The market and venture capital accelerate digitization amid the pandemic

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However, the regulatory readjustments in the making are keeping technology companies on their toes about the degree of competitiveness in a key sector to disseminate digitization to other leading and strategic industries and to generate employment in the new business cycle, the post-era era. -industrial.

The United States, the first market on the planet and the most technologically advanced market, has once again made a move faster than its economic rivals. At least, when it comes to reactivating the engines of dynamism and in the neuralgic sector of the post-Covid business cycle, which will be, above any other component, eminently digital. Software and data companies have taken positions from the moment the last of the stimulus programs was activated – the first of the Biden Administration – and showed between January and March that the American technological hegemony is far from subsiding. Because in this initial period of take-off, the credit market has been massively directed towards these assets, according to data from LCD Market, which reveals a 19% jump in LBO operations -for the purchase of firms in the sector- due to a volume of new loans of $ 181 billion. A historical record for a quarter that is equal to that recorded in all of 2020, a year that, despite the epidemic, increased financing for acquisitions of software and data companies by 12% compared to the previous year. A large part of these placements were due to leveraged purchases, but they have ended up starring in notable Mergers & Acquisition (M&A) processes that doubled in number those that were consummated between January and March of last year. Right during the outbreak of Covid-19. A trend that seems to continue, since in April the lending capacity of institutional investors reached 17,800 million dollars compared to the 12,300 that were compulsory, on average, in the three months of the first tranche of 2021, and almost 10,000 million more than in the monthly evolution of the previous six months, between October and March.

This spectacular upward trend has already made purchases of technology assets more expensive. But despite analytical voices warning of a speculative market bubble, investments in software and data stocks appear solid. Orlando Bravo, co-founder of the venture capital fund Thoma Bravo explains it eloquently: “when an entrepreneur is imbued by his clients, to satisfy their purchase demands, the software is your tool. A company cannot carry out transactions, nor analyze information, nor communicate, nor operate or offer goods to its consumers without making an integral use of technology ”. The prioritization of investments in digital innovation is no longer a surprising novelty for lenders and has become spending needs that they are eager to hear, explains Bravo: and the health crisis has accelerated the credit appetite for digitization. To the point that these companies continue to have a “love relationship” with the market, as has been reflected in the recovery of tech-branded prices during the Great Pandemic. A stock market activation that “has led numerous venture capital firms to anticipate their entry into their shareholding structures before agreeing to M&A contracts”, recognizes Benjamin Rubin, from Proskauer Rose. “In the midst of extremely high levels of competition between the different variants of lenders and restructuring processes in tech companies.” Even incurring in debt increases and intense negotiations to extend the due dates of payments.

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Investment portfolios with technological securities have been able to trade under more or less speculative parameters in the last decade. But the health crisis has revealed the strength of digitization. “We are moving towards a post-industrial society,” say a team of Citi analysts by Carl Benedikt Frey, director of the Oxford Martin Chair at the British university. “Advanced economies have seen their manufacturing jobs decline due to outsourcing and automation and are gradually moving towards service sectors that have assumed remote work and that demand professionals with higher qualification ratios.” Last year, according to Citi GPS Technology at Work 5.0, advances in the field of technological innovation in American companies managed to connect the 52% of the workforce that remained active during confinement, which shows that this leap towards Digitization has spread with unusual speed throughout practically the entire industrial landscape, from the retail trade, to the healthcare segment, the financial sector and, of course, the industry itself in all its multiple areas of activity. And automation has burst into this journey, accelerating on three fronts: in the elimination of low-skilled jobs, in adapting to the resilience of companies in the face of economic and stock market recessions, and in the adoption of preferences of online consumption, through e-commerce and digital ecosystems, which demand technological vanguard.

