The Wrap Podcast | Episode 063 | Seizing Opportunities in the Tech Industry | Warren Averett

Commentators (0:02): You’re listening to The Wrap, a Warren Averett podcast for business leaders designed to help you access vital business information and trends when you need it. So, you can listen, learn and then get on with your day. Now, let’s get down to business.

Paul Perry (00:16): Everybody, welcome to another episode of The Wrap here at Warren Averett. We’re glad to have some of our friends with us today. I think this is Episode 63. Today, we’re going to be talking to folks in our Technology and Life Sciences Industry Group. They work with a lot of companies in that space, and we are so happy to have them here. Today, we also have with us a new co-host for The Wrap. I’m happy to have my friend Derek Johnson out of the Tampa office.

If you remember way back on Episode 14, we talked about recruiting and retaining talent. Derek, it is good to have you as a co-host today.

Derek Johnson (00:51): Paul, thanks for having me. I’m Derek Johnson out of the Tampa office. I’ve been here a little over nine years at the firm, spearheading the staffing and recruiting arm for our Florida operations. But enough about me, the stars of the show are both Larry Pirkle from our Birmingham office and Yogesh Patel from our Atlanta office. How about you to introduce yourselves for the show?

Yogesh Patel (01:16): Yeah, sure. Before I do that, I guess one thing I will bring up is… Larry, I think you and I share a big milestone here at Warren Averett. We’re 20 years in, so that’s exciting. It’s gone by fast. I think it’s a big milestone for us, and I’m excited that we’ve reached that. A lot of my time at Warren Averett is spent advising fast-growing companies, founders and CEOs from both early stage all the way to mature middle market that are typically acquiring or looking at some type of transaction on the horizon. A lot of the companies are backed by the growth equity firms or may even have a control investment by private equity. So that’s where I spend most of my time, Larry?

Larry Pirkle (02:00): You are correct, this is 20 years for me as well. It’s been fun, and it goes by quickly. But yeah, I also work with a lot of tech companies, emerging growth companies and private equity companies and their portfolio companies. I also have the privilege of leading our Technology and Life Sciences Industry Group.

Paul Perry (02:17): Gentlemen, sorry, but I’ll say it again. We’re really happy to have you all with us today and look forward to this discussion. So, let’s really jump right in. There are a lot of challenges and opportunities that these types of companies in this industry face that maybe others don’t. Today, we’re going to talk about some of those. I think one of the first ones we wanted to talk about—Larry, we’ll start with you—what challenges and opportunities are companies in the industry facing as it relates to raising capital?

Larry Pirkle (02:39): Yes, I think one thing that is facing the industry, particularly as it pertains to raising capital, could be the macroeconomics of interest rates increasing. If you look at the public markets as an indicator, we saw them decline significantly in 2022 last year, and then rebound considerably in 2023.

I think some are starting to wonder now if that rebound anticipated rates leveling means that they may start to come down sooner than they’re actually going to. It now appears that they’re going to come down. But I think as interest rates go, they have a direct impact on valuations and valuations can have a direct impact on raising capital.

Yogesh Patel (03:22): Yeah, I agree with you, Larry. I think raising capital in 2023 is a lot different than in 2021 and 2022. I think with a lot of our technology companies, a lot of technology is coming out there. What they saw was term sheets overnight in the last couple of years with high valuations in terms of growth equity firms and private equity firms willing to invest. We’ve seen that slow down a little bit right now.

Overall year over year, capital rates have gone down. Series A and Series B have gone down, and the valuations are becoming more realistic. I think that’s really part of the challenge right now. Then, you throw SVP and Signature Bank as well into the mix. I think access to capital continues to be somewhat of a challenge, since it’s more restricted right now than what we’ve seen the last couple of years. But on the flip side opportunity-wise, there’s still a lot of capital on the sideline.

For good, fast-growing companies, especially if you’re B2B or SaaS—high margins and high ARR—you’re going to be able to raise capital easily, I think. There are some higher valuations out there that are AR company-driven, but I think those are more outliers. For example, Series A raises roughly $2 to $4 million on average, valuing at $25 to $50 million. On the opportunity side, there’s still a lot of options out there in terms of meeting some suitors to raise capital.

Larry Pirkle (04:53): I think deals are still being completed. Maybe buyers are just being a little bit more cautious in this environment. At the end of the day, maybe the dial is just turned down a little bit, but it’s definitely not turned off.

Derek Johnson (05:07): That’s very interesting, guys. There are still some silver linings. There are some good things going on. In the meantime, what are these companies doing and what challenges are they facing trying to just grow their revenue and do good business?

