Forbes: Mature Markets Can Deliver Multiples

Moira Vetter
October 1, 2015

(As appeared in Forbes.)

I was meeting with a Private Equity promoter a few weeks ago and the talk was good for non-traditional entrepreneurs. What I mean by non-traditional are the visionaries in this climate that are looking where the crowds are not. Too many people are on safari scouting unicorns when there is herd of mustangs standing beside them.

If you hang out with entrepreneurs or read anything about them you know that technology dominates the news. Specifically the internet of things. And while my company works with a ton of technology companies, I’m always interested in the ones doing something different. I like the founders that aren’t just creating the ‘new thing’ but are re-inventing existing industries.

Innovation in mature categories

You know what’s great about re-inventing things that already exist? They already have a channel in place and usually there is existing revenue to fund the venture. In many cases companies have a strong set of customers or ‘book of business.’ What they need in these cases is a visionary to look at what they do today, find an industry in an inflection point, apply a game-changing technology and watch a new business or market explode.

Mature markets at an inflection point

For those of you that are geeks like me and like ‘real stuff’, things that manufacturers actually make, there are interesting times ahead. One of the pockets of innovation I discussed with my PE promoter friend was the huge network of infrastructure hardware, and hardware manufacturers, that are benefiting from combining with automation technologies informed by big data. For example, someone spent decades placing sensors to monitor logistics and transportation systems for operational insights—fuel usage, miles traveled, operating speed, etc. Now, those same companies have the infrastructure in place to use new automation and intelligent monitoring to optimize logistics and transportation. I know that’s a lot of words that put some people to sleep but to investors, it spells an existing market (lower risk) with a newly developed layer (innovation) set to collide and expand (they can smell the multiples already).

The real world result of these inflection points and innovations is that markets are moving. Especially markets that often are slow or haven’t moved in a while. People are talking about manufacturing technologies in America with excitement. And investment bankers and promoters have noticed a real uptick in interest and movement the last 60 days. That’s bad news for the PE and VC guys that are tired of kissing frogs, but it’s great news for the economy when the guys (and gals) with the money are being run ragged sizing up all the opportunities for growth.

But isn’t all the deal money going to technology?

According to Preqin, no. They do a deal analysis on buyout deals and exits each quarter. Here’s their analysis of the 755 worldwide deals backed by private equity in Q2 2015. Only one of the top 10 deals was software and half of the top 10 deals were in the United States. While yes, 20% of the deals and a higher deal value went to information technology, the highest percentage of deals was industrials at 24%. Food & agriculture represented 5%, energy and utilities 4% and materials at 2%. The moral of the story is that people are buying and investing in any good business where a value-add has been demonstrated or a strategic buyer has gotten excited.

The most successful entrepreneurs I know have spent a lot of time looking at broken systems and broken businesses and applying something new to create growth and revenue. These businesses may not necessarily be the next unicorn, but most people never went into business to be a unicorn. You rarely see them and can’t ride them. What I see is a crowd of mustangs with a few breaking from the pack and taking off.