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January 5, 2016updated 22 Sep 2016 12:00pm

Unicorns or unicorpses? What will 2016 bring for tech stock investors?

Analysis: A slow down in valuations may happen, but tech still offers lots of investment opportunities.

By Charlotte Henry

2015 was generally a good year to be an investor in technology firms with various firms being brought public, and significant deals being done with private firms too.

Andy Kaye, managing director at full service investment bank William Blair, told CBR: "looking back tech was particularly active in 2015, and we saw some strong trends.

"What we see is an equally strong pipeline going into 2015 of good quality companies that will have a shot at going public."

Kaye said that in 2015 there were "31 tech IPOs, 12 were software, 6 were internet, and 5 were fintech." He notes that the tech IPOs performed slightly higher than other sectors last year.

Those numbers make particularly pleasing reading for the rapidly growing fintech space, something reiterated by new data released by London and Partners today.

The data shows that since 2010 UK tech firms have raised a combined sum of $9.7bn in VC funding, with $5.2bn raised just in London, with fintech funding a major chunk of that. For example, in 2015 alone loan provider Zopa raised $106m, while money transfer firms TransferWise and WorldRemit raised $58m and $100m respecively. Transferwise is valued at around $1bn.

Eileen Burbidge, Partner at Passion Capital and Mayor of London tech ambassador said: "Today’s record investment figures offer further proof that the UK’s tech sector continues to mature. Investors are increasingly attracted by the diversity of London’s tech ecosystem but also our strengths in certain sectors such as FinTech."

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Another positive area for investors is cyber security, says Kaye, as "there’s a real need to develop solutions."

"There’s a real concern, and therefore we are seeing a new category of companies addressing real problems emerge. Some of them are going public, and some of them are trying to be private."

"The smaller cyber security plays are getting more VC money, and the consolidation you’re seeing private equity look to get involved in that," he adds.

In recent times Silicon Valley startups, and disruptive so called Unicorn firms, have been raising money at massive valuations. For example, in October 2015, Uber raised $1bn at a valuation of $70bn, having closed a similar round at a valuation of $50bn just a few months earlier.

Similarly, Air B’n’B, raised $1.5bn at a valuation $25.5bn in June 2015, despite losing $150m the year before.

Kaye said: "It’s a case of investors seeking out the category leaders, and in some of those, certainly AirBnB and Uber, have demonstrated clear leadership in that sector. I think the business model has additional room to expand.

Burbidge told CBR that there is a clear difference between the UK and US investment landscape. In the US "valuations got so far ahead of where we are here in the UK. I think here they’ve still be pretty sound, they’re based on business fundamentals. The businesses that are attracting things record levels of investment generally have really sound business fundamental, and actually profit margins, which is not always the case with other companies."

"The UK hasn’t been over optimistic," she adds.

Where does this leave their more middle aged competitors then, the original tech and web firms?

Kaye is clear we are seeing some winners and losers but also "overall consolidation" with giants like "Cisco, IBM, Oracle, quite aggressively Microsoft looking to shape themselves so they are in line with these trends."

George O’Conner, technology analyst at Panmure Gordon, goes even further singling out Yahoo criticism, which he says "looks like a car crash".

Despite the general positive outlook, yesterday’s start to the new year was a lot more rocky, with stock markets down and major tech firms both side of the Atlantic, including Sage, Google parent company Alphabet, and IBM seeing their share price hit on the back of poor Chinese manufacturing numbers.

Kaye says: "The slowdown in China has been gradual and is not a new symptom. We’ve seen a slowdown in China starting in 2013. As it becomes more in the public light then people are wary because of the implications, but definitely China’s been slowing down for a long time."

O’Connor says tech didn’t fare too badly in yesterday’s worldwide market tumble, and that it "feels like an in line as opposed to a beat" – i.e the sector was generally following the market of the time.

That’s not to say everything is fine in technology. Kaye says that some valuations are "an area of more concern", as they "got very aggressive, and therefore difficult to support on a continued basis."

He cites the example of Chinese firm Xiaomi, which "was raising a series of smallish rounds raising money at close to 3.5 to 3.7 times revenues, and that has bitten them because margins have come down, have contracted, and therefore it becomes an issue."

Kaye says that in general "it’s not a bubble, it’s a case that you’ve seen investors be extremely aggressive and take positions in a new generation of company, of companies that are evolving. These are new generation companies, the Ubers of the world, the AirB’nBs, they’re redefining sectors and therefore have been able to command higher valuations."

Jim Mellon, chairman at investment management firm Burnbrae broadly agrees, although he says "unicorpses will litter the landscape soon. "Truly disruptive techs will still attract dollars, but this will be the year that the mania will stop."

Looking further a field Mellon is bullish about a variety of sectors. "The areas I like" he said, "are robotics, IOT (industrial) and education related."

He believes that "med internet is overdone, almost all internet apps are toast, and ride sharing/taxi substitutes is the biggest bust-in-the making in history."

Most controversially, he adds "Apple is beginning to rot at the bottom of the barrel."

Although not putting it quite the same way, both Burbidge and Kaye agree that valuations will start to decrease somewhat.

I think we’re already starting to see it," said Burbidge. "In q4 we anecdotally heard about that from our networks, people that we took in the

West Coast and people that we talk to in Asia . My point again is I think in the UK you want really see too much of a reaction or a correction because I don’t think we ever got to that level of exuberance."

2016 then looks set to be a fascinating year for anyone interested in putting money into future services and technology. While it may have had a somewhat difficult start on the stock markets, these industry experts clearly think there is much scope for optimism, particularly in the UK.

Whether we see anything like the kind of valuation mania we saw in 2015 remains to be seen, but a cooling off period seems likely. That probably won’t do tech firms, or their venture capital investors, much harm.

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