Private equity firms are eyeing fast-growing small tech companies for big returns
Private equity (PE) firms are known for investing in companies, improving their value, and then selling them for a profit. In the past, most PE firms focused on large companies with high revenues and strong market positions. But in 2025, a clear shift is happening. More and more PE firms are turning their attention toward smaller technology ventures. This article explains why smaller tech firms are becoming attractive to PE investors, the latest trends and data, and what this means for the future of private equity.
The Growing Interest in Smaller Tech Companies
Smaller technology companies are getting noticed by PE firms because they offer many advantages in today’s market. These companies usually have valuations under $250 million, which makes them more affordable than large firms. They often work in fast-growing areas like artificial intelligence (AI), cloud computing, software as a service (SaaS), and cybersecurity.
For example, earlier this year, an Indian PE firm called Multiples Alternate Asset Management invested $200 million to take control of a mid-sized IT company called QBurst. Similar deals have been seen across the globe, with private equity funds buying into promising smaller tech firms that are flexible, innovative, and able to grow quickly.
Why Are Smaller Tech Ventures So Attractive Now?
Several reasons explain why smaller tech ventures are catching the attention of private equity investors.
Agility and Innovation
Small tech companies can adjust to new trends and technologies faster than large companies. They can launch new products, enter new markets, or change business models with less effort. This is important at a time when technologies like AI, machine learning, and automation are reshaping industries at high speed.
Lower Valuation, Higher Growth Potential
Smaller tech firms are generally valued lower than big companies. This means PE firms can buy them at a reasonable price. Because these companies are young and growing, they also have the potential to deliver higher returns once they scale up.
Opportunities for Add-On Acquisitions
Many smaller tech companies can be added to larger businesses that a PE firm already owns. This allows PE firms to create stronger, more complete businesses through integration.
Digital Transformation
As businesses worldwide speed up their digital transformation, demand for technology services is growing. This benefits smaller tech firms that provide software, automation tools, cybersecurity services, and cloud solutions.
Latest Data and Trends
Recent data shows that PE firms have shifted their strategies. In the first half of 2025, growth equity investments—which focus on investing in fast-growing companies—have increased by over 60% in value and volume compared to last year. These investments are mostly targeting mid-sized and small tech ventures.
At the same time, large buyouts have slowed down. Uncertainty in the global economy, trade tensions, and high borrowing costs have made big deals harder to complete. As a result, PE firms are sitting on about $1 trillion in unspent capital, according to recent reports. This has encouraged many firms to focus on smaller, more manageable deals where growth potential is high.
A notable example is Thoma Bravo, a well-known private equity firm that raised $34 billion this year. Part of this money is meant for investing in smaller software and technology companies. This shows strong confidence in the sector, despite global uncertainties.
Challenges That Come With Investing in Smaller Tech Ventures
Although investing in smaller tech firms has many benefits, there are also challenges to consider.
Exit Uncertainty
It can take longer for PE firms to sell smaller tech companies, especially if the market conditions are not right. Some firms may have to hold on to these investments for five to seven years or more before finding the right buyer or taking the company public.
Valuation Risks
Smaller companies can be more affected by changes in the economy or in their industries. If market conditions change suddenly, the value of these firms could drop quickly.
Operational Challenges
Scaling a small tech firm into a larger, more successful company is not easy. It requires strong management, skilled workers, and clear strategies. PE firms often need to provide operational support to help these firms grow in the right way.
Changes in PE Strategy
The growing interest in smaller tech ventures is also changing how PE firms operate.
Focus on Minority Stakes: Many PE firms are now happy to take smaller, non-controlling stakes in tech companies. This allows the original owners to continue managing the business while the PE firm provides funding and advice.
Specialized Funds: Some PE firms have launched funds that focus only on smaller tech firms. These funds are designed to find, invest in, and help grow mid-market technology businesses.
Strong Operational Teams: PE firms are building teams of experts who can guide small tech firms through the challenges of scaling up.
Interest in Emerging Markets: In countries like India, where many small tech firms are coming up, PE firms see a lot of opportunity. These markets offer growth potential that may not exist in more mature economies.
The Impact of the Global Economy
Several global factors are helping to push PE firms toward smaller tech investments.
Slowdown in Big Deals: With trade tensions, rising tariffs, and economic uncertainty, large deals have become more difficult and risky. Smaller tech firms are seen as safer bets that can deliver good returns without huge upfront costs.
AI and Cloud Boom: The rapid growth of AI, cloud services, and other digital tools has increased demand for the products and services provided by smaller tech companies.
Government Support: In some countries, government programs are helping smaller tech firms grow, especially those working in deep technology, cybersecurity, and digital infrastructure. This support creates even more opportunities for PE investors.
The Road Ahead
Experts believe that the interest in smaller tech ventures will continue to grow. Analysts predict that private equity activity in technology will rise over the next two years as the global economy stabilizes and digital transformation efforts expand.
Private equity firms that are able to identify high-potential small tech firms, provide them with the right kind of support, and manage their growth carefully are expected to see strong returns. However, they will need to be careful about choosing the right companies, offering operational guidance, and timing their exits well.
Smaller tech ventures are emerging as the next big thing for private equity firms. These companies offer faster growth, flexible business models, and opportunities to create value through integration and scaling. While risks such as exit uncertainty and operational challenges exist, the current market environment makes smaller tech an attractive sector for PE investors. As technology continues to reshape industries, private equity’s focus on smaller tech ventures is likely to play a major role in shaping the future of both sectors.
