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Deal-Making Involving VC-Backed Startups Picks Up Slightly, But Still Slow

Illustration of M&A block letters.

Many in the venture capital and M&A worlds have predicted this year could see a return to more robust deal-making after a slow 2023.

There is good reason for some of that optimism — as valuations of venture-backed startups have slowly come down, the IPO market has reopened slightly, and strategic and private equity buyers are loaded with cash.

However, the first quarter saw only a slight uptick with 413 deals being completed through March, Crunchbase data shows. That is a 20% increase from Q4 2023 — which saw only 344 deals consummated — but that quarter was also the slowest in years when it came to VC-backed companies being bought. 

In fact, the deal total for Q1 is still a notch below Q3 2023’s 421 deals — which had been the slowest in years before Q4.

The quarter also didn’t see any deal of more than $1.8 billion, as the top deals included:

The fourth quarter last year saw three deals of $2 billion or more involving VC-backed companies, including Roche agreeing to buy obesity drug developer Carmot Therapeutics for $2.7 billion.

Market stays sluggish

Despite the optimism from those in the deal-making field, it likely was unreasonable to expect VC-backed deals to make huge strides in Q1.

Most in venture will tell anyone that while valuations have come down, those for high-quality companies — which are the ones other companies actually want to buy — remain high, even if off their peak.

Many buyers likely think the market still hasn’t hit bottom quite yet and are waiting on the sidelines to see if prices come down further.

Regulatory complications

Concerns about the antitrust regulatory process also remain. Deals are taking significantly longer than past cycles, if they are approved at all, bankers and lawyers in the space say. Delays in consummating deals cost companies money, upping the value of deals and dissuading suitors from looking for deals.

Most famously, regulatory issues nixed the proposed $20 billion acquisition of Figma by Adobe late last year.

Just this week, Altruist founder Jason Wenk said an M&A exit for his wealth management startup — which just raised a $169 million Series E led by Iconiq Growth that values the company at more than $1.5 billion — was not in the cards because few buyers could afford the company and those that could would likely face antitrust scrutiny. 

Looking ahead

However, not all news is bad for the M&A market.

Just last month, Microsoft-backed data security firm Rubrik joined an array of startups testing the IPO waters and many insiders are “cautiously optimistic” the market for new public companies will be rejuvenated as the year wears on. 

An active IPO market also helps M&A deal-making, as it helps set market price and gives companies optionality, as most will run a dual-track process — looking at both an IPO and sale — as they aim to give investors liquidity.

Cash-flush buyers

There is also what could be a strategic aspect to the M&A market.

Nvidia made headlines just last month when it bought two young AI-related startups. The chip giant announced it had bought Run:Ai for a reported $700 million. It was also reported that it bought Deci AI. Both startups help companies develop lower-cost AI models.

Many in the M&A ecosystem believe strategics will use some of the dry powder they have on their balance sheets to broker deals for VC-backed startups, especially for those in the AI or adjacent spaces. 

For instance, Nvidia has seen its cash and short-term investments basically double to $26 billion in the past four quarters. Companies such as Cisco and Apple also have seen their cash and short-term investments increase in that time — although Apple’s recent struggles and share buyback plan may hinder any big deals.

While Microsoft’s cash and short-term investments on its balance sheet decreased last year through buybacks and deals closing, the cloud giant, which has made no secret of its AI desires, still has $80 billion. Search giant Google, meanwhile, has $108 billion.

Private equity also has substantial dry powder, as evidenced by Thoma Bravo’s deal a couple of weeks ago to buy cybersecurity firm Darktrace for a cool $5.32 billion in cash.

Of course, things can still go awry for the M&A market. Inflation has ticked back up, making money — including that on the balance sheet — more valuable, and some tech stocks have seen rocky weeks. If that continues, it can make any M&A deal involving shares tricky. A company will not want to use what it sees as discounted shares in a deal.

Nevertheless, many startup investors are looking for liquidity after a slow few years, and both strategics and private equity seem ready to add to their portfolios, so perhaps Q1’s uptick in deal-making is just the start.

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Illustration: Dom Guzman


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