By Richard Moore, Director at Calculus
How has the tech sector performed in 2023?
When the cost of capital increases in line with rising interest rates, the costs faced by the most capital hungry sectors increases by the most.
Fast growing sectors such as technology require significant capital and therefore valuations have been moderated accordingly. Public and private M&A activity across the tech sector has also been materially impacted by the increased cost of capital, driving valuations down further.
It is usual for there to be a lag between an increase in the cost of capital and the expectations of investors on the one hand; and the ambitions of companies raising funds on the other. This was particularly the case during the first half of 2023, although towards the end of the year companies coming to market to raise fresh capital became more realistic.
What do you believe will be the main challenges facing tech in 2024?
It’s broadly accepted that interest rates will remain high for the next few years. As higher interest rates continue to filter through to client cash accounts the temptation will be to adopt a short-term view and allocate a large portion of an investment portfolio to cash. This has the potential to further exacerbate the volatility across both public and private market tech valuations.
Prolonged high interest rates also have the potential to continue to stifle the M&A activity across the tech sector. A realignment of the expectations of founders and potential acquirers could help resolve this.
In which tech subsectors do the best investment opportunities lie?
The effect of the economy has impacted sales, operational efficiency and access to capital, and companies have had to be resourceful. B2B tech companies with intellectual property at the core of their value and a business model centred around a product with a proven market fit and a defensible market position, have the potential to grow significantly in value. Delivering on the Company’s business plans will have a far greater impact on their valuation than the change in the interest rate environment.
What does a potential change in UK government mean for tech?
There seems to be a cross party agreement and understanding that tech as sector will continue to play a vital role in driving future economic success and expansion across the UK. Various schemes and tax incentives are successfully facilitating the flow of capital into a sector which in return continues provide a high level of employment and productivity across the nation. Regardless the outcome of the 2024 Election all signs seem to suggest government support for the tech sector will remain firm.
What role can the VC sector play in boosting tech investment in 2024?
Various forms of venture capital will continue to be a crucial source of investment for tech companies at different stages of their growth journey. However, the funding environment for private tech companies has changed over the last 12 – 18 months. Investors are more focused on capital efficiency and the path to profitability than before the turn in the interest-rate cycle, when the pursuit of revenue growth was paramount. This is a mindset which will likely continue into 2024.