What do you see as the catalyst for future revenue and earnings growth?
We believe the market environment for technology companies is generally constructive with low interest rates, corporate balance sheets that are reasonably healthy, and competitive and regulatory requirements that support IT spending. Several of our portfolio companies are seeing improved demand as enterprise customers release some pent-up or deferred spending following the economic downturn. However, enterprise customers have become better educated buyers of IT and will demand a tangible ROI proposition from their vendors. During challenging economic times when innovation slows, we see more pricing pressure and risk aversion. This usually benefits the larger global technology names. But when innovation returns, large customers will be more willing to evaluate technology from emerging companies.
When considering an investment opportunity in today’s technology landscape, what target criteria do you seek from private growth companies?
At Summit Partners, our target profile has remained unchanged during our 26-year history. We invest in profitable growth companies with the potential for market or technology leadership. These companies choose to work with us because of our expertise in technology, healthcare and other growth sectors. They also value our experience in building category-defining companies and our track record of working with more than 300 companies.
What does it take for technology companies to go public in this market, and how can they differentiate themselves?
Following the 2009 rally in domestic equities, the IPO pipeline is filling with potential new listings in 2010. Underwriters and investors are generally focused on companies that can deliver above-average revenue growth and margin expansion over the intermediate term. However, the IPO market is highly sensitive to market volatility, and when volatility increases, fewer new issues actually launch.
Investors are still willing to award premium multiples to companies with a high degree of forward revenue visibility and high gross margins. These companies will typically have a sustainable competitive advantage built on intellectual property in a rapidly growing end market with durable growth trends. Interestingly, many investors will build an M&A premium into their valuation thinking for small or mid-cap companies, given the significant potential for continuing consolidation in many technology sectors.