand, service-focused internet technology companies that are helping people navigate the new normal of day-to-day life have seen a massive increase in usage.
These behaviours could become so embedded that they permanently cannibalise or replace some of the demand for face-to-face interactions in the long term, especially those that take more time, cost more or involve personal health risk. Likewise, with the dramatic rise in working from home, there is a greater opportunity for companies that can deliver improved connectivity, data compression and security.
Post COVID-19, some of the tech sector is likely to become a buyer’s market. Distressed companies and venture capitalist portfolios that haven’t been able to access necessary funding will be looking to sell at reduced valuations. That won’t be the case for all; some companies have recently done debt deals that have improved the robustness of their balance sheets.
Similarly, certain companies, particularly in the software and internet space, are eyeing possible IPOs in the second half of the year, pending a return of stability to both the tech sector and other key areas such as equity, credit and oil markets, even with the traditional uncertainty that accompanies the US election cycle.
It’s likely that future investor interest in tech will fall into three general types. First, in the companies that have survived the crisis either by pivoting their market offering to sustain their balance sheet, or by using debt or equity to prove their long-term viability to investors.
Second, in ‘Big Tech’ companies that have benefited from the crisis in terms of increased consumer use or sales. These companies are likely to emerge stronger and more valuable, helping to sustain substantial investor interest.
Third, and much like 2008, there will likely be more intense investor interest in the kinds of nascent tech that have found their market during the COVID-19 crisis, such as the next generation of streaming and video communication, remote security and tele-medicine.
1 Source: Global Data, https://globaldata.com/covid-19-slowed-tmt-ma-by-26-q1-2020-with-worse-to-come/