Rough Ride: M&A Dropped 31% For VC-Backed Startups In 2023

Dealmaking involving venture-backed startups hit an eight-year low last year, as strategic and private equity buyers decided to keep their cash, likely waiting to see how far startup valuations would drop.

It is not shocking that dealmaking hit a low ebb last year, but the dearth of VC-backed startups sold last year may offer a surprise. In 2023, only 1,738 venture-backed startups were acquired globally 鈥� the lowest amount since 2015, when 1,687 startups were bought 鈥�

The number is a 31% decline from the 2,507 deals in 2022 and a 21% drop from 2021.

The figures did not get better as last year wore on either. In fact, they declined quarter by quarter, with just 340 deals consummated in the fourth quarter.

The same held true in the U.S. as dealmaking involving VC-backed companies hit a 10-year low. In 2023, only 824 deals involving U.S.-based, VC-backed companies were completed, a 30% drop from 2022 and the fewest since only 710 deals were consummated in 2013.

Similar to the global trend, the U.S. market also basically saw a quarter-by-quarter decline through the past two years.

Problems

A lack of dealmaking can be devastating for venture capitalists. M&A is the main way venture investors get liquidity back from their investments. Dealmaking was all the more important last year with the IPO market frozen 鈥� closing off the other option for investors to see cash.

Although the slowdown is alarming, it is hardly shocking. Cash has become more expensive while many startups have watched their valuations plummet from the highs of 2021 (except obviously those in AI).

That has caused potential acquirers to hold onto their cash and play a wait-and-see game as they bide their time for the bottom of the market. Strategic acquirers have also been cautious to do stock deals to acquire firms, as some companies have felt their shares were undervalued in the market.

That鈥檚 not to say there were not any big deals. Per SA国际传媒, three deals that involved venture-backed companies topped $3 billion globally last year.

acquired Culver City, California-based game publisher and developer for $4.9 billion in April;
Digital engineering firm merged with Paris-based in a deal announced in March and valued at $4.8 billion; and
acquired for $3.3 billion in July.

Crystal ball

However, those were definitely the outliers. Big deals 鈥� and really just any deals 鈥� were few and far between last year.

Now the question becomes: What will this new calendar year bring? Those with skin in the game seem to have varied opinions, but mostly expect dealmaking to perk up somewhat.

鈥淚 think in three to nine months you鈥檒l see things picking up as valuations continue to drop,鈥� said , a managing director at focused on investments in the cybersecurity, cloud and AI infrastructure sectors.

Padval added the slow venture funding market may leave some companies with no choice but to find a dance partner.

, managing director at Menlo Park, California-based 1, said the hottest sector of 2023 likely will spur on some more activity this year.

鈥淧ublic companies are sitting on hoards of cash,鈥� said Chaddha, adding these companies are holding more cash now than they did during the 2008 downturn. 鈥淭hey want to invest, especially in AI.鈥�

Others are also optimistic, looking at historical precedent.

鈥淭here鈥檚 never been three straight years where it鈥檚 been down, so 鈥︹€� said , senior managing director and head of investment banking at .

Nash said he could see sectors like cyber, crypto, semiconductors and, of course, AI all helping to make 2024 a little better than last year.

鈥淓veryone is poking around right now,鈥� said Nash, adding more deal activity could happen in the second quarter or half of the year.