United States: Could 2024 Mean A Happy New Year For Founders?

It's no secret that startup founders have faced a difficult past two years. Beginning in 2022, we saw valuations slide, and funding became much harder to secure. That has, of course, continued into 2023. So, what will 2024 hold for founders?

A recent article in TechCrunch examines just that, outlining a more positive outlook for founders in the new year. They point to three factors that could impact startups: a growth rebound, venture capital totals that could bounce off of 2023 lows, and an IPO market that could open back up. I am skeptical that any of these three factors will materialize.

Regarding a growth rebound, TechCrunch reports that the outlook for software sales in 2024 looks positive. Gartner, Inc. has also forecasted that "worldwide IT spending is projected to total $5.1 trillion in 2024, an increase of 8% from 2023. Their report also indicates double-digit growth in the software and IT services segments, which they say will be largely driven by cloud spending. Because software is the most common product produced by startups, that could mean we will see growth next year as companies accelerate their spending in this area. From what I am seeing anecdotally, however, businesses continue to consolidate software and IT spending into fewer platforms and a smaller, more trusted group of vendors and seek to eliminate non-essential services that do not generate calculable efficiencies.

Venture investment could also begin to flow again. Interest rates are expected to drop in the coming year as there has been encouraging news on the economy. And this is not just speculation; on December 13, the Federal Reserve indicated that it is ready to make at least three cuts next year and up to four in 2025. TechCrunch reports that this might mean tech shares and valuations could get a boost as "cash-rich" investors look for new places to invest. Investors are also willing to take greater risks when interest rates are lower, which is always a good thing for founders. On the flip side, however, institutional investors who have made commitments to venture capital are substantially over-weighted to the asset class, given relative valuations. As such, it looks to be another challenging year for existing firms to call capital or sign new commitments in amounts that are more than replacement amounts.

And then there is the IPO market. Exits have been difficult for founders over the past two years, but much has been written recently about a possible thaw in the IPO market. An article in Yahoo! Finance quotes Barclays Global Head of Tech Investment Banking Kristin Roth DeClark as saying there's a "huge backlog" of tech companies that could go public in 2024. She notes, "These companies will be larger and be 'much closer to profitability, if not profitable,' making it easier for investors to take a chance on them." If the fourth quarter of 2023 is any guide, however, newer public companies will continue to struggle to gain commitments from institutional investors, who will find it hard to resist doubling down on the returns they are getting among the "magnificent seven" stocks (Alphabet, Amazon, Apple, Meta Platforms, Microsoft, Nvidia, and Tesla).

TechCrunch also points out the potential impact of Artificial Intelligence on startups in 2024. AI-powered automation could lead to much greater efficiency for startups and improved operations. This technology can automate various tasks, from data entry to customer support, meaning significant cost savings for founders. More efficiency equals greater profitability and, in turn, more interest from investors. As always, no one can predict the future 100%, but conditions seem right for a sunnier year for startups. As we approach the end of 2023, founders should prepare for what this means and work with their advisors to determine how they can best capitalize on more favorable conditions.