Yogesh Patel (05:23): Growing revenue is—as Larry alluded to earlier on is at the top was just the macroeconomic conditions, right? I think if you are a B2B technology company selling to enterprise clients or any other type of business customers, the challenge in growing the revenue is: are you one of those application (like cloud apps) that are not necessary? It’s nice to have, but it’s not a must-have.

I think in these conditions that CEOs and CFOs are looking at probably 200 cloud apps, right? They have 20 of those that may need to be scrapped. So, ensuring that you’re not one of those 20 and that you’re continually developing the product and you have that must-have type of platform that your customers want.

Larry Pirkle (06:08): Yeah. I think revenues is something for companies in this industry to focus on historically. ARR (Annual Recurring Revenue) has been a significant factor in valuing these companies. So, it can be a great time to look to your customers, listen to their feedback and reinvest in some development of new features that meet their needs and really focus on revenues.

But at the same time, I think it’s also a good opportunity to focus on other things, such as your labor. It can be a challenging time right now to find qualified developers in this space. Inflation has affected salaries for the labor in this area. Then, there’s also the shift in more and more professionals in this industry working remote. That may be remote here domestically, but it may even mean that you’re working with developers across the globe.

Yogesh Patel (07:05): Larry, you just reminded me of something. In terms of growing revenues, Derek, you had mentioned that we see a lot of companies with a significant cash balance. I think it’s key to understanding, where do you invest that? As Larry mentioned, is it in development? Do you go out and look for a strategic target to acquire? There are different ways to grow those revenues, right? I think if you’ve got the cash or the ability to invest, making sure you make the investment in the right places is also key to growing the revenue.

Paul Perry (07:33): Yogesh, you mentioned product development. Let’s unpack that a little bit further, because I’m sure that’s another huge challenge and opportunity for folks in this industry that maybe other industries don’t have and don’t see. Can you go a little bit further on what those challenges around product development are that you haven’t already talked about and what they need to be thinking about?

Yogesh Patel (07:55): Yeah, sure. So, there’s Generative AI. Generative AI is a hot topic, right? I think product development-wise, it’s continuing to enhance the technology. It may not be Generative AI, but I think your customers continuously look for you to enhance your product and they expect that. So how do you do that? I think some of the things that we’re seeing is what Larry had alluded to as far as developers go.

You may have some great expertise in-house with the DevOps and with creating the platform and enhancing that platform, but you may not have anybody that has AI experience. Now, you’ve got to go out and find that talent, right? I think that’s one of the challenges that you see in terms of product development, making sure that you have the right resources in-house or whether you’re outsourcing as far as development goes and continuously looking for that as you grow the product.

Larry Pirkle (08:47): I think with product development, like Yogesh alluded to, new technologies are coming on the scene all the time. The big one that you referred to when Microsoft goes and invests in a ChatGPT, it gets on everyone’s radar. Suddenly, there’s a rush to AI. You see that in the public market valuations indicating the premiums that are being paid for that industry.

But technological change is the norm here in this industry. So, whether it’s AI right now or whatever the next thing is down the road in the future, this is a challenge. But also, an opportunity in this industry is managing the technology changes—not being caught by surprise—but embracing those, looking forward to what’s the next one and thinking about how you can leverage it and take advantage of that change.

Yogesh Patel (09:35): I think one good example is Bill.com. I think Bill.com has like a $12 billion market cap. They’ve been around for a while. Their technology’s been around for a while, but they still demand a high stock price. Why is that? They continuously enhance the product. So, if you go to Bill.com now, they’ve got some AI built in that technology and I think they’re going to continue to make investment in that AI.

QuickBooks is another one that’s continually enhancing the project product overall. These are just accounting and finance applications I’m giving examples of, but really, it’s across the board for any application for companies that use technology.

Larry Pirkle (10:17): Undergirding all this is that you’re trying to keep an eye on your competition by making sure your product stays current or ahead of what others in your space are doing. You see a lot of companies employing approaches where you try to get out a product quick to the market, some minimally viable products that you can get out quickly—either your initial product launch or even your subsequent development and enhancement, so that you can get out to market quickly and immediately start obtaining user feedback from your product that you then use to build the next upgrade to your product.

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Derek Johnson (11:09): Guys, talk about the constant change and development and redevelopment. You know, I just stretched back to episode 14 where Paul had me. You hear about retaining talent—Larry, you dipped your toe in that pool a minute ago—my staffing census started to hum in my head and all this development requires great talent. What are you guys seeing? What are your clients telling you? Larry, since you cracked that egg, why not go first and tell me, what are they seeing with the talent in their staffing situations? What are they up against?

