IT budgets should increase in 2024, but it still could be tough going for startups

I think most people would agree that 2023 was a challenging time to be a startup. There were lots of layoffs as companies struggled to make the transition from growth to profitability. Meanwhile, sales cycles were longer and many startups struggled to grow at a decent pace.

As we start to see the economic signals improve a bit with inflation letting up, the cost of money dropping, and most currency headwinds decreasing, you would think that 2024 might be shaping up to be a better year.

Not necessarily.

We are in a new era, one where money won’t flow so freely, and according to the experts we spoke to, we won’t see a bounce-back again anytime soon. This means that startups that aren’t well capitalized right now could continue to struggle in 2024, and the flipping of the calendar isn’t going to change that.

What does it all mean for startups entering 2024? It means they have to prove their worth more than ever. It means they need enough cash to ride out long sales cycles. It means they have to fight for their piece of enterprise budgets, and that, possibly, 2024 could look a lot like 2023.

The budget outlook

A good starting point for budget discussions is what the proposed budget looks like. Analyst firms like IDC and Gartner predict IT spending each year, although they generally adjust throughout the year as the reality becomes clear.

IDC is predicting 6.8% growth, which is up from 5% last year. This number looks at hardware, software and services but excludes any telecom spending. Meanwhile, Gartner is predicting a bit higher at 8.2%.

The overall upward trend has to be good news for startups, which are looking to enterprise buyers to lift their businesses. But John-David Lovelock, a Gartner analyst who looks at IT budgets, says while 2023 was a year of getting more efficient, that doesn’t mean that just ends with the new year.

“The pursuit of greater efficiencies is now something that is in the cloud in the same way it used to be in data centers and outsourcing contracts. So we are not past it,” Lovelock told TechCrunch+.

And conversations with several CIOs seem to bear this out. Sharon Mandell, CIO at Juniper Networks, a public technology company with 10,000 employees, says she was able to cut $3 million from her 2023 budget, what she called the low-hanging fruit. Next year, she’s been asked to double that amount.

“We are targeting another $6 million of savings, but those are going to be more challenging,” she said. And that’s especially true when it involves entrenched processes that are part of the core business that could involve an expensive and time-consuming migration process.

Kathy Kay, executive VP and CIO at Principal Financial Group, a financial services company with well over 19,000 employees, says her budget is increasing in line with analyst’s predictions, but that doesn’t mean she’s still not thinking about efficiencies.

“What I will say is because of the focus on trying to get more efficient, the capacity is changing between run and change, meaning our cost to run it is going down, which leaves more capacity to create new capabilities. And so we’ve been focused on that, as well as changing that mix so that we can create more value,” she said.

Investor outlook

How do investors see it? Early-stage investor Ed Sim, founder and general partner at Boldstart, said that 2024 will likely be another tough market for startups looking to sell to enterprises. But the ones that can prove they are actually offering a significant improvement to productivity and workflow will see success worth getting excited about.

“You have to solve a real fundamental pain point and have to do it 10x better, or more, than what’s in the market,” Sim told TechCrunch+. “[Startups] need a story about how to articulate that and have an incredibly fast time-to-value on that product.”

Nina Achadjian, a partner at Index Ventures, agreed. She said this isn’t an environment where enterprise customers are using an increased budget to try out cool new tech to see if it works; startups need to show they will make a difference to a customer’s bottom line right away.

“Proving ROI quickly will be one characteristic of the companies that do well,” Achadjian said. “There are a lot of companies doing incredible things with AI, but I think the ROI is still yet to be seen. I think the companies that will have the biggest advantage in getting that IT budget are probably companies where they can be like look, what costs you ‘X’ to produce ‘Y’ will cost you a third because we can automate a lot of the processes.”

Achadjian added that startups that can attach their product to existing software and workflows enterprises already have will be an easier sell, especially if they can make a smaller team more efficient, as many companies are still adjusting to layoffs.

“Meeting the customer where they are, and becoming the system in their own workflow, you come in and solve a critical pain point which gives you an unfair advantage to solve future pain points with that customer,” Achadjian said.

Startups that can use their solution as an entry point to potentially grow their contract with a customer into other areas down the road will do well, too, Sim said.

The startup sectors that saw demand during 2023 will likely see it continue in 2024. Areas within security around data and cyber will remain hot next year. Sim added that he also thinks SaaS startups that can help enterprises roll out their internal AI projects and initiatives may start to see interest pick up in the latter half of 2024, as well.

How do startups fit?

It appears that many startups will continue to have to fight to get a piece of the budget pie, and that’s especially true when you consider that some entrenched vendors raised prices this year, meaning some of that budget increase will be eaten up by the higher cost of doing business.

Then there’s the new IT budget darling: generative AI. Everyone seems to believe that this technology is worth looking at, and perhaps investing big in. That’s yet another bite taken out of the budget as companies look to take advantage of the new technology, often from big, established vendors.

Achadjian said a recent market survey found that many enterprises have a dedicated AI budget headed in 2024 and many also have someone in charge of figuring out an AI strategy for the organization. While there may be more enterprise interest in AI, these startups will still have to prove themselves just like everyone else.

“I do see pockets of growth and this is what gets me excited,” Sim said. “Execution, having the right timing, and really honing that efficiency will separate the winners from the losers, which is what should have been, and was pre-COVID.”