EisnerAmper Blog

Technology and Life Sciences Blog

Private Equity in the Technology Space

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August 21, 2015

By Brendan Freidrich

EisnerAmper’s San Francisco office recently hosted a meeting of the minds among seventeen prominent Bay Area technology leaders. “Private Equity in the Technology Space” addressed some of the increasingly visible issues concerning the funding and valuation of what seems to be an endless wave of new technology companies. Moderated by EisnerAmper’s Mike Morris (SF), along with John Pennett (NJ), Dan Heller (SF) and special guest, Nick Ellis, founder of data-driven talent management company Hirabl, the group identified and analyzed current major shifts in venture capital and private equity investment in the technology sector.

The supply of venture capital and private equity in the technology space has increased tremendously in recent years as investors seek higher returns in a low interest rate environment. Additionally, the advent of new funding platforms such as Funding Circle has increased access to alternative sources of capital and made it easier for new companies to obtain vital infusions of working capital. As a result of this influx, valuations and acquisition prices for new ventures are at an all-time high, and investment funds have begun selling off some of their portfolio companies. However, inherent problems in the market such as arbitrary valuation multiples are troubling both potential buyers and sellers as fund managers try to answer the most important question: Is this a good deal for my investors?

The panel weighed in on the subject and talked about debunking the “unicorn theory,” a model in which one amazingly lucrative success in the portfolio more than makes up for a series of smaller failures. Both private equity and venture capital groups are trending away from trying to hit these figurative grand slams and instead are starting to concentrate on hitting a more frequent string of singles and doubles.

When asked how he identified these kinds of opportunities as an entrepreneur, Ellis cited the concept of “negative space” in art and explained that instead of simply jumping on board a trend, he looked for new openings forming in the market spaces surrounding the trend. (As an aside, my thoughts at this juncture were on the potential kinds of products and services which might arise if driverless cars ever become the norm.)

Despite all the excitement in the technology space, there remains much uncertainty in the world of start-ups. What will prevent valuations and the supply of capital from shrinking when higher interest rates make other forms of investment more attractive, and how can that risk be managed? The financial structure of emerging companies is becoming increasingly important as PE & VC groups turn their focus towards shared-risk models which are becoming popular for aligning investor and entrepreneur interests.

A growing trend in the issuance of convertibles over traditional equity stakes, for example, encourages entrepreneurs to be responsible in managing their funding and ultimately softens the blow to investors if and when a venture does go belly-up.  In addressing the question of profitability for their investors, fund managers are taking a more holistic approach by looking to other metrics and factors besides valuation multiples and projected cash flows when trying to make informed decisions.

To that extent there was unanimous agreement by the panel: Sound investment decisions often stem from backing the right person, as well as the right company.

Virtual Wallets

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August 11, 2015

Katz_DavidBy David Katz, CPA

As virtual wallets became more common, it was only a matter of time before the big players wanted their piece of the market. And with that, Google Wallet and Apple Pay have gained traction, relying on their brand and pushing to make paying with your phone more widely accepted at retailers. 

Both companies have made strong plays in 2015, foreseeing a market opportunity where a retailer would accept either Google Wallet or Apple Pay, but not necessarily both. For Google, the company announced the acquisition of the intellectual property of the carrier-backed competitor Softcard, intending to integrate it into Google Wallet and bundle it with wireless service providers. For Apple, they were able to snag Best Buy and Target, who announced they would accept Apple Pay for mobile application purchases and then make it available in all stores towards the end of 2015. 

While other competitors remain, consumer adoption still appears to be hesitant. Widespread use may be dependent on the use of incentives (such as discounts or reward points for use) and is certainly tied to availability at retailers, a big consideration for a consumer to fully leave their wallet at home. And with hacking scandals seemingly each month, will consumers get over the hump of being comfortable that their credit card data is stored on their phone? Leaving your phone in a cab is daunting enough, but doing so with your entire banking information stored in one app, no matter the security, takes it to a whole new level. Still, if paying with your phone is going mainstream, you’d have to figure that these are the companies to work that out.

MetaProp Launches Real Estate Accelerator

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June 30, 2015

Kreit_SteveBy:  Steven Kreit

EisnerAmper is a strong supporter of technology infrastructure across the U.S. An example is MetaProp NYC.

MetaProp NYC recently announced the launch of its application process for an inaugural 16-week program geared to technology-driven startups in the real estate sector.

The program, which will accept eight companies per cohort, will provide growth services, mentoring, intensive courses and funding for a select group of companies. MetaProp NYC will invest an estimated $4-5 million in approximately 40-50 startups over the next five years, with the goal of launching and growing the next generation of leading edge real estate technology companies. Applications for participation in the program open on June 16, 2015, and selections will be determined and orientation will kick off in August 2015. The program will culminate in a Demo Day to partners, investors, VCs and media.

MetaProp NYC has five founding corporate partners including EisnerAmper LLP as well as Zillow Group, Warburg Realty, DLA Piper, and News Funnel.

Tesla’s Powerwall Raises Questions

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June 18, 2015

Katz_DavidBy David Katz, CPA

For most, the monthly electric bill is just as certain as those other items in the familiar adage: death and taxes. So will Tesla Motors’ announcement of its intention to enter the energy-storage market change that? With an anticipated price of $7,000 to $9,000 to the consumer, the Powerwall system is a rechargeable lithium-ion battery that would store solar energy to use at night. 

But will there be demand or will it take years to generate the interest that the Company’s cars have only now begun to see? It will vary and depend on the incentives states offer for the installation of renewable energy power. Additionally, it remains to be seen whether this is a solution to be a full replacement for home energy needs, or a different way to provide emergency backup power (replacing gasoline or natural gas generators). 
What does seem clear is Tesla CEO Elon Musk’s vision and motive: As founder of another company that builds home energy-storage systems to be linked to rooftop solar arrays, he has a vested interest in the success of home energy options. 