In Europe, the commitment to digitization as a pillar of the new sustainable economic pattern in the internal market, requiring huge investments in technology to achieve energy neutrality, and its transfer to other sectors, is already underway with a substantial change in the rules of play. The European digital world is already subject to the Digital Services Standard (DSA) and the Digital Markets Standard (DMA). Both, under the guiding principle promulgated by the super-commissioner for Competition, the Danish Margrethe Vestager, that “everything that is illegal offline, is also so online.” In short, the European regulatory framework establishes obligations for digital signatures. Depending on its size. With up to four levels of responsibilities. In which the bigtechs, large platforms or gatekeepers – those that exceed 10% of the 450 million users in Europe – will also be more closely monitored by the demanding laws of free competition of the community club. The DSA establishes rules of transparency with the algorithms and requires external audits, access to data from large platforms for investigation or the obligation to maintain a registry of users who sell online, to help identify those who sell illegal goods. So the big online platforms will have specific requirements; among others, explain how their algorithms work or share data for your research. While the DMA prohibits certain harmful practices with the competition, under coercive sanctions that can reach up to 10% of world business volume. Fines greater than the 6% stipulated by the DSA.

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A regulatory shift that transcends the online field, which reaches the 5G spectrum, the battlefield in which the technological players will be resolved in all its dimension and that has been called into question by voices such as the president of Telefónica -in line with that of other European operators-, who warn of the risks that “the new digital world, which has swept away the old standards of the analogue world”, should advocate for fair and viable competition. “It is not about regulating more, but about deregulating more”, because “some regulated companies cannot continue playing in the same field with others that are not.” Because, in his opinion, the threat arises that “technologies such as 5G, called to lead the digital world, will be lost even before they can be developed.” In full progress of innovation towards 6G. Pallete warned that “Europe cannot be the playing field, it has to be a relevant player in the digital world. We must recover the digital sovereignty that today other powers dispute ”. And he pointed out that “the proof that the current framework does not work is that, in addition to competing with OTT’s – service firms for free transmission of audio, video and other content over the Internet without the involvement of traditional operators in the control or its distribution- there are hundreds of small European telecommunications companies that are born outside and outside the competitive dynamics, and that are protected by an obsolete regulation ”. Thus – he added – “you cannot compete; only the speculative advantages from which a few benefit are perpetuated, at the cost of weakening those with a firm investment commitment “, which seriously undermines their ability to lead the digitization of society.”

A criticism that James Mancini, from the Competition Division of the OECD, also conveys to the army of bigtechs, given the “growing social and governmental concern about the conduct of these firms and their impact on the markets”, which is ending with “ the idea that big is not bad ”that has guided the decisions of antitrust authorities and courts in all latitudes of the planet. In defense of its high innovation ratios, its innovative business models or just because of its efficient operations. But “more aggressive antitrust rules can be established without abusing the dominant position of companies and strengthening markets, protecting consumers, and raising productivity.” That is, without falling into a monopolistic temptation. In short, says Mancini, bigtechs must adapt to tax laws and market liberalization laws and specific requirements. Because, more than digitization, technological advances point to a digital transformation, to the channeling of innovation in a multiplicity of productive sectors. A total convergence between business and business technology skills that Deloitte Tech Trends 2021 affirms requires a true organizational reconversion of companies, a resetting strategy around Big Data and software advances.

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From the McKinsey consulting firm, companies are recommended to undertake a renaissance of their business models. Because digitization is not the same as digital transformation. Hence, it is necessary to establish an operational nucleus in its structures that revolves around customer quality. With exhaustive and rigid software processes that serve their value chains with the capacity to respond to risks. This requires a “deep understanding of consumer preferences”; very especially, in a crucial cycle change like the one that emerges from the Great Pandemic that is born under deep transformations in growth and structural patterns. “Analyzing the lines of activity, identifying the efficiencies and vulnerabilities of their production models and channeling the aversion or difficulties of this transition should be at the frontispiece of the executive leadership of the companies”, explain Ramesh Srinivasan and Laura LaBerge, analysts of the firm. “If you want to face the change towards digital culture”, a short-term remodeling is necessary in three essential areas: ending functional silos in operational departments, overcoming the fear of undertaking controlled risks and shaping the company under a homogeneous corporate strategy. conception and consumer preferences of customers. This will require investments in technological capital to create channels for the transmission of offers and services, relocation and acceleration of restructuring processes and capital expenditures in a dynamic way – contemplating divestments or merger plans and alliances – in addition to reviews of access agreements to financing and loans and the capital markets, advances in the capture and treatment of Big Data and a unification of the productive forces.

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