Cut Through Venture: The state of global technology funding 2024

The technology sector led the strong performance of global equity markets in 2024, fuelled by investors’ insatiable appetite for any equity story that might benefit from the worldwide surge in interest in artificial intelligence (AI).

The FTSE All-World Technology Index finished the year up 35.0%, outpacing the overall index, which was up 17.7%.¹ Strong earnings at the biggest tech names, lower interest rates and expectations of an AI-powered boost to margins continued to outweigh concerns about ongoing geopolitical tensions.

Within technology, AI dominated investors’ attention – especially in the hardware segment. As of November 2024, stocks tied to the build-out of AI infrastructure had risen 80% since the start of the year, AI enablers were up 30% and early AI adopters had risen 7%.²

AI also emerged as a driver of returns across the wider market. The IT sector is leading the adoption of AI, with HSBC Global Research data showing about 23% of IT businesses already using AI, and a further 8% saying they will within the next six months. Tech giants including Microsoft and Meta are enjoying a revenue boost from AI services, such as copilot, cloud computing and AI advertising tools. Professional services and education are the next biggest adopters.

As time goes on, the performance improvements will penetrate more deeply into other sectors, such as healthcare, where AI has the potential to augment both drug development and patient care.

But it is already clear that the promise of gains in productivity and profitability from AI has fundamentally reshaped the outlook for equity markets over the last two years.

Even after such a strong upswing in valuations, the potential of technology is arguably still being underplayed by the market. HSBC Global Research expects technology to drive further gains in equities over the next 12 months.

“We expect global earnings to grow a strong 11% in 2025,” says Alastair Pinder, HSBC’s Head EM and Global Equity Strategist. “Margin expansion, driven by lower input costs and AI productivity gains, is seriously under-appreciated.”

There has been much debate over the extent to which recent stock price performance will be sustainable, given market volatility in the second half of 2024. But we believe that the AI trade will shift from being driven by speculation and promise to being underpinned by substantive revisions to earnings expectations.

On that score, the outlook appears bright, with 12-month forward earnings per share for key AI beneficiaries rising by 17% in 2024. And we expect to see more success in monetising AI over the next few quarters, led by the mega-caps at first.

Much of this will come from the rapidly increasing power of generative AI and the potential offered by the large language models that have brought this technology to prominence. Bloomberg predicts that generative AI will grow to be a USD1.3 trillion market over the next decade, up from just USD40 billion in 2022 – a staggering compound annual growth rate of 43%.³

Australia’s AI sector will benefit from this too. New research from Microsoft finds that generative AI will account for 90% of the projected AUD18.8 billion in annual AI revenue in the country by 2035.⁴

The counterweight to the promise is the risk of a more volatile world trade environment amid global tariff uncertainty. A volatile US yield curve also indicates continued uncertainty over the possibility of a recession.

Heading into 2025, the big question is whether continued strength in global technology stocks will spur a long-anticipated revival of primary capital raising. After peaking in 2021 on a flood of liquidity, startup funding fell precipitously in 2022 and 2023, and recovered only slightly in 2024, according to Crunchbase figures.⁵

The sluggish IPO market has created an unprecedented backlog of VC investments looking for an exit. As of October 2024, the number of US unicorns – unlisted companies valued at over USD1 billion – had reached 739, according to HSBC Innovation Banking. This has had a knock-on effect on VC funding, as slower distributions leave investors with less capacity for new deals.

As in the public markets, the dominance of AI in the tech landscape is creating a two-tier market for private funding of early-stage ventures. Non-AI companies face a particularly challenging environment. In the first 10 months of 2024, we calculate that 42% of US venture capital went to AI firms – almost doubling from the 22% recorded two years ago.

With exits stalled, companies looking to scale up face a pronounced funding gap at Series B and beyond.

Venture debt has emerged as a critical way of bridging that gap in growth funding for promising tech firms. In the US, venture debt had an exceptionally strong year in 2024, with bigger deals helping to drive record projections for the market. This performance has come after two years in which venture debt deal volumes fell from their 2021 high.

As well as compensating for the lower availability of VC funding, demand for debt is also being driven by a rise in the cost of equity at late-stage tech businesses, making founders less willing to accept the dilutive effect of fresh equity and preferring to finance their cash burn with more palatable debt.

Beyond the US market, there are encouraging pockets of activity in Europe. UK startups raised USD16.2 billion in venture capital in 2024, with generative AI and fintech among the most popular segments.⁶ European start-ups also ramped up their use of venture debt funding in 2024, especially in the first half, according to data from Sifted.⁷

As interest rates decline in 2025 and the IPO and VC markets gather pace, we are hopeful of a strong rebound in tech funding globally. For businesses looking for capital, a focus on AI looks set to boost their chances of success.

The Cut Through Venture State of Australian Startup Funding Report examines the largest data set available on the Australian startup funding landscape. Click here to read more The State of Australian Startup Funding Report 2024