With tech industry valuations plummeting this year and a lack of initial public offerings (IPOs), the bubble has burst for growth equity investors, a key factor enabling the sector’s rapid growth over the past decade. Many people wonder if
In recent years, a new wave of growth investors has fueled a surge of multi-billion dollar privately held startups that have reshaped established industries, invented entirely new ones, and created incredible value in the process. did.
While many traditional venture capitalists focus on early-stage companies that have not yet achieved product-market fit, funding from a new class of investors pioneering different investment models has significantly increased. Increased. According to Bain & Company’s analysis of data from S&P Capital IQ, Pitchbook, and Dealogic, growth equity’s share of investments in the tech sector increased from his 19% to 27% from 2017 to 2021. This is the largest increase of any investment segment.
These growth equity investors have committed significant amounts of capital, often in excess of $100 million in a single funding round, allowing relatively mature companies to pursue breakthrough innovations and grow at an unprecedented pace. We help you scale. They often double in subsequent funding rounds and establish themselves as long-term investors by holding shares in IPOs and beyond. As a result, newly formed growth specialist funds, hedge funds, refocused VC firms, and other growth equity investors have become the financial partners of choice for many fast-growing companies.
Thanks to this new model, capital is no longer the limiting factor for rapid scaling of private companies in recent years. About 30% of companies going public in 2020 raised more than $100 million before IPO, compared to 7% of him in 2015. Grows to a huge private valuation, Uber’s IPO hits over his $70 billion, and helped Kuaishou Technology debut in his $150 billion to his $160 billion range .
The growth stock’s first big test comes in 2022. By May, the cumulative market capitalization of the fastest-growing software-as-a-service (SaaS) stocks had fallen by almost 70% as interest rates hit the high-growth stocks and IPO markets, according to Meritech. Tech IPO volume in the first half of 2022 is down 80% from the same period last year. The number of late-stage funding rounds has collapsed. Prominent investors began talking about Black Swan and the difficult times ahead. Companies that once couldn’t hire fast enough began letting go of talent.
Was this the bursting of the growth stock bubble?
It’s an understandable question, but growth equity has fundamentally changed technology investing over the past decade. There is a strong argument that the fundamental changes that have led to the creation of the asset class are still healthy as technological innovation continues to create opportunities for rapidly expanding companies.
Innovative technology continues to help build and scale disruptive businesses. Cloud computing makes highly scalable data centers and advanced capabilities readily available to fledgling companies. Cloud-native companies such as Snowflake, Databricks, and GitLab have found success with cloud data analytics, artificial intelligence, and DevOps tools. The modularity of their technology, the way applications communicate via an API-based architecture, has created an ecosystem of complementary solutions that compete with Monolith as a whole. And the next generation awaits in the wings of emerging technologies such as the Internet of Things, quantum computing, artificial intelligence, virtual reality, autonomy, new spaces and the web. Supported leader.
Business model innovation
Business model innovation has changed the way technology is bought and sold. SaaS customers no longer need to install and operate purchased technology themselves. Thanks to open source, freemium, and a product-driven growth model, today’s frontline users can both try and buy the technology.
Other business model innovations have lowered barriers to entry in industries previously thought immune to technology disruption, such as financial services, healthcare, and even space. Moreover.
Even in a world where geopolitical tensions increasingly affect the technology industry, today’s innovation is still a global marketplace, fostering a fertile global competition for ideas.
steps to take now
New models of innovation already have strong roots, but the market shocks of 2022 will have ripple effects. The once-rising star needs to focus more quickly on its path to unit economics and profitability.
Fallen angels who haven’t lived up to expectations can benefit from thinking like a private equity investor. What assets will they sell to focus on their core business?
Incumbent technology leaders have a unique opportunity to fundamentally rethink corporate innovation patterns. After doing our homework, we aggressively pursue mergers and acquisitions (M&A), partnerships with innovators, and talent acquisition. In working with companies around the world, we’ve found three steps to be the most important.
Develop skills to perceive chaos
No industry or company is safe from disruption. Invest in customer relationships and gain a deep understanding of customer needs. Enable customer and competitive intelligence to meet the task of monitoring the landscape and informing strategy. Evaluate where you can partner and integrate with the next generation of companies, including using corporate venture capital as a means to better understand, partner with, and nurture the ecosystem.
commit to major investments
Most companies have to become technology natives. This may require new organizational structures, talent, culture, and budgeting. Streamline your innovation bet by focusing resources where you can win and cutting out small, half-baked efforts.
Reassess your M&A strategy for an environment where it remains difficult to buy winners due to growth-backed valuations and founders who find selling to big companies less attractive .
Get better at scaling
Incumbents may not be as innovative as founders can raise $100 million, but they may lack disruptors such as business ecosystems, customers, and often a strong core business. have valuable assets.
Established companies that have found ways to unlock the untapped potential of these assets and scale them can rent a page from Unicorns and embark on a whole new growth trajectory.
Whether they are direct competitors, complementary partners, or acquirers, companies are wise to operate on the principle that business innovations backed by growth stocks take hold.
Christian Buecker, Greg Fiore, Dunigan OKeeffe, and Sean Tanaka are partners in Bain & Company’s Technology, Cloud Services, and Private Equity practice. They are based in San Francisco.
Opinions expressed in commentary articles on Fortune.com are solely those of the authors and do not necessarily reflect the opinions or beliefs of Fortune.
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