by Luis Miguel Ochoa Comments (35)

Technology Investment Banking: Bubbles, Failed IPOs, and Unprofitable Billion-Dollar Companies?

Technology Investment Banking
If you want to lose a lot of money very quickly, few sectors can beat technology investment banking.

Not only can you potentially lose your life savings on spectacular failed IPOs, but you might even get lucky and invest in a company with no revenue and no profit that somehow still gets acquired for $1 billion.

And as an investment banker, you get to be in the driver’s seat and make it all happen.

Today, we’re speaking with a banker who’s been there during both bubbles and downturns – and you’ll get to hear his take on:

  • How the technology world is divided, industry-wise.
  • How the deal and modeling work differs.
  • What sorts of assignments and deals you work on.
  • Where tech bankers go when deals dry up or when they need a quick exit.

And maybe he’ll even reveal the secrets of how to push over-hyped companies to get acquired at huge premiums:

Technology Investment Banking: Bootstrapping Your Way In

Q: So were you interested in technology to begin with? Or did you just end up in a tech IB group randomly?

A: It was pretty random. I was actually more interested in finance from the start and took the most finance-oriented classes I could: international financial markets, financial accounting, corporate valuation, corporate finance, and so on.

I also did a sophomore rotational program at a bank, and then a junior year internship that I converted into a full-time offer. And then I just happened to be placed in the tech group.

Q: So how was the sophomore rotational program? Was it useful in landing this role?

A: There is something to be said about having a broad experience and learning how a bank’s different departments work, and in turn work together. And having a bank’s name on my resume helped lot with winning future internships.

Looking back at my experience, though, it probably would have been more useful to work at a 3-5 person boutique running through tasks.

Q: So based on your experience, it sounds like banks aren’t necessarily looking for people from tech backgrounds to work in technology investment banking – is that correct?

A: It can definitely help, and you do see quite a few former engineers and tech people here.

But I don’t think it’s necessary, partly because technology is a far less specialized area than something like financial institutions or real estate, where industry-specific knowledge is essential.

Interviews are all about your “story,” so the more interest in technology you can show, the better… assuming that you’re actually interviewing for that specific role, or for a boutique firm that specializes in technology.

If you’re not, and, like me, you’re just going to be placed somewhere, I don’t think it matters as much.

Technology Investment Banking Teams and Sectors

Q: How are technology investment banking groups divided? What are the most common sectors?

A: The one constant in technology is change. The tech landscape looked a lot different in 1980 or 1990, and it will look even more different in 2050.

But here are the most common sectors I’ve seen throughout the years:

  • Communications Equipment: This area is largely driven by macroeconomic factors, such as economics, service providers, customers’ behaviors and preferences, and purchase timing and related deployment. It’s not as “sexy” as other areas, but it’s critical for almost everything else Software / Internet-related.
  • Computer Systems: Previously, computer makers focused on developing faster and faster computers. Offerings there have expanded to include enterprise solutions such as servers, networking, and storage. Similar to the healthcare sector, in which big companies acquire start-ups to speed up the R&D process, firms that compete in the computer systems space often do the same thing so they can improve their existing products.
  • Internet/Digital Media: Mary Meeker’s annual “Internet Trends” presentation (do a search to get the latest version) provides a great update on what’s going on these days. This one of the key growth areas in the technology space, and it’s where most of the startup and venture financing activity has been taking place.
  • Semiconductors: The area is driven by the demand for computational power; chips get smaller and faster, and even collaborate with other types of chips now. Previously processes would run on CPUs, but the trend is to move away from that, which helps improve processes outside of imaging and traditional graphics. There are some start-ups and growth opportunities here, but overall it’s definitely a more mature market than Internet.
  • Information Technology Services and Payments Processing: This area is home to the Software-as-a-Service (SaaS), itself based on a subscription approach to pricing. The players vary greatly, as do the applications. For example, in the accounting function, you’ll see Microsoft GP, SAP, Sage, Blackbaud (nonprofit), as well as smaller companies.
  • Software: Software is increasingly moving towards availability on both in-cloud and on-premise formats. Pricing naturally has moved from individual licenses to concurrent users and the subscription model. The old model of one-time licenses and yearly maintenance fees for complex software installations is going away, and that market has already matured and consolidated to a large extent.

Q: Thanks for that overview… where do you see the most deal activity? And what types of deals are most common?

