Investment expectations for emerging technology markets in the year ahead

Talking points

• Recent trends have driven an uptick in venture funding for expansion-stage technology companies compared to other emerging growth companies (EGCs) in 2024.
• These trends include a willingness among investors to pay for rapid growth if liquidity and profitability look strong, and a preference for tech sectors with a greater potential for exits.
• Deloitte’s latest Road to Next publication provides an in-depth look at these trends, which we’ve also summarized below.

An abundance of caution has dampened EGC venture funding over the past two years. But one segment has bucked the trend: expansion-stage tech companies. This select group of EGCs, which are still privately held and include investments from institutional funds, are some of the fastest-growing, most innovative verticals in the tech space. In the first quarter of 2024, the value of expansion-stage tech company venture investments increased substantially to $18.1 billion (from $14 billion in Q4 2023), with the number of deals exceeding 300.

What’s behind this resurgence of expansion-stage tech startups compared to other EGCs? And what trends will affect funding prospects moving forward? The answers to both are explored in Deloitte’s new Road to Next thought piece that can help explain the near-term outlook for EGC funding. Let’s break down some of the findings. 

The importance of liquidity

Liquidity continues to be a major concern for EGC tech investors. A decline in EGC liquidity in 2022 and 2023 decreased the number of exits during that period from the 2021 peak. As a result, investors have upped their focus on liquidity, leading to an increase in exits in expansion-stage technology so far in 2024.

The data shows that buyouts and strategic acquisitions make up the bulk of Q1 2024 exits, while some additional liquidity is also generated by secondary-market transactions. With the cost of capital still high compared to the past, valuations have decreased to more reasonable levels. The result? Transactions are currently more appropriately priced, so more corporate development and late-stage investment teams are now considering them. 

The shift to profitability

Closely related to liquidity is profitability. Over the past two years, concerns over liquidity and exit potential have shifted the negotiating advantage in venture deals toward investors. What does this shift mean for expansion-stage EGCs? It means there is now a distinct emphasis on transitioning from growth at any cost to prioritizing profitability. As a result, companies with clear profitability in their direct line of sight now have a fundraising advantage. That’s why we can expect proven profitability to move higher on the EGC tech companies’ agenda over the next 12 months.

Preferred tech sectors

When it comes to investment decisions, not all tech segments are created equal. Those focused on technology innovation have garnered the lion’s share of venture funding based largely on exit potential. The artificial intelligence (AI) and machine learning (ML) segment has led the charge with the largest deal value so far in 2024, followed by digital health, robotics and drones, agriculture tech (AgTech), and insurance tech (InsurTech). Not surprisingly, these markets have seen the largest uptick in liquidity, leading to a general flattening of this
metric compared to the volatility of the past two years. While these trends
could easily reverse, at present they are driving the near-term funding market.

What role can Deloitte play?

Want to learn more about these EGC tech funding trends? Read Road to Next, our quarterly report on emerging investment trends in private financial markets and the venture capital ecosystem. Deloitte understands the value and long-term investment potential in technology companies and can provide a wide range of audit and assurance solutions. Don’t hesitate to reach out to either of us with any thoughts or questions.

The services described herein are illustrative in nature and are intended to demonstrate our experience and capabilities in these areas; however, due to independence restrictions that may apply to audit clients (including affiliates) of Deloitte & Touche LLP, we may be unable to provide certain services based on individual facts and circumstances.

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