Tech companies adapt to the scarce funding environment

“The money is not making the round trip,” says Marc Cadieux, president of Silicon Valley Bank in September 2024 to the Wall Street Journal, referring to the growing challenge for venture capital investors who may not be making the expected returns on their investments in growth startups.

Tech IPOs have slowed in North America over the past couple of years. As technology companies progress through their lifecycle—startup, growth, maturity and exit/IPO—investors typically follow along. However, if an expected step on this trajectory does not materialize, investors do not reap their returns.

In the face of a funding environment characterized by scarce venture capital, reduced business valuations and fewer exit options, technology companies must embrace innovative strategies to secure investment, drive growth and strengthen their competitive advantage. Technology companies have two main ways to exit, through IPO or acquisition. 

The IPO environment

Initial public offerings, one of the main ways for technology, media and telecommunications venture capital investors to gain liquidity on their investment, have seen a weak market since 2022. A rebound driven primarily by the inverse relationship between asset valuations and interest rates is expected by early to mid-2025, and a lower interest rate environment should help leveraged buyouts and reduce the bid-ask spread needed for M&A and IPOs. However, IPOs are currently not budging, primarily due to market uncertainty and tentativeness following the U.S. election related to tax policy, tariffs and other considerations as to who will be appointed as leadership in the new administration. Liquidity is important as limited partners who invest in venture capital or private equity funds rely on incoming investment distribution to satisfy capital calls. 

A decline in acquisition activity

Though anticipation for deal flow was high after an uptick of activity last year, M&A for technology companies has declined sharply since 2021, decreasing from 3,836 deals that year to just over 1,900 in 2024 (as of early December) according to Pitchbook data. In addition, over the past year we have also seen a reduction in deal values, largely attributed to a lower number of megadeals in the industry.

Technology companies have historically relied on significant investment to rapidly grow, build and hire. However, with less available capital, timelines for tech companies to exit have been postponed until exit opportunities re-open in the form of acquisitions or IPOs.

Tech companies must innovate strategically to secure limited investment and extend their runway. Given economic pressures, delayed funding rounds and fewer exit opportunities, many are pivoting toward business optimization and alternative financing.

Business optimization

When a tech company is burning more cash than it has coming in—whether through investment or revenue—reviewing current processes and operations is essential, eliminating inefficiencies and streamlining redundancies to focus on high-value people and projects. Many tech companies are adopting workflow automation software tools to optimize ongoing projects, meet deadlines and eliminate redundant activities. Recently, tech companies have embraced the “do more with less” model, but there is, and needs to be, a balance between growth in the right areas and cost cutting.

Alternative funding

Because traditional equity investment from private investment firms has decreased, technology companies need to consider alternative opportunities such as non-dilutive funding sources. For instance, revenue-based financing, an alternative to equity financing that provides funding to tech companies in exchange for future gross revenue, is expected to see massive growth. According to Allied Market Research, this market is expected to grow to $42 billion of global funding by 2027, an increase from $901 million in 2019. R&D credits offer another source of non-dilutive funding when government agencies provide tax credits or grants to support innovation. For instance, the Canadian government allocated $4 billion through its SR&ED program in 2023 to encourage business research and development.

As IPOs remain rare and investors face increasing challenges in recovering their investments, tech companies are left to navigate a disrupted funding landscape. With limited exit options, companies must make decisions to extend their runway, whether by creating operational efficiencies or exploring alternative funding options. Even when the environment improves, leveraging process optimization and maintaining visibility into new funding opportunities can better position tech companies for sustained growth.