Larry Pirkle (11:42): Yeah, I went through it quickly, but I think it is good to stop here, pivot and expand on it a little bit because I think it is important. At the end of the day, technology is all about those who are creating the technology. You’ve got to have the developers who are writing the code and developing the technology and like we mentioned, the labor market is tight in this area right now. So first, just finding good developers. I think companies are having to be creative about how they do that, whether it’s offshoring to other countries to obtain the right amount and the right skillset or a hybrid of U.S.-based and overseas, global-based developers. Also, that can have an impact on salaries.

You may get some salary benefit in other countries, but that’s another topic that has to be addressed and managed because salaries are increasing. As the demand for developers increases, the price for those developers is going up. Then, as you gain the benefits of more availability, maybe a little bit better pricing of salary level from going overseas, but then it creates its own challenges of managing remote workers.

You’ve got different time zones that must be managed. Even in the U.S., pretty much everyone went home for COVID. Companies are starting to reconsider that. Maybe it’s certain days of the week or a mandate to get more and more people back into the office. I think every company is having to think through: how do we manage our remote workers? Do they stay remote, or do they need to get back into the office?

Yogesh Patel (13:20): Derek, I’ll speak a little bit to what’s near and dear to your heart, which is finding the right candidate, right? In terms of aspects of a technology company that’s growing fast. A lot of times, it’s about asking the right questions when you find the right candidate. On paper, they have the right experience that you need, but it’s what are they really looking for? Because in a technology company, when you’re building the product as a $1 million company and building that technology is completely different from when you’ve built it and you’re now a $25 million to $50 million company.

What I mean by that is, the developer may be looking for a different experience. Maybe they already want a built product and that’s what they want to do in terms of moving forward, or they may want to build a product. I think it’s important to understand what they’re looking for to be able to make a good match. A lot of times, folks want to work at a startup, but what they really may be looking for is a Google or a Salesforce that has that work and play environment that’s already established versus a true startup where you’re just grinding it out, right? Trying to get to that 1 million ARR or 5 million ARR, it’s really a grind for companies to make it all the way up to that level when you’re first starting out.

Paul Perry (14:27): Larry, we’re talking about things that are specific to this industry. I know you and I have a lot of these conversations because of your clients, and you always talk to our group, Yogesh, as well. Every company in the world is quickly becoming a data company because we’re all holding information. But that’s at the core of what a technology company is, right? I’m sure that there are challenges that you see when you’re talking to your clients as it relates to how they verify and vouch the security of the data that they’re holding.

Again, everybody’s about to be in the space, but the technology industry really built this. We see a lot of things in the news about Google, Microsoft and GDPR over in the European Union. California’s got their privacy laws. So, what are the challenges you’re seeing with your clients as it relates to that verifying of the data that they hold?

Larry Pirkle (15:21): I think that cybersecurity and cyber-protection are very important, especially in the technology space. As you mentioned, you are holding your customers’ data on your systems and your networks. I think there’s at least two layers of defense. There’s the internal and the external from an internal standpoint. That can be everything from the applications and programs that you obtain to protect that data.

It can also be the people that you have, the security experts that you have in-house to make sure that you’ve got appropriate policies and protocols. I think more and more customers, while they may trust you, they’re being held responsible for verifying that trust. So, it’s not uncommon for a customer to call and say we need to see your SOC report. A SOC report is a report that a third party, such as an accounting firm, has said that your policies and procedures are in accordance with a particular framework or standard. It’s a written report that backs up and communicates to the third parties that are trusting in your company that you do have appropriate safeguards and controls in place.

Yogesh Patel (16:40): Paul, you and I just spoke last week, regarding a company that called because they formed a strategic partnership with a public company. Now, suddenly there are some requirements that they weren’t really prepared for or had anticipated. So, I think the key is just anticipating—especially when you’re growing fast—what those requirements may be. We’ve got a few examples of this. There was a fintech company that we worked with who got acquired by a strategic public company.

They were growing fast, and they landed a client they’d been wanting to land for quite some time. As that due diligence process played out, they had to get a SOC 1 report. There were no ifs, ands or buts. That had to be done for that contract to be signed. That was quite a bit of challenge to get through that process, in terms of making sure that contract could be executed. So really, the moral of the story is just anticipate what those requirements are.

It’s better to do that on your own timetable, versus being forced to comply and then going through that process. I think that’s really the key there when it comes to when you’re housing data and some of the potential compliance that may come with it.

Paul Perry (17:49): I think the key takeaway from that, Yogesh, is to anticipate it. You can’t overstate that enough. How many times do we get a phone call and it’s, “Hey, I need this in two weeks, two months.” You know, we’re talking 6-10 months before something like that can really be done well. So, anticipation is the key there.

