Why Enterprise AI Investment Has Entered a New Era

As our most recent Enterprise Software M&A Report has confirmed, investor confidence is riding high in the sector. The most recent reporting period saw an 18% surge in the number of transactions, reflecting a strong appetite among acquirers for tech companies meeting the rising demand for software tools which drive workplace efficiencies – whether that’s in terms of customer relationship management, document management or design testing and simulation. 

The leveraging of AI by Enterprise Software companies has certainly fuelled momentum in the sector. However, there has been a notable shift when it comes to the valuations of AI-focused acquisition targets. While such companies continue to be highly sought-after, accounting for 30% of deals closed over the past 30 months, their valuations have dropped precipitously over the last couple of years. Let’s look a little more closely at what’s been going on.

Throughout the early phase of the AI era, we saw markedly elevated trailing 30-month median revenue valuations for AI-focused Enterprise Software startups. For example, back in 2019 the median EV/R for AI-focused targets was 6.0x, compared to the 4.0x garnered by Enterprise Software targets as a whole. 

This disparity widened dramatically between 2021 and 2023, with the biggest valuation gap coming in the wake of the watershed release of ChatGPT in late 2022, when the EV/R for AI-focused Enterprise Software targets soared to 8.6x, compared with 5.2x for the sector as a whole.

This trend proved to be short-lived. Over the course of 2023, the valuation premiums being paid for AI-focused companies all but evaporated, with the median EV/R virtually matching the median multiple for the rest of the sector by the end of last year. 

This shift can be explained by the evolving priorities of investors amid the rapid mainstream adoption and normalisation of workplace AI tools. The race to back innovative new technologies, which caused valuations to spike at the start of the AI revolution, has – as the hype has settled – quickly given way to a more considered and value-driven approach, with a focus on profitability and the potential for sustainable growth. 

As Hampleton Partners’ founder and senior partner Miro Parizek clarifies, “This does not mean AI is not an important deal driver, but rather that AI is now increasingly required or expected, and is therefore no longer a premium value enhancer. 

“It’s reminiscent of what we saw during the initial SaaS boom, when Enterprise Software companies utilising the SaaS revenue model enjoyed premium valuations. A key difference here is that the trajectory has been truncated with AI, occurring over just a few years, whereas it took over a decade for SaaS companies to get back to a zero level of premium.”

While the normalisation of AI functionality within the Enterprise Software sector has had the most significant impact on valuations, there are a few other key factors which are shaping how buyers regard AI-focused companies.

Regulatory compliance is high on the list of investor concerns, with governments around the world developing frameworks for dealing with hot button issues such as data security, AI algorithm accountability, and the legal ramifications of generative AI content. The picture remains complex and somewhat uncertain. For example, the US lacks a comprehensive federal regulatory framework for AI, with some individual states bringing forth their own regulations (for example, the Colorado AI Act, which aims to protect consumers from algorithmic discrimination).

So, while AI has become part of the fabric of enterprise applications at breakneck pace, the true nature of the legal compliance burden on AI-focused companies is still taking shape, and this ambiguity is inevitably contributing to investor caution.

This year has also seen added uncertainty due to President Trump’s sweeping tariffs, whose unprecedented scale is still being absorbed by investors and entrepreneurs around the world. The impact of Trump’s protectionist policies is also triggering concerns around the reliance of tech companies on US-based hyperscalers such as Microsoft Azure and AWS. As recently reported by Sifted, “European startups are now rethinking their dependence on the US incumbents, with some consultants even advising founders – particularly those in fintech, e-commerce and AI, which they say are uniquely exposed – to treat reliance on Big Tech as a ‘geopolitical risk’”.

Commenting on the current uncertainties, our senior partner Miro Parizek says: “There may be some hesitance in M&A, especially deals crossing country borders, due to the back and forth with Trumps tariffs and resulting caution in international investing. Based on past experiences with macroscopic disruptions such as this, the pandemic, or the debt crisis, the business community gets ‘used to them’ within two or three quarters and kind of gets back to business as usual despite continuation of the disruptive factor.”

If you’re an Enterprise Software founder or senior decision maker interested to know how you might be able to navigate your business to a successful exit in these interesting times, get in touch with Miro to get the conversation started. 

And for more analysis of the global tech market, don’t forget to download our free half-yearly M&A market reports, which explore transaction statistics, valuation trends and pivotal deals within sectors ranging from Digital Commerce to Autotech & Mobility. You can also subscribe to ensure you never miss out on the latest research and insights from the team of expert analysts at Hampleton Partners.