After a fast start to 2025 (extending a strong finish in 2024), technology deal-making has not been immune to the tariff-related uncertainties and geopolitical tensions that have slowed the broader deal market since April.

But even as some deal processes have stretched out, tech investors remain upbeat going into the year’s second half. The sector has held up better than most through the first half of 2025, lifting its share of all deals to 22% as of July, compared to 19% at the end of 2024 (see Figure 1).

Discussions earlier this year with 30-plus private equity tech specialists indicated they remain confident that technology—software in particular—is less exposed to tariff-related impacts than many sectors. And the pressure to move assets is only building. Not since 2012 has the backlog of technology companies held longer than four years been higher, and dry powder in tech-focused funds was sitting at $476 billion globally at the end of 2024. There’s a growing recognition that raising the next fund will likely depend on freeing up that capital sooner rather than later.

The shifting value equation

Amid these shortish-term market dynamics, however, tech investors face a larger, more complex question: As software markets mature, where will the next phase of growth and returns come from?

Many indicators suggest the nature of software investing is undergoing a fundamental shift. The “easy money” era of picking up a promising SaaS company and watching revenues (and multiples) explode is drawing to a close. Future returns will increasingly depend on finding new sources of revenue growth and expanding margins through operational excellence.

Revenue growth in the software sector has outpaced the broader market for so long it’s almost taken for granted. But as penetration curves in many product areas begin to flatten, overall software spending is easing off, too. Although software continues to expand its share of US gross domestic product (GDP), its relative growth is starting to ebb (see Figure 2).

Figure 2

The amount of white space available varies by sector. But after adopting software at a breakneck pace for years, mature segments like retail and manufacturing have deeply embedded software solutions for nearly every workflow—not just the standard enterprise resource planning (ERP) or customer relationship (CRM) software but also specialty solutions for specific functions like contract management and employee engagement (see Figure 3). Relative digital laggard sectors like construction may have more room to run, but overall, growth derived by a company simply showing up in an underserved market will be harder to come by in the years ahead.

This is not to say that the outlook for software is dimming. We know for sure that analysts and pundits have consistently underestimated software growth as the industry continues to innovate and find new use cases and workflows to automate. The digital revolution in the workplace is ongoing and will continue to fuel spending. At the same time, however, tapping into that growth and turning it into investment returns will require different capabilities and approaches to value creation.

The easiest way to see this is to look at how PE funds have generated returns in the past (see Figure 4). Revenue growth has contributed 53% of the total value creation since 2010. Of that, the majority has come from traditional means: penetrating new markets and customers, upselling existing accounts, and eventually raising prices. Almost as much—43%—has come from multiple expansion as booming deal markets pushed acquisition prices steadily higher. Margin improvement, meanwhile, has contributed just 4% of value.

In the current interest-rate environment, the same level of multiple expansion is unlikely, and those once-reliable revenue producers are losing steam. In addition to flattening penetration curves, traditional upsell/cross-sell motions are less effective and like-for-like pricing increases are harder to sustain amid pressure on customer budgets and heavy competition. That means investors will have to not only work harder to find each dollar of top-line growth but also build efficient new operations capable of executing on those opportunities profitably.

Top-tier firms seeking new revenue sources are focusing on several areas at once.

• Displacing competitors. This is an imperative in any maturing industry. As penetration curves flatten, the companies maintaining growth rates are those adept at taking share from weaker competitors and incumbents: Think fighting for gray space, not opening new white space. This requires significant investments in new go-to-market capabilities to better quantify and segment market opportunities. These are motions many fast-growing software companies haven’t had to worry about until now. 

• Tapping AI. It’s no secret that artificial intelligence is changing the game in many product categories. It offers opportunities to both transform legacy products with new functionality and develop new offerings and use cases. Indeed, continued upsell and cross-sell will increasingly depend on AI-enabled innovation. That requires targeted investment in R&D and rapid testing aimed at aligning the success of the software provider with the success of the customer. 

• Deploying modern pricing models. Waiting for a product to stick and then tapping incremental, seat-based price increases is less and less effective. Innovative commercial organizations are gaining traction with outcome- or value-based pricing models founded on the measurable value they deliver to the customer, not the number of users, provider costs, or other traditional factors.

• Expanding geographically. Even if a once-hot sector is slowing in the US, ample opportunity may exist in another region. But successful expansion into new geos requires a disciplined strategy often based on M&A capabilities (including successful integration and change management), new market development, and localization of products to adjust to different languages and workflow requirements.

• Building in payments capability and/or monetizing data. Especially in vertical software, or products aimed at a specific industry, customers are increasingly looking for solutions with integrated payments capabilities—built-in systems that smooth transactions and often capture valuable data that standard point-of-sale (POS) systems can’t.

Tactics like these give software investors the means to maintain their growth focus. But generating top-tier returns will increasingly require concerted efforts to boost margins.

The traditional answer here, of course, is cost takeout—coming in and rationalizing a company’s cost structure, too often with a heavy hand that can end up being counterproductive. A more evolved approach to margin improvement is holistic: All costs get a thorough going over. But the real value comes from developing an improved strategy based on the right top-line considerations and matching it to improvements or investments in go-to-market capabilities, better cost-of-goods management, enhanced processes, and a more efficient, targeted R&D function.

AI can be an important tool to increase efficiency in all these areas as can a much tighter definition of who your most important customers are and how to serve them. Commercial excellence is eminently measurable, but so is R&D (surprise!) with tools like Faros AI or Jellyfish. Top-tier performers no longer treat the research function as a black box; tracking engineering productivity is increasingly critical.

For fund managers, a few key questions can help focus the new imperative for each portfolio company:

• Is our go-to-market approach the right one for future opportunities, or is it still calibrated to yesterday’s market?
• Are R&D and product development focused on the innovations that will stand out with today’s customers and power the next phase of growth?
• What are the specific future risks and opportunities AI presents for this business? How should we prepare right now?
• How can we use M&A to supercharge our strategy? Which opportunities are likely to be accessible?
• Is our current talent matched appropriately to the value creation strategy we’ll need in the future?

The opportunity in tech is no less vibrant than it ever was. But the best way of capitalizing on it is evolving rapidly. What worked so well in the past is unlikely to generate the same level of return in the future. It’s time to boost your value-creation game.