SA国际传媒

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 SA国际传媒 data, M&A activity involving VC-backed startups has fallen since last year.

In 2021, there were more than 3,000 M&A deals globally involving a VC-backed company getting bought, according to SA国际传媒 . 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.鈥攁 leading indicator for the venture market in general. Last year, just fewer than 1,700 VC-backed startups were bought, per . This year has only seen 745 such deals.

鈥淚t’s not terribly hot right now,鈥� said , managing director at , 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: buying Alameda, California-based device software company for $4.3 billion; acquiring Bellevue, Washington-based gaming company for $3.6 billion; and buying Cambridge, Massachusetts-based clinical-stage biopharmaceutical company 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 鈥渇or sale鈥� signs in Silicon Valley and other startup regions.

鈥淪o many companies raised so much money last year,鈥� Butler said. 鈥淵ou look at some of these balance sheets they have and they are sitting on $100 million or $200 million. Someone joked to me, 鈥楬ey, that used to be the cash balance of a public company.鈥欌��

The record amount of financing raised in the last few years鈥�2021 in particular鈥攏o 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.

鈥淚 think everyone went into a slowdown,鈥� said , general partner at . 鈥淵ou 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.鈥�

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.

鈥淚 think you will see M&A pick up in Q1 next year,鈥� Ghaffary said. 鈥淕ood companies will start looking for possible acquisitions right now, but I think the market could pick up later.鈥�

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.

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

Illustration: Dom Guzman