Five things to consider that may impact your tech company in 2020
It’s quite a time to be leading and expanding a tech company. Gone are garages; in are WeWorks. Gone are WeWorks; in are coworking spaces with less high-profile publicity crises; gone are publicity crises altogether; in is a world health crisis.
Oh, and the world is still overheating.
For leaders of growing tech companies, there’s a lot to think about. In the spirit of consolidation, we sat down with professionals at CohnReznick, one of the largest public accounting, business, and tax advisory firms in the country, to recap five considerations for tech companies in 2020 and beyond.
Mergers and acquisitions are likely to continue pace
There were about $3.8 trillion worth of merger and acquisition deals in 2019 — a slight 4% slump from the year before, but that’s still a lot of deals.
Professionals at CohnReznick say 2020 should keep pace with M&A activity from years prior, citing low interest rates and large sums of capital available. Private equity firms and strategic acquirers will continue to show interest in tech firms: Last decade, almost a third of private equity investments went into tech.
That said, not all mergers and acquisitions will be exclusively tech — or rather, tech investing tech. In 2020 there’s potential that tech behemoths (you know the ones) buy off as many analog and retail competitors as they can. Although 2020 looks to be a year of market growth, simultaneous consolidation is likely too.
Regulatory ease has increased the volume of acquisitions in fields like finance and energy. The oil and gas sector, specifically, is in an interesting place as investment in new drilling technologies is starting to settle — leading companies to focus more on sales and returns. For tech companies with one foot in other industries, the pressure will be on to show investors revenue growth. 2020 is not a season of just showing promise. Click here for additional insights.
The election will make a difference
Like much of the country, appetite for buying tech companies is not politically-neutral. However, elections don’t always mean slow downs. M&A deals expanded in October, one month before the 2016 Presidential Election. Remember the AT&T / Time Warner deal? Occasionally deals make their way onto the debate stage.
Also worth noting — private equity deals into tech in the 2010s peaked in 2016.
But with the possibility of new leadership comes the possibility of change in policy. This time around, you can look for trade agreements with China, immigration, and interest rates to be top of concern. With a change in administration, the potential for policy overhaul could greatly affect the tech market.
One consideration that might also disrupt the status quo is state-to-state regulation of so-called gig-economies. Already, California’s A-5 bill has changed the way tech companies employ freelancers. Expect more changes state-to-state, and possibly at a Federal level too.
The intersection between governance and private markets to watch will be all about climate change. In his much-anticipated annual letter to other CEOs, BlackRock CEO Laurence D Fink set the tone for industry: Fink will be making sustainability a critical element in investing decisions, and he encourages others to do the same.
The only thing consistent about taxes is change
For all business owners, it’s important to pay attention to court decisions that can change tax liability not only when they happen — but also when they’re implemented. The Wayfair decision, for example, which was settled in the summer 2018, could begin affecting some state taxation this year. Technology Tax Partner, Shaune Scutellaro explains, “While new economic nexus rules resulting from the Wayfair decision were implemented in most jurisdictions in October 2018, the first round of follow up enforcement is likely still about to happen and companies should be prepared.”
In this vein, cloud-based or SaaS companies are especially advised to research new policies.
Other tech companies that should consider a tax-refresher are those who deal internationally, specifically in Europe. CohnReznick points to the “Tech Tax” in France — a 3% tax on large tech company revenues — as a possible precedent for future decisions.
“We could see this sort of practice expand across the globe,” explains Scutellaro, “and push down to thresholds that pull in traditional Middle Market companies.”
The company that eats cybersecurity news for breakfast stays cyber secure
Undoubtedly, security is at the top of mind for any leader of a budding tech firm. Expect the insecurity about security to continue — and for good reason.
New regulations like GDPR (General Data Protection Regulation) in the European Union and CCPA (California Consumer Privacy Act) are examples of the government tightening its scrutiny on consumer privacy. Leaders in tech will have to adapt accordingly.
Professionals at CohnReznick’s cyber security practice explain, “Tech companies will have to embrace for and make technological advancements in their own solutions or implement solutions in their environment that will help them with managing and responding both effectively and efficiently to the influx of consumers and users requests for how, why, and for what their data is being collected and shared.”
Regulation has been bubbling under the surface, but you can expect 2020 to be a first for enforcement. (Already in California companies, several high profile companies have been sued under the CCPA). You can also expect to see Federal legislation like GDPR hit the floor of the U.S. Congress in 2020 or 2021.
And beyond all that, Saas providers and cloud-based companies are likely to invest more and more in predictive and behavioral detection, driven by AI and ML. This will make consumers less and less anonymous, making the threat to privacy more and more dire. Companies are likely to face pressure to employ more multi-factor authentication as consumers’ concerns over privacy begins to affect their product usage.
Unicorns aren’t real, even though a few are
Last year was big for the so-called unicorn haircut. Well-known companies with significant brand recognition and engagement took early dips after moving forward with IPOs (see: WeWork). Expect the trend to be prevalent in 2020 too.
“Investors will continue to be cautious and look for companies led by strong management teams who can build a sustainable and profitable business while controlling cash flow,” explains Alex Castelli, Managing Partner of CohnReznick’s Emerging Markets Practice.
As you move forward in 2020, take note that revenue growth and customer acquisition continue to be primary drivers for funders, especially when in the public markets. As Asael Meir, CohnReznick’s Technology Practice leader, put it, “Marquee names have not been immune to downward valuation adjustments and will continue to draw scrutiny from investors.”
Generally speaking, the secret sauce to growth isn’t much different than years prior — it’s just that the variables facing tech leaders are piling on at a faster rate. If you were to downsize the considerations of investors even further, we’d recommend focusing on the following: demonstrated sales and returns, advancement in cybersecurity and compliance, and long-term sustainability. And, of course, keep a good team on your side.
Subject matter expertise
CPA, Partner - Technology Industry Leader
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