For the last four years, BDO has conducted a survey of the technology sector. Teresa Morahan, head of the technology sector team at BDO examines this year’s results.
As part of our annual evaluation of the Irish technology sector, during the second half of 2013, over 100 interviews with tech companies in Ireland were carried out by either BDO or by UCD Smurfit Business School.
Companies were selected across a range of sub-sectors within the tech sector. We asked about their growth plans, growth sentiment, opportunities for export, barriers and even exit plans.
Confidence has grown right across the tech industry. Indeed, this is the single biggest message coming out of the 2013 survey. To put that in context, in the prior year’s results, signs were improving however it was evident that a percentage of respondents were lacking confidence with respect to future opportunities for growth and the level of financial growth that they anticipated. This has now changed.
From my own experience working with companies’ across the technology sub-sectors, we are now witnessing a much greater level of positivity in growth expectations within the marketplace. This positivity is not derived from youthful exuberance often witnessed from early stage companies. This new level of positivity can, and is, being viewed both from within established companies and in successful start-ups, the number of which is increasing.
This positivity which we are witnessing parallels the survey results. The clearest example of this is in the response results to the question of growth forecasting. When asked, 90% of companies forecasted sales growth for the coming six months and three quarters of companies said they were confident enough to plan to enter new markets as part of their growth strategy. Significant? Hugely, because traditionally growth breeds further growth in this sector and also drives growth for others providing ancillary or support services.
So where is this growth going to come from? When asked this question our respondents pointed towards their belief that constant investment (whether human capital or financial) is key. They acknowledged that their sector is unique; for on-going growth of businesses within it there is a need for continuous innovation and an appetite for new products. In this rapidly evolving sector, the ability to continue to meet the constant demands of the market with respect to new innovation is an essential element for both survival and growth. This focus on product innovation is up notably from last year’s survey with over 80% of respondents saying it was the driver of their growth strategy (12 months ago less than half identified this as a key driver for their business).
Product and service innovation was not viewed as the only element to delivering growth. More than two of every three respondents (who forecasted growth) saw opportunities in new market segmentation as part of their strategy. Again this is borne out in real world advisory experience.
Many successful tech companies that we work with have seen the benefit of expanding into new marketplaces. This ability to diversify is at the core of what they stand for. It is in their DNA and the freedom of thought required to deliver this is encouraged right throughout the organisations. It is encouraging to see that many of the respondents to the survey have also recognised the importance of looking beyond their existing markets for growth opportunities and implemented plans to do so. It sounds obvious however inertia, rigid structure and complacency can all work as barriers to this type of flexible approach.
It is not just new domestic markets that the respondents are focused in on. The emphasis has turned more and more to expansion into new geographical locations. Almost three quarters (74%) of all who said they were looking to new markets said they were focused on geographical expansion, up from below half (43%) in last year’s study. Why this focus on new geographical locations? The reasons given were because that was where the expanding markets for our tech companies exist.
We have seen this recently with a number of our clients who have set up operations overseas, who found that in order to obtain greater traction with key customers, they needed to be in the markets where their customers have operations. This strategy has resulted in increased revenue for many of them both from pre existing and new customers.
Other growth drivers prominent in responses include more traditional methods such as organic growth, talent acquisition and investment in marketing.
The key to funding for any company is matching its needs with the right type of funding. This is dependent on multiple factors including nature and predictability of revenue streams, stage of development and the purpose of the funding.
There has been a radical change in the funding source expectations. While last year over three quarters of respondents looked to banks and private equity for their sources of future funding, that has now changed. Two in three of those surveyed see self-funding as the way forward, from either the business itself or from existing shareholders.
There is either sufficient funding within companies to fund growth plans or a strong belief that capital is not available to them – likely to be the former because when asked if raising capital was difficult only one quarter said it was. There was a 17% drop year on year in the number of companies that felt that banks unwillingness to lend was the barrier to funding, although again this was given as the biggest obstacle to raising capital.
And what about areas that perhaps make less positive reading? The survey flagged one clear macro trend that was an area of caution. There still remains a level of concern with respect to competitive and pricing pressures. Yes, competition is positive for consumers, however, it is important that there is realism with respect to levels of pricing. Without this there can be a serious impact on the ability of companies to survive and generate profit.
For the first time in four years the economic downturn was not given as the most important macro trend in the sector.
Looking at the results overall, a picture is painted of a sector with renewed optimism, looking to innovate, to develop new products and to drive into new markets with strong growth ambitions, but with some concern that competitive price pressure is becoming its biggest hurdle.
To read the survey in full, log on to www.bdo.ie