A: I don’t think any one area dominates all the time – I’ve seen waves where there were a bunch of semiconductor deals, then acquisitions in cyber-security (a subset of Software), and then a bunch of financings in the Internet and social media space.

But generally, M&A deals are the most common in technology.

The IPO market never fully recovered after the dot-com crash following the 1990s, and companies there tend not to perform well. A company is going to raise equity capital when necessary, not necessarily out of convenience.

If you’re interested in some bad examples, here’s a gallery of some of the worst tech IPOs.

Debt financings can be common in mature tech markets, but you tend to see them more when credit is easy to come by and when leveraged buyouts are happening left and right.

Q: So, what drives valuation in technology investment banking?

A: It’s hard to generalize because it depends on the specific market you’re in, plus the stage of the company you’re analyzing.

Early-stage companies in growth areas like Internet tend to be all about the user base, getting eyeballs or mobile users, and don’t even worry about making money at first.

They often use “Freemium” models where they give away a product or service for free and then attempt to charge a smaller portion of the customer base for premium features (see: Dropbox and Evernote back in their early days).

Sometimes that leads to hype and bubble-like valuations when you start using user growth metrics and non-financial criteria to value companies – just look at the failed IPOs above for more examples there.

In more mature areas, like Semiconductors and Enterprise Software, valuation starts to make more sense and you focus on more traditional metrics like efficiency, market share, and profit margins.

Real cash flow becomes more important and analyses like the DCF become far more applicable.

And then there are macroeconomic factors at work – if the economy is in a slump, for example, both consumer and enterprise spending will be affected and businesses will be reluctant to upgrade to the latest software and hardware.

If you want a good example of a tech DCF/valuation, see our Uber valuation case study and video tutorial.

Technology Company Valuation and Deals

Q: One common question we get is, “What industry-specific valuation multiples and methodologies are there for technology? How do you value companies differently?”

Any thoughts on that?

A: Valuation is not that much different in technology investment banking, despite what you might have heard.

For profitable companies, you still use similar multiples: EV / Revenue, EV / EBITDA, and sometimes P / E… and the usual comparable company analysis, precedent transactions, and DCF analyses.

And then there are the less common methodologies like M&A Premiums, Sum-of-the-Parts, Future Share Price Analysis, LBO Valuation (finding the minimum price a firm can pay to achieve a certain IRR), and so on.

If you don’t believe me, take a look at these examples:

From these presentations, two valuation measures pop up that you haven’t covered before:

  • Net Asset Value: Simply Assets Minus Liabilities. If this is lower than market capitalization, it might provide a signal for growth. Like any other valuation metric, it’s all comparative.  If the NAV is greater, it might be worth it to liquidate the company rather than continue operations.
  • Liquidation Analysis: More art than science. Assign a percentage that the creditors can reap from the sale of inventory, physical assets, and accounts receivable.  Don’t forget to include discount if you are pursuing a bankruptcy process (see page 41 of the Duff & Phelps presentation).

These methodologies are more applicable for firms on the brink of bankruptcy or whose values have declined greatly, as was the case for Atari here – you normally don’t see them used for healthy companies.

Q: Right, that makes sense… but going back to the example with Internet companies, don’t you see different methodologies used there?

A: Not so much different methodologies as more “creative” multiples. For example, you’ll see Enterprise Value / Unique Visitors, Enterprise Value / Registered Users, and other variants like that with those companies.

And you may see multiples like EV / Subscribers for software and telecom, and sometimes even Gross Profit multiples (EV / Gross Profit) for hardware companies since margins are so important there.

Outside of those, though, valuation is quite standard.

Q: I’ll have to object once again here because I noticed in those presentations above that they draw special attention to a “Net Operating Loss” in one section – can you clarify that?

A: Sure, that’s a good point… many tech companies are unprofitable early on, or even in the late stages if they’re struggling financially as Atari was.

If they consistently lose money, they’ll accrue Net Operating Losses (NOLs), which allow them to save on taxes in the future by deducting the NOLs from their taxable income.

If the NOLs are significant, sometimes you factor them into the valuation as well, usually by calculating their tax-saving value to an acquirer.

Normally after an acquisition you can only use a small portion of the target company’s NOLs to offset your own taxes, so that’s what you look at and value.

You can check out a sample video covering this concept on Breaking Into Wall Street right here.

Since NOLs reduce taxes and save you money in the future, they’re sometimes viewed as a “cash-like item” and may be subtracted from Equity Value to calculate Enterprise Value.

