Sanu Desai probably knows venture-backed M&A as well as any investment banker. Since last year, Desai has been the lone San Francisco-based managing director for the London-based investment bank Torch Partners. But Desai has also been the head of JPMorganChase’s Internet and Digital Media group, a role that evolved out of Desai’s early involvement as a cofounder of Hambrecht & Quist’s Internet banking practice in the ‘90s. (For the young’uns: H&Q merged with Chase in 1999; Chase was acquired by JPMorgan in 2000.)
As the year winds down – yes, this is one of those pieces – I wanted to get Desai’s perspective on the sluggish tech M&A market, private company valuations and what sectors he expects will drive deals in 2013. We wound up talking about a bit more than that, though.
For example, when I asked Desai if he expects U.S. companies to remain concerned that Europe could go off the rails in 2013 (Torch is mostly Europe focused), Desai quickly dismissed the possibility, as least as it relates to tech companies. “In Europe, people ask what’s going on in the States. In the States, sometimes people want to know what’s going on in Europe; sometimes they don’t care.”
I also asked about the IPO window and whether it might be narrowing for consumer Web companies in particular, given the poor share performances of Zynga and Groupon. Desai doesn’t think so, suggesting the companies most likely to be impacted going into next year are still-private, late-stage companies like Spotify and Foursquare that have already reportedly seen their heady valuations drop.
Facebook’s disappointing IPO, in particular, was an anomaly that has “almost no bearing” on most other consumer Web companies, insisted Desai. “Who had growth expectations for Facebook at a $100 billion valuation?” he asked, referring to the market cap that many assumed the company would almost immediately enjoy once public. (Desai, who helped in Amazon’s public offering, reminds that Amazon’s market cap at the time of its 1997 IPO was roughly $450 million, giving it plenty of room to grow into its current market cap of $110 billion.)
Perhaps unsurprisingly, while Desai doesn’t think some “crappy IPOs will shut the window,” Desai does see more exit opportunities for enterprise companies, on which greater numbers of VCs are now focused and that, in the most successful cases, “will get bigger and get acquired or go public.” (“The software services sector…is a business model that’s easy to understand and predict,” shrugged Desai. “You have actual cash flow, bookings – it’s easier to grasp than Foursquare.”)
Desai is also predicting more M&A, partly because “we’ll have more competition to buy companies, now that there is more cash in the accounts” of Facebook and other newer publicly traded companies; partly because prices are likely to fall, as private companies are forced to lower their expectations; and partly, he noted, because things are changing – fast, particularly when it comes to business software. “Oracle has spent a ton of money on cloud companies in the last 18 months, billions. I think that will continue because the old ways of doing software are still quickly getting superseded by these new models.”
Desai pointed to San Francisco-based FuzeBox, as an example. (Torch advised in its $20 million Series A funding round, closed in July.) The video conference company – backed by Khosla Ventures, Index Ventures, and Insight Venture Partners — is going head to head with Citrix, Adobe, Microsoft, and Cisco’s WebEx, and its prospects look promising because many of its predecessors’ products have languished for years without meaningful improvements. (WebEx in particular is “crappy” and “not thought through,” said Desai.)
In fact, in Desai’s view, the only things that might slow down tech M&A further or impact companies’ ability to go public in 2013 — and he characterized them as remote possibilities — include fallout from the HP-Autonomy “fiasco.” As he notes, “An $8 billion write-off will freak out anyone.” He also conceded that “any major economic downturn will slow things down,” though he quickly noted that even then, tech — likely ahead of any other sector — should quickly rebound.
Interestingly, if Desai is worried about anything at the moment, it has less to do with the sorts of financial transactions he analyzes on a daily basis and more with Silicon Valley’s Hollywoodization. Pointing to the lavish parties that Bay Area entrepreneurs are throwing, the money being spent on real estate, and the growing number of founders hanging out with hip hop stars, Desai asked plaintively: “Is this aversion to anything Southern California going to break down? That’s what concerns me. Part of what makes this place special is thinking differently than everyone else.”
Image: Photos courtesy of Torch Partners.