The proliferation of smartphones, tablets, laptops and PCs and the various applications that empower these devices speak to the rising value of IT and companies that develop, deliver and support the entire ecosystem. As businesses and consumers increase their dependence on computer technologies, the investment community pays even closer attention to organizations involved in that supply chain. That interest translates into real dollars for IT businesses with an increase in mergers and acquisitions and funding.

Those activities have steadily grown over the past few years despite the pandemic and ongoing worldwide economic and employee recruitment challenges. Venture capital investment in the global technology industry hit a record USD 643 billion in 2021, a 92% increase over USD 335 billion in 2020. Conditions are ideal for that trend to continue.

Investment dollars available from private equity, venture capital firms and other funds is rising steadily. With the value of IT businesses upsurging, especially those earning consistent recurring revenue from SaaS and other service offerings, technology vendors, distributors and ITSPs should remain a top target for savvy investors.

Distribution is No Exception

IT distributors have a strong track record in the investments community, from M&A to private equity and venture capital funding, as well as new and recurring forays into public trading. While the quantity of these transactions is significantly higher in the vendor and ITSP community due to the sheer number of those businesses, the industry pays close attention when their distribution partners

Among the recent high-profile deals are Apollo Global Management’s $5.4 billion purchase of Tech Data in 2020 and their subsequent move to take the distributor private. Just fifteen months later, company executives entered into a pure-stock merger agreement with SYNNEX to create TD SYNNEX.

DCC Technology acquired the Almo Corporation for approximately $610 million (£462 million) in 2021 in a bilateral transaction with the Chaiken family. Then, in July of that year, Platinum Equity purchased Ingram Micro from HNA Technology Co., Ltd, a part of HNA Group, for around $7.2 billion, including $5.9 billion of equity value. The structure of the investments and other equity exchanges involved in these transactions varies. As with many M&A activities, there are an exponential combination of financial options buyers can pitch to potential sellers to close the deal.

The investment community takes other roles in distribution funding, too. For example, in September 2021, Exclusive Networks’ launched a $256 million (€260 million) Initial Public Offering (IPO) involving a maximum of 13,000,000 new shares to develop the company’s cybersecurity and digital technology practices. Many technology businesses follow a similar route to fuel expansion, sales and marketing programs, and other activities.

Value Drives IT Investment 

M&A and public offerings are nothing new in high tech. However, the investment prospects and options are growing for businesses – especially for companies that develop and deliver cloud services, process automation solutions and other high-demand technologies. And those with superior revenue and profit growth and strong cash flow sit atop that value chain.

On the supply side of the equation, competition between traditional business buyers and funding sources like Venture Capital and Private Equity firms tend to drive up valuations for solid prospects. Channel companies with strong partner networks (driving sales and support) have traditionally proven to be worth more than organizations that only sell direct. ITSPs help suppliers scale their businesses faster using fewer people and resources− a major advantage with current concerns around the job market and inflation.

Working collectively with distributors and vendors, channel organizations can share sales and marketing efforts, solution development and implementation, logistics and ongoing support. For example, distributors can help SaaS suppliers ramp up deployment and cash flow through their IT service provider communities. The more recurring revenue these relationships create, the higher their value to prospective investors.

VC and PE firms often focus on the same metrics a quality IT channel program enhances, including revenue, profitability, cash flow and customer acquisition costs. The collaborative efforts of distributors, vendors, ITSPs and other contributors not only generate longer-term sales success but also deliver efficiencies that stakeholders recognize and value.

The Promise of Future Success  

Most financial experts predict a positive funding outlook for technology companies, especially those that create, deliver and support business-critical solutions. As Troy Cogburn, Director of Vation Intelligence with Vation Ventures, points out in the new GTDC report, Investment Trends in the IT Industry, “firms are investing in infrastructure software, cloud, cybersecurity, data, AI, SaaS, developer tools, and solutions that impact the future of work. I believe that we will continue to see the most growth in data, cloud, and cybersecurity areas, where there is a significant demand for new technology solutions from end customers.”

With 62% of companies expecting to raise IT budgets in 2022 and 32% remaining the same as last year, companies in hot growth segments like cybersecurity, cloud infrastructure, and business intelligence are sure to attract more investment dollars.

While past performance is typically a predictor of future results, business valuations often rise and fall (sometimes quickly) based on news and earnings reports. Business technology firms can buck that trend during recessions and other economic downturns, but those that target more economically susceptible verticals may experience sales and profit challenges. Those situations may not dissuade investors and potential M&A partners, especially those looking seeking bargains or more leadership control. However, as valuations drop, it lessens stakeholders’ negotiating power.

Cogburn did note that market uncertainty and volatility are negatively affecting 2022 investment dollars, though the volume remains higher than in the pre-COVID era. Late-stage high growth-startup valuations have also gone from 100 x ARR to 20 x ARR, which could drive more investment in series A and B funds and extend the time between corporate funding rounds.

The good news for channel companies is that venture capital, and private equity firms understand asset value. While business relationships may not be line items on P&L statements, the industry professionals who smart financiers rely on when exploring investment options appreciate strong alliances. The ability to scale sales, reduce costs, and optimize processes definitely factors into current and future valuations − another big benefit for vendors and ITSPs that work with distributors.