The Big Slowdown: M&A Involving US-based Startups Weakest Since 2013

If you think your startup will soon get a too good to be true offer to sell, you may be in for a reality check.

It’s no secret venture has cooled considerably since late 2021, but so have possible exit opportunities for startups. While the IPO pipeline is still frozen, M&A involving U.S.-based, VC-backed companies is on pace for its slowest year since 2013, per Crunchbase data.

And it only appears to be getting worse.

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Through the first two quarters of the year, only 429 U.S.-based, VC-backed startups have been scooped up in M&A deals. That puts the M&A market on its slowest pace since 2013, when only 698 deals involving startups occurred — as the world’s economy was coming out of the global financial crisis of 2008-09.

Those numbers are a far cry from the more than 1,700 deals we saw just two years ago, and even the robust 1,134 witnessed last year as the venture market slowed.

All of that isn’t to say there haven’t been any big M&A deals. In fact, so far this year we have seen five deals of more than $1 billion:

Brookfield Infrastructure Partners agreed to buy Dallas-based Compass Datacenters, a wholesale provider of dedicated data centers for businesses, for $5.5 billion last month. The deal is expected to close by the end of the year.
Savvy Gaming Group agreed to acquire Culver City, California-based gaming company Scopely for $4.9 billion in April.
Altria agreed to buy Scottsdale, Arizona-based Njoy, an e-cigarette and vaping startup, for $2.8 billion in March.
T-Mobile agreed to buy Costa Mesa, California-based Mint Mobile, a prepaid wireless brand, for $1.4 billion in March.
Databricks bought San Francisco-based language models training startup MosaicML for $1.3 billion last month (although that deal likely is worth less depending on the current valuation of Databricks).

Numbers going down

The Databricks deal sparked talk that M&A could be making a rebound, especially with AI leading the charge. While that certainly still could happen, the numbers appear to be trending in the wrong direction, according to Crunchbase numbers.

The just-completed second quarter saw only 196 deals consummated — the lowest total in years and the continuation of what appears to be a steady decline in M&A activity quarter to quarter, per Crunchbase data.

Looking for signs

However, just because that seems to be the trend doesn’t mean M&A will continue along those lines.

It made sense that dealmaking would pause or reset as interest rates kept increasing and money became more expensive. Just as consumers stop making big purchases — like homes or cars — as interest rates increase, so do corporations.

Dealmaking also started to decline last year just as many tech stocks were getting hammered in the public market and many startups held firm to ridiculously high valuations.

A drop in share prices is usually an ill-advised time for M&A, since public companies do not want to do stock deals — essentially doing a deal at a discount. Add to that the fact that cash deals are also sometimes not warmly embraced by public investors, and it’s not surprising a slowdown occurred.

However, some of that has changed.

Interest rates have held — although it does seem like a sure thing they will rise again. Also, many public tech companies’ shares have rebounded this year — making stock deals more likely.

On top of all of that is the fact a new reality does seem to be sinking in with founders. The valuations many received at the market’s high in 2021 are just not realistic anymore, and holding out for such a price is likely nothing more than a pipe dream.

As companies who raised during the heyday of the market watch their war chests start to dwindle, many startups already have raised flat rounds and even downrounds — accepting their valuations were out of whack with the real world.

That same understanding likely is or will be applied to M&A dealmaking when large tech companies or other strategics come calling. The price may not be at the elevated 2021 numbers, but may be a good alternative to a very competitive funding market and a fair price for what reality is today.