With Funding Down, Startups Are Making Fewer Acquisitions

It’s not just venture capital funding that has declined for startups. M&A dealmaking between VC-backed companies has slowed too.

This year is on pace to be one of the slowest for VC-backed startups buying other similarly backed startups, per Crunchbase data.

So far in 2023, startups have consummated just over 200 such transactions, putting this year on pace for the lowest number of deals since 2017 and just below 2018 and 2020 numbers.

“With some of the late-round funding diminishing, most startups are at a ‘risk-off’ stage right now,” said Don Butler, managing director at Thomvest Ventures, about the M&A market for startups. “Funding is unsure right now, rates are increasing … startups have to save so the urgency to buy something is not there.”

M&A slowdown

There certainly was urgency in 2021 — with funding hitting obscene levels and money cheap, startups couldn’t help themselves from going shopping. More than 500 deals were consummated in 2021. Last year, numbers dipped slightly, but remained robust with 443 deals.

However, this year, as companies continue to conserve cash and cut expenses, making an acquisition seems off the table — especially when considering the risk.

“The majority of all acquisitions fail, and that’s especially true for those involving startups,” said Butler, whose firm’s portfolio company Clari made an acquisition last month when it bought sales engagement platform Groove. “It’s just so unpredictable.”

That mindset has led to only three M&A deals solely involving startups of $200 million or more this year:

Databricks bought San Francisco-based language models training startup MosaicML for $1.3 billion in June.
Scottsdale, Arizona-based proptech firm Lessen bought competitor SMS Assist for a reported $950 million in January after raising a $500 million mix of debt and equity to finance the transaction.
In June, Mountain View, California-based business intelligence platform ThoughtSpot acquired Mode Analytics for $200 million.

Not easy

Of course, startup-on-startup dealmaking is inherently tricky even in the best of times.

One cash-losing company buying another can be difficult to integrate without burning through a lot of runway. Such deals can also face a lot of investor scrutiny, especially in the current environment which favors positive cash flow.

It also can be hard for a very young company to understand all the complexities of bringing in a new company with a different culture.

“It’s not something for the faint of heart,” said Yash Patel, general partner at Telstra Ventures. Some of his firm’s portfolio companies, including OpenGov and FitOn, have purchased other startups in the last year-plus.

Patel said startups typically acquire their peers for revenue synergies or purposes of asset or talent acquisition.

“Startup deals are usually very offensive-minded, such as new market penetration or expanding into new geographies,” Patel said.

However, the current financial investment has started rewarding growth less than cash flow and there are other issues to consider.

“There are always questions about how you structure such a deal,” Patel said. “If it’s stock, both parties have to agree on a valuation, and that can be difficult.

“It also can be tough from a culture perspective,” he added.

That said, VCs say startups are looking at opportunities and top companies continue to hire more corporate development people to explore those options.

Also, regardless which side of the table you find yourself on, investors say you should be willing to have those talks.

“You should always entertain conversations,” Patel said. “At the very least, you may get some intelligence about the market.”