Venture Slowdown Not Prompting More M&A

Illustration of a hand dropping M&A.

VC-backed startups have not yet started to turn to the M&A market as a way to exit even as fundraising has become more difficult and the IPO pipeline has dried up.

The pullback in the venture capital market and general economic uncertainty would seemingly create an environment where cash-strapped startups look for a safe landing spot in the form of a sale. However, according to Crunchbase data, M&A activity involving VC-backed startups has fallen since last year.

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In 2021, there were more than 3,000 M&A deals globally involving a VC-backed company getting bought, according to Crunchbase data. Halfway through the third quarter of this year, just under 1,600 startups have found a mate in the market.

The numbers are even more stark in the U.S.—a leading indicator for the venture market in general. Last year, just fewer than 1,700 VC-backed startups were bought, per Crunchbase. This year has only seen 745 such deals.

“It’s not terribly hot right now,” said Don Butler, managing director at Thomvest Ventures, about the M&A market for startups.

No rush

Since the venture capital market started to show cooling signs as early as late last year, it would be logical to assume the M&A market would have heated up as startups run out of financial runway and investors seek liquidity, ideally before a distressed sale.

That has not completely occurred, although notable transactions involving private companies have occurred. Big deals already announced this year include: Aptiv buying Alameda, California-based device software company Wind River for $4.3 billion; Sony acquiring Bellevue, Washington-based gaming company Bungie for $3.6 billion; and GSK buying Cambridge, Massachusetts-based clinical-stage biopharmaceutical company Affinivax for up to $3.3 billion.

Despite those, deal flow is down from last year and industry watchers point to several reasons there has not been a run on “for sale” signs in Silicon Valley and other startup regions.

“So many companies raised so much money last year,” Butler said. “You look at some of these balance sheets they have and they are sitting on $100 million or $200 million. Someone joked to me, ‘Hey, that used to be the cash balance of a public company.’”

The record amount of financing raised in the last few years—2021 in particular—no doubt has cooled the need to find an M&A dance partner. While startups are often portrayed as free spenders, many are not. Even some of those that may have spent a little wildly still may have raised enough money to have a long runway.

Others also see it as part of market dynamics when turbulence hits.

“I think everyone went into a slowdown,” said Mike Ghaffary, general partner at Canvas Ventures. “You have buyers who want to wait because they believe the price may go down. Sellers want to wait because obviously they think prices could go up.”

Nearing a possible M&A inflection point

Along with the fact startups are sitting on a lot of cash and may be waiting for the market to play out, it also is important to remember summer is a notoriously slow time for M&A deals and the current VC pullback is less than a year old.

Money is also more expensive right now due to inflation and interest rates. While companies may be cheaper to buy, the money for those deals is more expensive this year.

But there may be a growing market for VC-backed private companies more than ready to listen to suitors.

“I think you will see M&A pick up in Q1 next year,” Ghaffary said. “Good companies will start looking for possible acquisitions right now, but I think the market could pick up later.”

Butler said the market could see some distressed activity later in the year or early next as the VC market continues to experience a pullback.

“If you had not raised money in the last year, some of these companies will be looking at a possible sale,” Butler said. “If you are looking at raising money right now, you could be simultaneously looking at M&A options.”

Illustration: Dom Guzman

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