So while Musk touts the Powerwall’s ability to keep the demand for energy down, helping the energy grid during times susceptible to black out, Tesla will need the average consumer to buy into the up-front cost and deal with the potential penalties from utility companies, some of whom have moved to impose extra fees on those who install renewable energy resources. Yet, for a Company with a stock price that has grown in excess of $250 (from its IPO price of $17), these challenges are far from new.

Wearable Technology Devices

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June 9, 2015

Fogarty,MarcBy Marc Fogarty, CPA, CFE

Many science fiction movies have depicted how a particular technology seems good in the beginning but then goes rogue and becomes an uncontrollable anti-humanity threat that needs to be destroyed. No wonder new technology can be met with skepticism and fear! And it’s a tech company’s job to overcome that fear.

Today, there are electronic prosthetic limbs and virtual reality goggles that let us explore the surface of Mars from the safety of our own planet. What’s perhaps most amazing is that a lot of technological advances are within reach of the average person. In fact, maybe the phrase "within reach" is understated because these technologies can actually be worn by the user. "Wearable technology" is a large, rapidly growing sector that we will surely be hearing more about in the months and years to come. Here are two wearable technology products that are doing a successful job at blending the human experience with technology in a way that will hopefully help us overcome our technology anxiety.

GoPro, Inc. makes high-quality video cameras that are small enough to be attached to people and objects and go places that a traditional camera could not go. If you haven’t watched the GoPro Hero commercial, I recommend that you do. I’m not saying you should buy the product, even though it does a pretty good job of making you want one, but the video depicts how technology can record the intimacies of the human experience. It’s an uplifting video that shows humanity at its best and strongest. Maybe ordinary people can do extraordinary things and what better way to share it than to wear a GoPro camera?

The next wearable technology that is on many people’s minds is the Apple Watch. When it was first announced, I thought to myself, “Why do I need another tech gadget that virtually does the same things as the phone that I already have?” Then I read a blog in The New York Times from someone who wore the watch for seven days and it made me realize, I really don’t have any technology like it. The most interesting part for me was that the watch will pulsate differently for events such as a text from your kid vs. a friend’s post in Facebook. Pretty soon, like Pavlov's dogs, your brain starts to recognize what those signals mean without your having to think about it. For example, if a person works at a computer all day, they can set an alarm to remind them to stand up every hour and take a break. The brain automatically begins to recognize the alert pulse and the person automatically stands up without thinking about it.

Wearable tech companies hope to convince the public that being "connected" to the technology can enhance the human experience. By appealing to people’s “human” nature, these innovative companies are making technology less scary and their products more tempting to the average consumer.

LinkedIn Shows a Plan for Long-Term Growth

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May 19, 2015

By Marc Fogarty, CPA, CFE

Fogarty,MarcLinkedIn’s revenue is not driven by advertising but by sales of premium subscriptions and sales to employment recruiters. LinkedIn posted a first quarter 35% increase in sales which exceeded estimates. But recently they took a tumble in the market of about 25% after the company's forecasted second quarter sales did not meet Wall Street's expectations. So how can LinkedIn experience revenue growth without using advertising as a revenue stream?

In keeping with the theme of past blogs that touch upon the Synergies in the Tech Acquisition Market, LinkedIn is joining the ranks of tech companies who are acquiring businesses with “complimentary” services. LinkedIn recently announced the acquisition of Lynda.com for $1.5 Billion. Lynda.com is an online training resource that teaches business, technology, and creative skills. As a subscription-based service, they also serve corporate, government, and educational organizations. In the press release, LinkedIn’s CEO commented, “The mission of LinkedIn and the mission of lynda.com are highly aligned. Both companies seek to help professionals be better at what they do.” The deal is expected to take place during the second quarter.

Even though LinkedIn still has advertising as an optional revenue stream, LinkedIn’s “synergistic” acquisition could affect their longevity and long-term profitability in a more palatable way to LinkedIn users.   

Etsy IPO Follows a Different Path

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May 14, 2015

Katz_DavidBy David Katz, CPA

Etsy, a company that enables the craft and entrepreneur community to sell handmade and vintage products online, took a unique path to their IPO. Unlike Facebook's IPO, which was virtually inaccessible to individual investors, Etsy decided that their IPO should retain their sense of “community.” They made provisions for their customers to have access to their initial stock offering and limited the number of investment bank houses that could purchase stock before their public debut.

Etsy’s IPO was priced at $16 a share and the pre-IPO amount of stock was capped for retail investors at $2,500. The possible goal was to end up with more individual shareholders in the IPO, which would help stabilize their stock price. In theory, individual investors who are Etsy buyers and sellers may hold onto the investment rather than sell it for a quick profit. It was also rumored that when Etsy met with big institutional investors before the IPO, they focused on investors that were interested in owning the stock as a medium- or long-term investment.

Why would Etsy possibly make their IPO accessible to more individuals and court long-term institutional investors? Etsy reported on its 2014 form S-1 a $4.9 million net loss on $108.7 million in revenue. In fact, they posted net losses for the past three years. With the injection of cashflow from the IPO, Etsy might be able to accomplish goals which would increase their profitability. A strategy like this could take some time to bear fruit and a dedicated individual who believes in the company, or a long-term institutional investor, would give Etsy the time needed to follow through with a plan.

Regardless of the logic behind the decision, one thing is clear about this IPO. As a viable alternative to “big box“ retailers, Etsy has succeded in becoming a “big“ company while also maintaining their image of “accessibility“ to the average small-time vendor and consumer.

EisnerAmper is an independent member of Allinial Global.