It’s important to stay disciplined.

The last two quarters in 2016 saw the beginnings of a VC reset, a cooling in what were otherwise hot and active funding markets for much of this tech cycle. Today, there’s a premium applied to disciplined and sustainable growth — keeping an eye on unit economics and go-to-market efficiency will be critical for consumer and enterprise companies alike.
Though by no means a hard-and-fast measure, public markets now apply their own “Rule of 50” when evaluating technology stocks: those whose growth rates (%) and FCF (%) exceed the 50% mark are given meaningful premiums to those who don’t. At scale, companies like Atlassian and ServiceNow are growing at strong quarter-over-quarter rates while also sustaining clear business model leverage. These companies support dramatically different valuation multiples relative to companies with lower leverage models.
Entrepreneurs needn’t underinvest to prematurely hit profitability. But they should internalize how today’s public tech leaders are being valued. In many cases, this means thinking early and often about how to architect product and distribution together as a single, efficient offering. “Product” is no longer just the bits of software, it’s also how the software is sold, supported and made successful.

JPLOGAN Technology
4. We’re seeing an acceleration of M&A activity and a growing IPO pipeline through the end of 2016, but the bar remains high.

Exceptional companies get bought, especially when buyers can rationalize a target with future revenue goals and product roadmaps in mind. Salesforce’s acquisition of RelateIQ in 2014, was less about consolidating the CRM space, and more about acquiring the foundation for Salesforce’s roadmap around data-centricity, artificial intelligence, and intelligent workflow. This “acquiring-into-my-future” effect drives strategic premiums and can often be the best motivation to catalyze a transaction.
Relatedly, we’ve seen a rush of non-tech incumbents active in private tech markets as of late. Whether Walmart+Jet, Unilever+Dollar Shave Club, Under Armor+MyFitnessPal, non-tech incumbents are not naive to the market refactoring described earlier**; how quickly can one be left behind by missing a critical wave? For many, spending 1–5% of current market cap is easy algebra if it means mitigating big existential threats and/or forwarding investing in the evolution of an existing market. This will keep a number of “non-obvious” acquirers active well into 2017.

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