2024 tech industry trends for IPOs, M&A and cost savings

Last year, tech companies struggled to maintain the funding and growth they saw in the prior two years. Interest rates increased, and venture capital investments decreased for the industry. 

Investors balked at the high cost of “growth at all costs.” Instead, they looked for efficient, organic growth and evidence of profitability. When mature companies with compelling profitability stories tested the IPO waters in September, they earned funding. But high interest rates led even these companies to underperform. M&A activity was similarly depressed.  

The one bright spot was generative AI, which moved quickly from “someday” to “everyday.” After launching in November of 2022, ChatGPT reached 100 million users in January of 2023.

There is hope for growth in other sectors. Through the CHIPS Act, $52 billion became available, along with tax credits, loan guarantees and local funding. PE firms and corporations have impressive amounts of cash on hand.

Get ready for IPOs and M&A to recover

IPOs were up in 2023, and Q3 saw three large IPOs, including the ninth largest in the last twenty years. But the surge some predicted has not come to pass and the IPO window remained closed. Companies thinking of going public have refocused on 2024.  

The capital markets will continue to be cautious, demanding clear paths to profitability and growth. Macroeconomic factors such as interest rates and recession fears will likely continue. The larger picture could be further complicated by the presidential election.

That said, the market is unpredictable enough that companies should prepare for a change in investor sentiment. If investor enthusiasm rekindles, it’s important to be ready.

M&A activity was also down. Even a comparatively favorable metric, deal activity, was down 10,000 deals from 2021’s high. The total volume was dramatically off.

Companies should consider preparing five elements, about 12 to 18 months before a possible public offering:

1. An appealing equity story for investors

It’s important to frame that story, relate it to your risk profile, demonstrate differentiation, and outline a growth strategy founded on your business model.

2. High-quality and timely financial information

As a public company, you will have to make periodic filings with the SEC, prepare for audits, comply with Sarbanes-Oxley requirements, and show evidence of good corporate governance.

3. Robust corporate structure

Do your systems and processes facilitate your strategy and drive your financial results? Can you respond to business contingencies and market conditions?

4. An investor relations strategy

This should include earning calls, conference calls, road shows and investor presentations.

5. Capital structure and short-term savings

Look for savings that can be achieved with money raised from an IPO.  

Consider how the CHIPS Act facilitates growth 

Passed in 2022, the CHIPS Act supports innovation, competition and national security while striving to help depressed areas. It sets aside $50 billion, with $39 billion going to incentives for manufacturers and the remaining $11 billion going to R&D.

Application involves a three-step process:

1. Statement of Interest

This helps CHIPS administrators understand where you might fit, and adjust staffing to meet the volume of applications. 

2. Pre-Application Process

You’ll be expected to provide a detailed narrative as well as information on your ownership structure, sources and uses of the funds, and your company’s financials. You also need to specify what type of support you are asking for, such as direct grants, loans or loan guarantees. That process can be surprisingly involved.

3. Full Application Process

The full application process requires detailed financial modeling. If your model is insufficiently robust, you might be denied funding. Given this, you might need legal and professional advice and, in some cases, project management support. 

To apply, you need to be a U.S. manufacturing or manufacturing supply chain entity located in the United States. Funds pay for eligible costs, which include capital expenditures to build or retool facilities as well as necessary equipment. Supply chain applicants may request support to construct or expand facilities. Applications are accepted on a rolling basis. You’ll want to seek feedback from the CHIPS Program Office (CPO). Although it is still too early to determine how long the process will take, similar processes have taken 12–18 months. Direct grants can account for about 15% of the total funding for the project. The CPO will supplement that with loans or guarantees up to 35%.

You need to show that you have sought funding elsewhere. There is also a state and local matching grant requirement, and it is important to show community benefit for those matching fund applications.

Once a grant is awarded, there are some compliance requirements. These include wage compliance, as defined by the Davis Bacon Act. In addition, there is a 25% tax credit, codified in §48D of the tax code, for investing in facilities. Because it is refundable, companies do not need to pay the tax to benefit. While the disbursements apply to the supply chain, this is limited to investments in facilities that manufacture semi-conductors or the equipment that manufactures semi-conductors. Within those parameters, allowable costs are expansive, although space dedicated to administrative functions must be carved out.

Construction must begin before 2026. Any investment in China or other countries of concern within ten years of the placement of the facilities disallows the credit.