A version of this article was originally published in December 2022 in the Denver Business Journal.

There are three items that should be on the mind of every technology founder going into 2023: transaction flow, valuations and funding availability, and innovation.

Learn more about the major trends impacting technology companies as well as opportunities and challenges to help you position your company for success as you look to the next year.

Major Trends Impacting Technology Companies

Three major trends that will continue to affect technology businesses into 2023 include the following:

1. Transaction flow
2. Decreased valuations and funding availability
3. Continued innovation

Transaction Flow

Technology merger and acquisition (M&A) activity in the United States steadily grew throughout the 2010s and into the early 2020s, with 2021 seeing no less than $940 billion in aggregate deal value across more than 5,000 completed transactions, according to our Technology Landscape Macrotrends report. This is in part due to pent-up demand resulting from the initial year of the pandemic.

However, 2022 saw a slowdown with $443.1 billion across close to 2,000 completed deals as of mid-July. Geopolitical stress and inflation are lending to that slowdown. While 2022 figures thus far are lower than 2021, they’re still considered fairly high for the market.

M&A activity remaining for 2022 is focused on completing transactions that were started earlier in the year or before year-end. It’s anticipated that things could slow overall into 2023.

The anticipated slowdown could be due to a number of factors:

• Political landscape
• War in Ukraine
• Recession
• Inflated valuations in the technology sector over the past few years

Decreased Valuations and Funding Availability

All growth-stage technology companies need funding to develop and innovate.

In 2021 and through part of 2022, valuations and funding rose at a fast pace, with a record number of venture capital, private equity transactions, and overall funding.

The outlook looks distinctly different for 2023: Fundraising is now at a historically low rate per share. Depending on where a company is in their growth cycle and their valuations, funding might prove challenging when it comes to expectations.

Most technology companies raise funding to sustain operations and innovation for a few years at a time. The goal is to raise at its highest possible valuation at each funding, then have increased valuations in each subsequent funding cycle supported by higher valuations through innovation and business growth.

With start-up valuations high the past few years, it’s increasingly difficult for founders to secure additional funding as valuations decrease. Positioning companies in the current market could lead to a gap in expectations between bankers and founders:

• Founders. The next round of fundraising could be based off decrease in valuations in the market despite continued company growth.
• Bankers. Raising capital at inflated valuations could delay future capital raises if the market doesn’t continue to deliver increased valuations. A company’s positioning in its market, growth trajectory, development of products, and life span could all be important factors for a banker to consider.

Continued Innovation

Riding on the coat tails of disruption from the pandemic, technology transformation of legacy sectors continues to drive innovation and opportunity. Disruption spans multiple industries, including, but not limited to:

• Cybersecurity
• Retail
• Financial services and payment processing (Fintech)
• Health care
• Logistics
• E-commerce
• Education

Innovation is still strong. However, it could slow in reaction to fundraising difficulties.

Opportunities and Challenges

Five items to consider as you assess your organization’s operations in coming years include:

1. Labor and inflation
2. Funding
3. Start-up growth
4. Technology
5. Taxes

Labor and Inflation

Getting good people in the door and keeping them is a challenge with increased turnover, inflation, and the rising costs of labor.

Inflation and the rising cost of talent are expected to continue driving up labor costs in 2023 and beyond, which could impact growth as companies compete for skilled talent.

It could also lead to offshoring at earlier stages of the development life cycle.

With a workforce that continues to be largely remote or dispersed, organizations face new operational and regulatory challenges as well as opportunities to mitigate rising labor costs.

Funding

Capital markets remain available to emerging and growth-stage companies, including initial public offerings (IPOs) and institutional investors, which increases the ability to raise funds and accelerate growth. Special purpose acquisition companies (SPAC), meanwhile, have cooled.

Federal funding for certain sectors, such as communications and media, and medical technology (Medtech), could improve the ability to innovate and raise nondilutive capital.

Start-Up Growth

Companies are accelerating through the traditional stages of a business life cycle—from emerging to growth to mature.

As a result of the work-from-home environment, companies are experiencing reduced building lease costs and preparing for what the next cycle brings. By extension, the costs to launch a business by leveraging infrastructure could continue to decrease.

This would give emerging and growth-stage technology companies the opportunity to grow.

Technology

There’s a driving need for companies to better understand their IT environments, systems integration, and cybersecurity to ensure services provided to their customers are technologically advanced.

There’s also increased demand for system and organization control (SOC) examinations and Federal Risk and Authorization Management Program (FedRAMP) assessments.

Taxes

There are over 9,000 state and local jurisdictions that impose taxes on businesses, and their rules are in constant flux. Tax changes and regulation continue to be a challenge for companies.

The need for organizations to stay informed, be compliant, and mitigate exposure is predicted to continue.

Here are some tax-related challenges and opportunities for technology companies:

• Keep pace with tax law as companies grow rapidly
• Mitigate nexus challenges because a company’s footprint and customer base constantly change
• Monitor and mitigate any potential tax liabilities
• Stay up to date on state, local, and international tax laws, which often change
• Identify and leverage cost-saving opportunities such as the R&D tax credit

Despite fears of economic slowdowns and other ongoing market challenges stemming from the COVID-19 pandemic and supply chain dislocations, the inexorable advance of technology spending and investment will likely sustain dealmaking at a moderate pace—barring outright calamities.

We’re Here to Help

For guidance into growing your organization or overcoming challenges, contact your Moss Adams professional or ask a question.

Additional Resources

• Technology Practice
• IPO Solutions Services