Embracing capital efficiency critical for tech companies amid market volatility

An evolving capital landscape is forcing technology companies to embrace intentionality in how they approach internal efficiency and external fundraising.

For early- to mid-stage tech companies, this means extending their runway by leveraging artificial intelligence and eliminating redundancies. If incorporated thoughtfully, these strategies can help companies maximize their current resources and reduce dependence on outside investment.

This approach also allows such companies to work toward profitability while being able to respond quickly to changes in the market. In contrast, late-stage companies continue to require significant investment—whether through venture capital (VC) or other capital or lending means—to support scaling, acquisitions and extended paths to liquidity.

Why such a stark divergence? A slower initial public offering (IPO) market and tighter capital conditions mean late-stage companies face increasing pressure to secure funding for growth and liquidity events. It also becomes harder to slow down how much is being spent unless a massive layoff is considered.

Early- to mid-stage tech companies have more flexibility to make difficult decisions such as scaling down, slowing growth rates and laying off employees in the quest to become more capital-efficient.

Understanding these shifting capital dynamics is critical for both investors and middle market technology leaders navigating today’s challenges. This isn’t to say VC money is not available for tech companies—but the valuation expectations set during the COVID-19 pandemic no longer hold in the current market despite the availability of dry powder.

Early- to mid-stage tech companies must eschew notions of the world as it ought to be and take advantage of the opportunities actually available in the current landscape. Here is a look at some of the strategies these companies could consider in order to succeed despite the challenges of an increasingly volatile environment.

Focus on the product amid market noise

Uncertainty due to fluctuating economies and an unpredictable political landscape is the current standard. In the tech sector, heightened risk in the fundraising environment means a slowdown in exit opportunities.

As a result, some companies are postponing their IPOs—either for the short term or indefinitely. This trend has emerged in recent years, particularly in the tech space, but going public is still a potential option to consider.

While these external threats require appropriate consideration, they also reaffirm the need for early- to mid-stage businesses to put renewed attention on something within their control: their respective products. Focusing on what the business is building, emphasizing key differentiators and fleshing out plans to go to market are key steps toward profitability—which is more essential than ever in the tech sector.

Other ways that early- to mid-stage tech companies can be more capital efficient without depending on raising capital from investors include government grants, scientific research and experimental development (SR&ED) tax incentives and more favourable debt structuring.

Going public is still something to consider for companies looking for an exit opportunity or wanting to raise capital when other means are not appropriate or viable. However, major changes in the IPO market mean fewer tech companies are going public due to an abundance of private capital, heightened regulatory burdens, and increased risk and costs to businesses.

Staying private also opens these businesses to the global breadth of investment dollars while mitigating some of the risks of a fluctuating marketplace. But capital efficiency remains the key, so leveraging the right partner to optimize operations is critical for success.

The takeaway

The economic realities facing tech companies mean it’s more important than ever to double down on embracing capital efficiency as a core tenet. A slow IPO market and shifting investor expectations are not a death knell but rather a wake-up call for businesses to rethink their strategic priorities.

Fundraising challenges in the industry do appear to have less of an effect on middle market businesses—particularly as these early- to mid-stage companies work strategically to position themselves for long-term success.

Exploring internal enhancements and embracing new technology, in collaboration with trusted advisors, can help these businesses scale upward sustainably at a time when the path to growth may appear less linear than before.