For more on this topic, also see our coverage of how to calculate Enterprise Value.

Q: OK, great – anything else we should know about valuation-wise?

A: Not really. The methodologies, again, are very similar but you may see a few industry-specific metrics and some more advanced nuances like NOLs depending on the company you’re analyzing.

Technology Investment Banking Exit Opportunities: Billion-Dollar Acquisitions?

Q: So do you like being in tech banking?

A: It depends what you’re looking for and what your team is like. In tech, you won’t work on the massive deals that you see in other industries like metals, mining, and oil & gas – companies are much smaller and deals are much smaller as a result.

Some people claim that you don’t develop in-depth technical skills here because tech companies have simpler capital structures, but I don’t necessarily think that’s true; you’ll do plenty of modeling if you work with more mature companies.

And, of course, if you’re interested in tech and in getting into venture capital or venture capital careers, this is a great group to be in.

Q: Any recommended resources for learning more about technology investment banking?

A: Wired mainly, or Red Herring. The usual suspects including Financial Times and The Economist are good reads as well.

Tech bankers also read Business InsiderGigaOMTechCrunch, and Wikibon.

Q: Thanks for those. Most tech start-ups are aiming for that billion-dollar exit, but I’m guessing most technology investment bankers aren’t so lucky.

Where do most tech bankers go after their time in banking?

A: Definitely venture capital and private equity.

Working with early-stage companies makes it ideal to continue working with early-stage companies, so VC is a natural fit.

And there are lots of growth equity PE firms that focus on technology, or at least have made many investments there (ex: Silver Lake, Francisco Partners, Summit Partners, TA Associates, Technology Crossover Ventures, Accel-KKR, Vista Equity, Vector Capital).

Finally, the mega-funds (KKR, Blackstone, TPG, Carlyle, etc.) also have dedicated tech teams, so there are plenty of opportunities for tech analysts and associates there.

And some bankers also move to boutiques – over the past few years a lot of tech-focused boutique banks have emerged, such as Qatalyst Partners, Allen & Co., Union Square Advisors, GCA Savvian, CODE Advisors, etc.

This has happened because many deals and financings in tech tend to be small, but the bulge bracket banks need to focus on winning huge deals – that leaves a gap in the market for these smaller firms to sprout up and win business.

Needless to say, if you’re in the US and want to do tech banking, you need to be in San FranciscoIt’s the biggest hub and where most of these boutiques as well as the top groups at larger banks tend to be.

Q: Great, thanks for your time. Enjoyed the chat!

A: Sure thing. And thanks for running this site – it has been so helpful in my own career development! Feel free to leave any questions or comments here. And thanks for creating the financial modeling program you offer, the modules there have been worth their weight in gold.

Keep up the good work!

M&I - Luis

About the Author

Luis Miguel Ochoa has facilitated a variety of strategic initiatives from corporate acquisitions to new market development. He earned his B.A. in economics from Stanford University where he was a member of the varsity fencing team.

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  1. Nice article. How does technology groups fare in recessions/economic slowdowns? Also, are they more competitive to break in compared to other industry groups such as industrials?

    1. Nothing does well in a downturn. Yes, big tech companies might be OK, but startups and smaller companies are dying left and right. Tech might be a bit more competitive to break into, but there are also more spots because it depends to be a bigger group… so… maybe.

  2. Avatar
    sumit das

    How can I contact you, since I have many question to ask.

  3. Hi

    Can you talk about how Valuation is tied up with popular Unit Economics analysis on a tech company

  4. Hi Brian,

    I have an interview at a specialist TMT boutique in London for a junior analyst role, I’m in the final round with 2 senior partners. I’ve already been tested on my technicals by analysts / associates so I’m guessing this time it will be more focused on fit? Assuming that being the case, what fit / behavioural are likely to come up? I’ve prepared for generic fit questions such as: Why our firm? Why TMT? Why investment banking? Why boutique v BB? Interests / hobbies outside of work?

    Are there any other areas / questions that might be worth preparing for?

    Many thanks,


    1. Avatar
      M&I - Nicole

      Yes, these questions are likely to come up. Other fit questions may include how you are as a leader/team player, etc. I’d also make sure you understand the industry well and be able to articulate drivers of the industry.

  5. Many people are talking about new money these days. Is TMT an opportunity to work in the ‘new money’ industry? Are most opportunities based in SF?

