[Editor’s note: This post was co-authored by Moss Adams partners Ken Salgado (based in Southern California) and Derek Dowsett (Silicon Valley).]
It’s early in the year, and although there are a number of positive trends building, it’s hard to make overly optimistic predictions. But based on the data we currently have, 2011 could be a very strong year that marks a major milestone in the economy in general and in the technology sector in particular. The chief expectation right now is that the IPO markets will return, mergers and acquisitions will continue their upward trend, and investors and entrepreneurs will get rewarded with increased valuations.
Before we look too far ahead, though, it’s important to note that we’re in the middle of a moderate recovery that must continue for a robust forecast to play out. The momentum began to take hold in the third and fourth quarters of 2010, with increased deal flow, merger activity, and a strong transaction pipeline going into 2011. Transactions were completed at a hurried pace, and valuations are trending upward. We’re seeing increased inbound interest from strategic acquirers, oversubscribed venture rounds, and a long list of IPO hopefuls with registration dates pegged between the second and fourth quarters of 2011.
The technology sector continues to lead all industries in terms of post-IPO performance for new listings in 2010, and we expect this trend to continue and even increase, given those expected to file in 2011 and 2012.
There’s still lots of money on the sidelines, and while more of it will be put to work in 2011, it will continue to be at a cautious pace and with intensive due diligence. And it’s important to note that even a slight negative connotation in the global economic landscape could bring this to a halt.
A number of companies are in registration today. In addition to LinkedIn’s recent filing, the potential IPO pipeline includes big brand-name companies such as Groupon, Zynga, Facebook, and Twitter. If successful, these market leaders will allow the next tier of companies to enter the markets, making 2011 truly a breakout year. We’re seeing an unprecedented number of pre-IPO technology companies aligning themselves to enter the markets in 2011—but will their efforts be rewarded with an open window? It appears so. Even in the down economy of 2010, in terms of IPO activity technology was second only to the financial services industry.
Early-stage funding should continue to increase in 2011, but we’ll also see later-stage deals with large values. Many investors are passing up modest returns offered via M&A and are instead