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Innovation Works President and CEO Rich Lunak saw very high valuations for Pittsburgh technology companies, as well as strong venture investment, in 2019. Sellers are benefiting from competition, which is generated by both strategic and financial buyers.

“For example, one technology company is growing very quickly,” he says. “I think the investors want to continue to see this business grow, but they are seeing such hot markets that they are testing the waters with an investment banker — because they think the multiples will be so strong.”

That investment banker is not only looking at potential U.S.-based buyers, but in some cases, multinational firms headquartered outside of the United States, Lunak adds.

Smart Business Dealmakers spoke with Lunak in December about the M&A climate for technology companies and disruptive startups.

How does the Pittsburgh market compare to the East and West coasts?

Historically, our valuations and terms were considerably lower than you would see in the coastal communities. I think that’s still the case. But as we are starting to more and more attract top tier out-of-town money, our deals are getting a little competitive and those terms are starting to increase.

Over this past year, we’ve seen valuations probably higher than I’ve ever seen them. Part of that is due to the fact that many of the sectors that are strong here in Pittsburgh are very important nationally, areas like AI, robotics, machine learning, enterprise SaaS (software as a service). Financing terms continue to be strong, at least for now.

 Are strong markets or the interest in these technologies driving the high valuations?

It’s both — probably a combination of markets continuing to be strong and some of these hot sectors, which are very sought after. As a result, the deals are fairly competitive and paying high multiples.

What do technology buyers use as the basis for such high valuations? How much is it based on potential growth?

In one of these transactions, you can’t ignore growth when you have a bookings backlog that shows that, if you laid off your sales force today, the 2020 numbers are going to be multiples of what 2019 were.

Typically, for a SaaS business, the traditional valuation metrics — whether on a M&A transaction or a financing — tend to go on growth rate and a funnel that can prove that that’s going to continue. That includes low churn numbers, great renewal rates and stickiness in your existing accounts, strong gross margins and unit economics, and very strong long-term value to customer acquisition cost, LTV to CAC ratio it’s called, and a real technology and IP component that creates a barrier to entry. Those kinds of things can weigh in to drive those really high multiples.

In one of these transactions, trailing 12-month revenue is one thing, but they may have backlogs, bookings and funnel support with really strong forward-looking, 12-month revenue. In some cases, they are being priced on a multiple of that forward-looking revenue because they can support it.

If you’ve got a company that’s growing at a strong clip, those revenue numbers and growth rates are definitely going to come into play.