Last year, tech companies struggled to maintain the funding and growth they saw in the prior two years. Interest rates increased, and venture capital investments decreased for the industry.
Investors balked at the high cost of “growth at all costs.” Instead, they looked for efficient, organic growth and evidence of profitability. When mature companies with compelling profitability stories tested the IPO waters in September, they earned funding. But high interest rates led even these companies to underperform. M&A activity was similarly depressed.
The one bright spot was generative AI, which moved quickly from “someday” to “everyday.” After launching in November of 2022, ChatGPT reached 100 million users in January of 2023.
There is hope for growth in other sectors. Through the CHIPS Act, $52 billion became available, along with tax credits, loan guarantees and local funding. PE firms and corporations have impressive amounts of cash on hand.
Get ready for IPOs and M&A to recover
IPOs were up in 2023, and Q3 saw three large IPOs, including the ninth largest in the last twenty years. But the surge some predicted has not come to pass and the IPO window remained closed. Companies thinking of going public have refocused on 2024.
The capital markets will continue to be cautious, demanding clear paths to profitability and growth. Macroeconomic factors such as interest rates and recession fears will likely continue. The larger picture could be further complicated by the presidential election.
That said, the market is unpredictable enough that companies should prepare for a change in investor sentiment. If investor enthusiasm rekindles, it’s important to be ready.
M&A activity was also down. Even a comparatively favorable metric, deal activity, was down 10,000 deals from 2021’s high. The total volume was dramatically off.
But there is cause for hope. “Many of the factors that led folks to believe M&A would recover in Q3 are still present,” said Grant Thornton Transaction Advisory Partner Bryan Walker. He cited increased hold periods and accumulating dry powder in Private Equity Firms — at $1.4 trillion, it’s only 10% below all-time highs. Corporate cash reserves are similarly flush. In addition, the recovery of the NASDAQ could drive up public equity premiums. This, in turn, could influence private valuations. But the failure to predict the tepid activity of the second half of 2023 has made “cautious optimism” particularly cautious.
Given this mix of persistent sluggishness and abundant dry powder, it is time for companies to pay special attention to their exit strategies. IPOs often follow three to four months after the market has started to trend up. If companies want to attract investor attention and optimize their valuations, they need to take advantage of that market window.
Companies should consider preparing five elements, about 12 to 18 months before a possible public offering:
1. An appealing equity story for investors
It’s important to frame that story, relate it to your risk profile, demonstrate differentiation, and outline a growth strategy founded on your business model.
2. High-quality and timely financial information
As a public company, you will have to make periodic filings with the SEC, prepare for audits, comply with Sarbanes-Oxley requirements, and show evidence of good corporate governance.
3. Robust corporate structure
Do your systems and processes facilitate your strategy and drive your financial results? Can you respond to business contingencies and market conditions?
4. An investor relations strategy
This should include earning calls, conference calls, road shows and investor presentations.
5. Capital structure and short-term savings
Look for savings that can be achieved with money raised from an IPO.
“If your public float exceeds $700 million or gross revenues exceed $1.235 billion, new requirements attach — and you’ll have to catch up. If in doubt, act like a public company.”
Emerge from “emerging growth”
Discipline, preparation, and agility are especially important for Sarbanes-Oxley compliance. Your controls and processes need to be impeccably documented. And, because valuations change, you may enter the process as an emerging growth company. “But, if your public float exceeds $700 million or gross revenues exceed $1.235 billion, new requirements attach — and you’ll have to catch up. If in doubt, act like a public company,” advised Andrea Schulz, National Managing Partner for the Technology, Telecommunications and Media Industry at Grant Thornton.
Although the specifics are different for M&A, the success factors are very similar. You still need a compelling story and historical results with accessible data that stands up to scrutiny. The most relevant KPIs will vary by company. For example, a SaaS company will want to show strong annual recurring revenue.
Consider how the CHIPS Act facilitates growth
Passed in 2022, the CHIPS Act supports innovation, competition and national security while striving to help depressed areas. It sets aside $50 billion, with $39 billion going to incentives for manufacturers and the remaining $11 billion going to R&D.
Application involves a three-step process:
1. Statement of Interest
This helps CHIPS administrators understand where you might fit, and adjust staffing to meet the volume of applications.
2. Pre-Application Process
You’ll be expected to provide a detailed narrative as well as information on your ownership structure, sources and uses of the funds, and your company’s financials. You also need to specify what type of support you are asking for, such as direct grants, loans or loan guarantees. That process can be surprisingly involved.
3. Full Application Process
The full application process requires detailed financial modeling. If your model is insufficiently robust, you might be denied funding. Given this, you might need legal and professional advice and, in some cases, project management support.
To apply, you need to be a U.S. manufacturing or manufacturing supply chain entity located in the United States. Funds pay for eligible costs, which include capital expenditures to build or retool facilities as well as necessary equipment. Supply chain applicants may request support to construct or expand facilities. Applications are accepted on a rolling basis. You’ll want to seek feedback from the CHIPS Program Office (CPO). Although it is still too early to determine how long the process will take, similar processes have taken 12–18 months. Direct grants can account for about 15% of the total funding for the project. The CPO will supplement that with loans or guarantees up to 35%.
You need to show that you have sought funding elsewhere. There is also a state and local matching grant requirement, and it is important to show community benefit for those matching fund applications.
Once a grant is awarded, there are some compliance requirements. These include wage compliance, as defined by the Davis Bacon Act. In addition, there is a 25% tax credit, codified in §48D of the tax code, for investing in facilities. Because it is refundable, companies do not need to pay the tax to benefit. While the disbursements apply to the supply chain, this is limited to investments in facilities that manufacture semi-conductors or the equipment that manufactures semi-conductors. Within those parameters, allowable costs are expansive, although space dedicated to administrative functions must be carved out.
Construction must begin before 2026. Any investment in China or other countries of concern within ten years of the placement of the facilities disallows the credit.
Think of AI as a business tool
Most companies are implementing or exploring AI. They are focusing on cybersecurity, compliance, explainability and personal privacy applications.
Amid the enthusiasm, it’s important to be vigilant about the risks and pitfalls. There are currently few AI regulations, but more are on the horizon. Whatever the government does, it’s important to actively foster trust.
Of the many AI use cases, five are the most popular:
1. Automating accounting functions
These include auditing, accounts payable, and routine tasks.
2. Analyzing contracts and documents
By processing large documents and extracting information, this could revolutionize decision making.
3. Developing conversational finance
Chatbots could provide customer support and financial advice 24/7.
4. Streamlining financial reporting
AI can assist in the labor-intensive preparation of financial reports.
5. Managing portfolios — and risk
Given its capability to analyze historical data and generate scenarios, AI can help optimize asset management and run market condition simulations.
The technology promises to be even more transformative in the future, starting with your day-to-day business processes. AI could increase the efficiency and accuracy of contract drafting, invoice processing, and general ledger reviews. AI is also emerging as a tool for supporting the finance functions of business partners. This could take the form of enhanced financial forecasting and comprehensive scenario planning. It could also provide more robust business intelligence assistance in mergers and acquisitions, speeding up valuations and due diligence.
With so many possibilities, some companies aren’t sure of the first steps toward an integrated AI strategy. Grant Thornton Cybersecurity Risk Managing Director Caesar Sedek suggested, “Talk to your IT and security teams, to come up with your own internal proof of concepts and use cases. Make them small and manageable, and try to see how they fit your organization.”
AI promises to be revolutionary. But the smartest adopters will be nimble and iterative.
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