Larry Pirkle (18:09): I would just add that when you’re a tech company and you’re trying to manage your cash, you’ve raised some capital and you’re really focused on your costs and making sure you really invest your cash in the most appropriate ways. It can be tempting to see security, particularly a third-party assessment of your controls and your security, as a cost. But then you get that one call from that prized new customer. They want that report and you’re caught off guard without it. That can be a dangerous situation as well.

Paul Perry (18:43): We sometimes refer to it as a revenue protector, right? If you don’t have that or have the good controls in place, your revenue is not going to be as protected as you want it to be.

Derek Johnson (18:55): It’s a lot to digest. We’ve got SOC reports and we’ve chatted about growing revenues, raising capital and the age-old topic of talent. We could probably go on for hours. What if we did a round two of this podcast? What would be on that potential laundry list of items we could talk about?

Larry Pirkle (19:16): I think to some extent, some of these are evergreen. We would talk about a number of these topics again: labor, capital and these sorts of things.

A couple of things that we might expand into I think would be that protecting your IP is important. We could delve into that a little bit further. I think we could expand on the cybersecurity that we talked about. I think another area that we haven’t spent much time about but we could dive in deeper a little bit into are some of the unique opportunities for technology companies from both an accounting and tax perspective.

There are unique issues that present themselves. All the spending on research and development can sometimes result in beneficial tax opportunities. Companies are doing mergers and acquisitions. So, while you could talk about the business side, that also creates certain accounting and tax situations. While it’s fun to talk about generating revenue, at the same time, it can result in significant revenue recognition issues because the contracts in this area tend to be complicated with a lot of elements all going into one contract.

There are some benefits that you can get a tax credit for and you can sometimes capitalize on your books. Sometimes, companies forget that you don’t have to expense all that right now. You can sort of say, “Hey, we’re investing for the future,” and reflect on your financial statements. A lot of these companies—because they’re short on cash—may reward employees to some extent with equity. We could talk about equity rewards. Again, one more area that has unique accounting ramifications. So, there could be an opportunity to talk about some of those topics and harmonize those with any impacts to their financial statements in their taxes.

Yogesh Patel (20:59): Yeah, I think those are all great and we could probably even do a third podcast if you were there to unpack some more of the areas. Like, for example, we talked about raising capital, right? With that, do you have the appropriate legal structure? What are the options or what makes you investor-friendly to take on the capital? That’s a whole separate discussion itself that we typically advise, as well as just-right sizing the business overall. Do you have the right accounting structure in place?

There are several areas that I think we typically see and that are hurdles, if you will, as you continue to grow as a tech company, that we would spend time talking more about if we had more time today.

Paul Perry (21:42): Good stuff, guys. So here on The Wrap, we like to wrap it up in 60 seconds or less. Yogesh, let’s start with you. What’s the one thing you want to leave the listeners in this industry with: either something we’ve already talked about or something new that wasn’t discussed?

Yogesh Patel (22:02): Thanks, Paul. I think one of the things that I would say that we didn’t really talk about is to make sure that you have a good CFO or VP of finance in place. In terms of, especially the macroeconomic conditions that Larry had outlined earlier, you need someone in that seat who’s actively tracking key metrics of the business, so you know where you’re going. What customers are you making money on? Which ones are you losing money on? Just things that can help you continue to grow and be profitable as a business. A lot of times we see growing tech companies invest more in their COO and sales side of the house. Sometimes, the finance is lacking. So, I think one of the things that I would want to reiterate is make sure you have a good finance leader in place to help you continue to grow and be successful. Larry?

Larry Pirkle (22:45): I think those are great points. You want to have your accounting records in order. It becomes important, not just for managing and understanding your business and making decisions, but also when it comes time to raise capital or perhaps sell the business, there’s going to be a significant amount of transaction due diligence and you may need assistance with that. A significant focus on that is going to be what we call the quality of your earnings, that there are not these spikes and unusual ups and downs in your numbers, but that there are predictable trends, which is one of the reasons that SAS has become so popular. Everyone wants that recurring revenue versus the old days when you’re selling a license every year, upgrading the maintenance or whatever. People want that recurring revenue because buyers are looking for that as they focus on purchasing companies. That brings me back to where I would leave it: just focus on growing your revenues, developing a customer-centric culture, listening to your customers and their feedback, great customer service and support. Also, that you’re incorporating and listening to your customers as you think about what’s most important in future product development.

Paul Perry (23:54): Gentlemen, this was an absolute pleasure. You clearly know your stuff. You clearly know this industry. Thank you for communicating that expertise to our listeners. Derek, it was an absolute pleasure to have you as a co-host. I look forward to future podcasts. Gentlemen, thank you all very much.

Yogesh Patel (24:12): Thanks for having us.

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