A Global Tech Race for the Investment Pie

Home to both major players like Amazon, Facebook, and Google and smaller new entrants such as GreenDeck, Slack, and StethoMe. The technology sector is an inescapable, huge investment opportunity for investors. In a broad sense, the roadmap of technology investments begins from the point of research, creation to the distribution of technology-based goods or services. A forecast from International Data Centre (IDC) predicts that spending on Information and Communications Technology (ICT) to eclipse $4.3 trillion this year, particularly, new, and innovative ICTs being the cornerstone of investments this year. As countless new technology inventions emerge each year, it is undoubtedly that the tech investment pie will continue to grow at an exponential rate.

Albeit that, tech startups are failing at an alarming rate. Based on gathered data, 70% of the tech startups, notably, 97% of consumer hardware entrants pulled their shutters in less than two years. Various reasons accounted for the flameout including the lack of funds, contradicting the forecast of investment for innovative technologies, and new startups. As such, this could reflect a concentrated investment in specific players or niche offerings of the market.

Tech’s Shrinking Investment Pie

Big Boys = Big Bully?

Copycat behaviour has been a detrimental factor for the smaller players in the technology arena. Whenever new entrants or smaller startups hit onto something innovative with high potential, often they invite the scrutiny of the tech giants.

With deep pockets, talent, data, and technology, the big tech companies such as Google and Microsoft can easily replicate and enhance any innovative inventions that are not fully patent protected – a common situation for most digital products in the market due to its high application cost which displaces the unique proposition of the startup by setting up the weak new entrant against a more formidable competitor. Besides, large corporations are also more inclined to invest in tech giants for the accessibility to the range of products bundled with the new and enhanced product. An example would be communication platforms, Slack and Microsoft Teams.

Slack, the fast-growing messaging startup made its mark and was nearly acquired by Microsoft. However, the acquisition fell through and shortly after four years, Microsoft Teams, a communication tool with similar product features as Slack was launched.

Although Microsoft entered the field of team communications later, it managed to acquire 20 million users as of November 2019, 8 million users more than Slack. Notably, larger businesses preferred Microsoft Teams over Slack due to the bundled deals along with its other business staple programmes like Microsoft Office (Refer to Figure 1 below).

Figure 1 -Survey respondents from Global 2000, Forbes list of the largest 225 private companies and the US government
Source: ETR

As such, without equal footing, tech startups are often left behind in a race against the big giants, as investments are often redirected to the major players with more robust backings as well as more credibility, more cost-savings, and more comprehensive product features.

Aversions for Investments in Startups

Other than industry contenders, factors that affect investments in startups include incompatibility of business nature to investors and regulations. Investments for early-stage or mid-stage tech business entrants are filtered out early in the deal-sourcing process on the grounds of deal size, fundamentals, and valuations alone. For example, tech startups are excluded from the selection choices of private equities that only focus on investment options such as buyouts and convertible bonds, limiting the reach of startups to these investors.

There is a minimum level of Ebitda that businesses need to meet and many tech startups are still in the early stages of growing and hence may be generating negative cash flow and unable to hit the quantum of profit required by the private equity firms, thus further restricting the tech startups from getting into the investment list.

Apart from that, many private equities still prefer the more traditional investment sectors of consumer, education, and healthcare. With the current coronavirus pandemic, it is even more attractive to invest in the healthcare sector, which is seeing a boom in investments. 

The Pandemic Push

As the coronavirus pandemic upends the entire global economy, investments in seed and early-stage startups nosedived. The investment crunch is felt globally by tech startups as investments in India and China shrunk by 85% and 50%, respectively, during the first two months of the virus crisis. Silicon Valley, the global centre of technological innovation is also not spared from the slowing valuation growth as capitalists placed their bets on older and more established startups. A study revealed that later-stage startups generally experience smaller price increases in percentage as compared to larger companies. As the pandemic continues to rile markets, the clear trend is that larger establishments are being prioritised above new entrants as part of a defensive investment strategy – to protect existing investments.

Outwit the Giants

Even though it may seem impossible, new tech startups can thrive in today’s business world.  Although an advantage of big companies is their brand equity as well as their vast resources that are used to achieve economies of scale and set prices below their competitors, these tech giants are also often crippled by bureaucracy and red tapes, resulting in slower responses to customer responses. For instance, large businesses often suffer from “Innovator’s Dilemma”, a common business pitfall that market giants fall into as they fail to seize the next big innovation while being overly engaged in securing consumers. Established companies would overlook the adoption of disruptive technologies in view of focusing on investors’ demands and factors that promise higher profits. Thus, preventing them from enhancing their products or service offerings with better technologies.

Tech startups, on the other hand, have fewer established bureaucratic practices resulting in the company being able to adapt their products and services to customer requests and pivot more quickly to market changes, making them more effective than their larger counterparts. These new entrants also have a greater capacity to develop one-on-one, “real” relationships with their clientele, crucial for customer retention. As the adage goes: the devil is in the details. A personal touch and high-quality service is becoming essential as more consumers are looking for the personalised element when choosing products or services. According to the Oracle Retail research, more than 56% of the consumers value personalised offers during their shopping experience. Thus, focusing on a good product coupled with exemplary service would be the perfect combination for new tech startups to bourgeon.

Another approach tech startups could focus on is to deliver more tech convenience to consumers. Often, consumers have to settle for using the tech conglomerates’ products with its inbuilt systems and settings or risk ensuing issues such as difficulty in data transfer due to the incompatibility of systems. For instance, Apple products cannot be used with Android products due to different operating systems.

New entrants can enter the market with disruptive technology innovation, an open ecosystem versatility that not only enhances the market with more interoperability but also one that provides consumers with more choices.

Getting the Right Advice

The tech investment pie is undeniably growing. Although the investment proportions are skewing towards the tech giants, leaving behind increasingly smaller slices of the pie for tech startups, there is still hope for tech startups to succeed, as long as they are equipped with skilful navigation and suitable strategies. As a one-stop solution provider, Desfran offers a wide array of corporate advisory solutions for business in various sectors.

Contact Desfran today to better position your business to attract investors or obtain suitable advice before venturing into technology investments.

References

Worldwide ICT Spending to Reach $4.3 Trillion in 2020 Led by Investments in Devices, Applications, and IT Services, According to a New IDC Spending Guide, Idc.com

339 Startup Failure Post-Mortems, Cbinsights.com

10 Intellectual Property Strategies For Technology Startups, Forbes.com

Slack just taunted Microsoft with ‘OK boomer’ for running an ad campaign that looks almost exactly like one of Slack’s, Businessinsider.com

Startups still love Slack, but big companies are bailing, Vox.com

Tech startups finding few takers from private equity – for now, Businesstimes.com.sg

EBITDA Margin, Investopedia.com

Deal Roundup: Tech startup funding shrinks 85% as Covid-19 turns pandemic, Techcircle.in

How the COVID-19 pandemic is starving tech startups worldwide, Computerworld.com

Covid-19: Only 44 startups in Silicon Valley funded last month, Businesstimes.com.sg

Defensive Investment Strategy, Investopedia.com

Understanding the Innovator’s Dilemma, Wired.com

Consumers love a personal touch, reveals study, Retailcustomerexperience.com

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