Rethinking Growth: A Healthy Reset for the Software Market and M&A Outlook

The software sector has long been defined by rapid growth, ambitious expansion, and eye-popping valuations. But as shown in the chart below, the revenue growth trajectory of public software companies has undergone a significant transformation over the past few years, especially when segmented by company size. While this may initially seem like a sobering signal, a closer look reveals a broader evolution underway: one where sustainable growth, profitability, and realistic expectations are taking center stage. This reset isn’t just healthy, it’s necessary, and it brings with it a promising new era for M&A activity and long-term industry strength.

Source: Capital IQ

A Look at the Numbers: High Growth Peaked, Now Rightsizing

The chart compares median year-over-year (YoY) revenue growth rates for public software companies with market capitalizations above and below $1bn, from CY2019 through estimated figures for CY2025. Several key trends emerge:

2019–2021: A Surge in Growth Across the Board

During this period, fueled by strong market optimism and accelerated digital transformation (especially during the pandemic), both large and small software companies posted impressive growth rates. In CY2021, smaller firms (market cap < $1bn) led the pack with a 26% median growth rate, edging out even larger firms at 25%.

2022 Onward: The Great Moderation

The landscape began to shift in 2022. While large-cap software companies maintained robust growth (24%), smaller firms saw a noticeable decline to 16%. This divergence continued and sharpened, with growth for sub-$1bn companies plummeting to just 5% in CY2023 and an estimated 2% in CY2024. In contrast, larger peers still maintain mid-teen growth projections through 2025.

This trend reflects a realignment of investor and market expectations. The era of hypergrowth at all costs is fading, replaced by a preference for efficiency, profitability, and scalability.

Why the Shift Happened

Several macro and microeconomic forces are driving this shift:

Interest Rate Sensitivity: Rising interest rates have dramatically altered the cost of capital. Unprofitable, high-growth companies, often in the small-cap category, have found it harder to raise money, forcing them to pivot toward cash flow discipline.

Valuation Compression: The "growth premium" that once inflated software valuations has compressed, particularly for smaller firms that may lack market dominance or clear profitability paths.

Market Maturity: Many software categories are maturing. While there are still plenty of disruptive opportunities, we're also seeing the natural plateauing of growth as markets become saturated.

Enterprise Buyer Conservatism: Corporate buyers, once quick to adopt emerging tech, are becoming more deliberate and ROI-driven in their software spend, favoring proven, well-capitalized vendors.

A New Reality, But a Stronger Foundation

Although growth rates have softened, particularly for smaller companies, this transition sets the stage for a more resilient and rational market. Public software companies are embracing sustainable business models. Many are prioritizing product-led growth, customer retention, and operating efficiency. This recalibration is not a sign of weakness; rather, it's the software industry growing up.

Importantly, the larger players maintaining steady growth rates suggest a continued appetite for software spend, just more selectively deployed. As digital transformation efforts persist, enterprises are seeking scalable, reliable platforms over risky bets.

What This Means for M&A: A More Active and Balanced Market

For the mergers and acquisitions (M&A) landscape, this evolution presents new opportunities:

Valuation Realignment Spurs Deals: As smaller companies face slower growth and valuation pressure, many are becoming more open to acquisition. Buyers, in turn, can pursue strategic targets at more reasonable multiples.

Strategic Consolidation: Larger players with strong balance sheets are poised to acquire complementary solutions, expand into adjacent markets, or enhance product portfolios—especially as public market growth moderates.

Private Equity Reinvigoration: With clearer paths to profitability and more disciplined financials, many software firms are increasingly attractive to private equity buyers looking for long-term value creation through operational improvements.

Improved Deal Rationality: Gone are the days of speculative deal-making. Today’s buyers are emphasizing strategic fit, synergy realization, and financial fundamentals, a healthier approach for all stakeholders.

The Road Ahead: Optimism Grounded in Realism

While the revenue growth rates illustrated in the chart may look less exciting than during the software boom of the late 2010s and early 2020s, they reflect a market that is maturing and maturing well. The industry is moving from hype to substance, from speculation to strategy.

In this new era, success will be defined not by who can grow fastest, but by who can build the most enduring value. That’s a welcome shift, and one that bodes well for the long-term health of the software industry and the M&A ecosystem that supports it.

Thanks for reading, and as always, don’t hesitate to reach out to learn more about M&A within the tech industry!