Top Tier Capital Partners’ Jessica Archibald

From Facebook’s acquisition of WhatsApp to Google’s purchase of Nest Labs, large US technology companies are increasingly using the ample cash on their balance sheets for M&A. Jessica Archibald, managing director at Top Tier Capital Partners, examines how this trend is likely to continue.

The motivation is largely defensive, eliminating perceived competition while diversifying into new business areas that can help these buyers deliver sustained performance in a fast-changing environment.

“If you look at the cost of acquiring a customer and you add all that up – how many customers they have, what’s the cost of that – and then the cost of eliminating the competition, is it better for a tech company to wait and watch a company like WhatsApp develop and then acquire it or is it better for them to start a business internally?” Archibald says. “And so I think we are going to see a lot more exits through M&A that are going to be high valuations.”

The combination of willing trade buyers and robust public markets has contributed to improved performance by US venture capital funds in recent years. Archibald adds that the balance between capital and liquidity is also better.

“In the 1990s you saw a lot of good performance, then capital came into the industry in 2000s, there was too much capital and not enough liquidity, and performance really went down. And so then the capital fell,” she explains. “Fund sizes are now smaller. Companies need less money to get started and you can get some earlier validation from revenues. The funds are the right size and the funds own enough of the companies that when they go public they have a meaningful impact on performance.”

The role technology has played in allowing companies to establish themselves with less capital, should not be underestimated. Cloud-based solutions have globalized the industry, making it easier for a truly compelling business model to achieve critical mass in a shorter amount of time.

“It doesn’t matter where you start a company now because your customers – if it’s a consumer product or website – can be anywhere in the world. That has been a fundamental shift,” Archibald says. “It has changed our investment strategy to think not where the company is being started but where the business and where the market is focused.”