  6. Any chance of a future article about the gaming (casino) industry?

    1. Maybe, but it’s often grouped together with Real Estate which was covered here: Will see if we can find someone who works more with gaming companies though

  7. Avatar

    I’d like to ask Luis a couple of questions as well. Could I get his info?


    1. I will ask, but feel free to leave a comment here as well… I worked in tech banking and am familiar with the groups and you may be able to get a faster answer with a comment here

      1. Avatar
        M&I - Luis

        Hi TechnoBanker, what’s the best way to follow up with you? I would prefer that you send your email to the inbox:

  8. Hey M&I, thanks for this article.

    I have a question if you guys wouldn’t mind..

    if I just graduated from a non target university, would it be better to apply to one of those Graduate Entry programs at a prestigious university and study for another bachelors for 2 more years, or would 2 more years of work experience at a non ibank be better?

    I would assume having a better degree would help with MBA applications and future job searches.

    1. Avatar
      M&I - Nicole

      2 years at a target is probably better (if you want to break into banking) if you can afford it, unless you can find a way to network a lot or you have work experience at an ibank, be it a boutique or third tier

      1. Thanks for your reply!

        Do you mean it would be better to do 2 more years (at a target)for a double degree in the long run if I can afford it?

        1. Avatar
          M&I - Nicole

          Chances might be higher but its not a guarantee

  9. I currently go to school in Boston. Would it be more difficult for me to land a position doing tech IB on the west coast as opposed to other kids who go to school on the west coast?
    I’m also currently a sophomore, what do you recommend as a good intermediary step for my soph year summer?

    1. Avatar
      M&I - Nicole

      Yes it might be easier if you were on the West Coast. I’d join an investment club and perhaps take an internship (paid or unpaid) if you can while you’re studying

  10. Avatar

    Any comments on HF exits after 2-3 years as a tech banker? I just started working at a top BB in their tech group and I’m currently leaning more towards working at a HF compared to PE/VC after my analyst stint. Are HF’s also a common exit for tech bankers?

    1. It can be done but it’s tougher since many tech groups work with smaller and sometimes non-publicly-traded companies. I have definitely seen more people go to tech PE, growth equity, and VC than HFs. But if you find the right fund (e.g. something focused on tech or a fund that uses merger arbitrage for tech companies) it could work.

      1. Avatar

        Thanks for your reply. I understand your point as to why it might be tougher, but what would you then recommend for someone in my shoes to best position myself for an analyst position at a long/short HF following my IB stint then?

        In addition to work experience, I have a MSF from a “target”, high grades, strong ECs and wrote my thesis on an investment strategy in collaboration with an internal hedge fund at a large AM.

        1. You have to show your passion for the markets, which really means “Have in mind great stock pitches and show how you’ve done extra work BEYOND just financial analysis i.e. calling people, suppliers, and customers to figure out your view.”

          Your story should be something like: “I’ve always been passionate about the markets and deals, but went to IB first to get the broader skill set. But then on one deal I worked on, I thought of an interesting investment strategy but couldn’t implement it because I was a sell-side banker… but that rekindled my interest in the public markets and my thesis before this, and I got more and more interested in going into a HF role where I could implement these types of ideas.”

          Actually passing the CFA is overkill / probably impossible due to time constraints, but mentioning that you’re studying for it or plan to take it may also help.

  11. Any Media and Telecom interviews coming up?

    1. The goal is to cover all the groups eventually, so yes. The time frame is not yet known for the rest but hope to add them all eventually.

  12. Avatar

    Hi, is there any possible way that I could field questions to the interviewee personally via email? I also currently work as an SA at a boutique tech bank and wanted to learn more about BB tech groups.

    1. Yes I will pass your message along to Luis and you can connect directly with him.

      1. Thank you.

      2. Brian,

        Same situation as TechBankingSA. Currently an SA at a boutique working with small companies helping them raise VC and institutional investor money. Would love to connect Luis to learn more. Thank you.

        1. Yup will ping him and let you know

  13. Avatar

    Great article with useful links.. And great to see the mobile page for M&I… Way to go..!!

    1. Thanks. Yeah mobile turned out to be easy, just needed to buy a theme.

  14. Brian, can you do an article on energy banking?

    1. Yes it’s coming up soon, Luis is working on it

  15. Avatar

    Would you be so kind and post more links to great ppts, from which you can learn the methods and argumentation used in the deals? Thanks in advance.

    1. There are a ton of PowerPoint links in the other industry-specific articles and in the article on pitch books:

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