Tech spending has remained surprisingly stable in 2023

But many enterprise startups are having a rough time

As 2022 edged to a close, we took a look at 2023 budget projections. As we approach the middle of the third quarter, we thought it would be useful to revisit those predictions and see where we are almost eight months into the year.

It’s always good to start with the analysts and see what numbers they are seeing. They talk to CIOs constantly and have their finger on the pulse of spending.

First some context: In October 2022, Gartner predicted 2023 IT spending would grow by 5.1%, while IDC was similarly predicting between 5% and 6%. By January, the firms had already revised those numbers, with Gartner predicting just 2.2% in real numbers with IDC dropping its estimate to 4.4%.

These numbers don’t happen in a vacuum, of course. We keep hearing that the economy is bad. Heck, just last week the Fed raised interest rates yet again in an effort to tame inflation, which has plunged to 2.97% this month per YCharts. In other words, the Fed’s medicine seems to be working, and maybe it’s time to stop.

Meanwhile, at the end of last year, we were seeing strong currency headwinds with a particularly strong dollar wreaking havoc on companies’ revenue numbers. Those headwinds have mostly dissipated, according to Gartner analyst John-David Locke. “Now IT spending is 4.4% in constant currency and 4.3% for the U.S. dollar. So the U.S. dollar is actually pretty much stabilized against most currencies,” Locke told TechCrunch+.

As for IDC, it’s right in the same ballpark with 4% growth. IDC analyst Stephen Minton blames the PC market rather than SaaS or cloud infrastructure spending cuts for the dip we’ve seen to this point. “So instead of 5% or 6%, we’re on course for about 4% growth. That’s mostly because of the PC market. So the PC market has performed pretty abysmally for the first half of the year,” Minton said.

CIOs we spoke with back in December talked about surgical cutting, such as tools they double up on, but cutting is sometimes harder than it appears. VCs also talked about a more difficult landscape for startups. We wanted to know what they’re seeing now.

Best-laid plans

When we spoke to some CIOs last year, they were looking more carefully at how they were spending money. Sharon Mandell, CIO at Juniper Networks, has been looking closely at costs and cutting where it makes sense without affecting key strategic initiatives. That’s in line with what she told us last fall. In fact, Mandell says the company has trimmed the budget by $1 million in the first half through careful cutting, so that would project out to $2 million in savings if she could keep it going. That’s for a company that made over $5 billion last year and reported earnings of $1.4 billion for the quarter last week.

“We’re also scrutinizing system enhancement requests in our backlog and are making sure they continue to make sense to execute with our go-forward emphasis as a business and in a more constrained environment,” Mandell said.

Interestingly, in light of the dismal PC sales numbers this year, Mandell says she’s moving from a three-year to a four-year laptop refresh cycle to delay some spending.

Monica Caldas, EVP and chief information officer at Liberty Mutual, whom we have spoken to about budget issues previously, says that she hasn’t adjusted her budget, but her job is to monitor spending and make sure the dollars are being put to good use to run the business.

“I’m focused on using our budget effectively and efficiently. Every business leader is responsible for investing in the right ways,” she said.

That involves an ongoing process of scrutinizing the budget, and not just in times of economic uncertainty. “As CIO, part of my mission is to maximize value creation. This includes looking at how we operate and ensuring we are efficient and effective. In fact, I don’t think that cost optimization is a one-time exercise; rather, it should be a way of operating.”

But for the most part, PC market aside, the numbers suggest that the spending is pretty close to where the analyst firms thought it would be. Locke says that’s because cutting costs can be harder than it seems, even with the best of intentions. “A lot of the spending that is going into software right now is non-discretionary and outside of their control,” he said.

Here’s a look at the most recent numbers from Gartner. Note that software is the highest growth category so far this year at 13.5%:

Gartner July 2023 IT spending table.

Image Credits: Gartner

IDC found similar numbers. “Overall a little bit of a redistribution with the software services markets growing ahead of forecasts and the infrastructure hardware market spending on physical servers, storage boxes and network equipment, was a little bit weaker than forecast,” Minton said. Conversely, he said that means more spending on cloud computing.

Whither startups

VCs weren’t terribly optimistic last year about the prospects for their portfolio companies. That’s because in times of economic uncertainty, companies look closely at all their spending, and especially their work with startups.

Enterprise startups face a big challenge getting buyers’ attention and keeping existing customers from churning, never mind upselling them. For the most part, it’s played out pretty much as the VCs had predicted.

“On the whole, it’s still rough out there. Budgets are smaller, sales cycles are longer, and things like unexpected customer reorgs or enhanced security reviews can blow up or delay deals that may be on the 1-yard line and key for a startup’s quarter,” said Jonathan Lehr, general partner at Work-Bench, an early-stage venture firm in New York City.

In terms of categories, Lehr says it’s still too early for generative AI, and companies are still kicking the tires, but there is a lot of excitement around it. Whether that translates into startup wins in the future is unclear, but it probably won’t have a lot of impact this year.

In spite of the macroeconomic pressure companies have been feeling, money is still flowing to incident management and cybersecurity startups, so those businesses have some reason for optimism, at least.

Last year, Mallun Yen, founder and CEO at Operator Collective, predicted that companies building something that solved a real pain point were going to succeed, regardless of the economic conditions, and to a large extent, that’s what has happened. “Nearly all companies are seeing softness in revenue growth, whether due to longer buying cycles or tightened budgets, but as you might imagine, the startups with the most traction right now are still the painkillers,” Yen said. “We’re seeing particular interest in products that can quickly process and analyze data to give visibility and actionable insights into things like what drives (or slows) revenue, where productivity gains can be made, and how inefficiencies can be eliminated. Enterprise customers are still willing to spend to save in these areas.”

Casey Aylward, a partner at Accel, is seeing what her counterparts at other firms are seeing, but she says her firm is seeing an uptick of interest in AI. “The exciting strategic areas right now are (you guessed it!) in integrating AI for both external and internal use cases. We’re also seeing new security tools — some related to AI and others catering to new types of threats — that have us as excited as ever to partner with companies in the space,” she said.

It seems when you set aside PC spending, the rest of the budget is pretty much on course. If the Fed is done raising interest rates, and that still remains to be seen, we might start seeing purse strings loosen further, which startups surely are hoping for. For now, at least, spending appears to be near where people thought it would be, for better or worse.