Big tech set to shop for discounted startups
In Q3, acquisitions of venture-backed startups have slowed to the lowest levels in years, according to PitchBook data. Through Sept. 22, 173 acquisitions of VC-backed companies were announced or closed, the lowest quarterly deal count since 2015, according to PitchBook data.
But those numbers won’t stay low for long. M&A deal advisers and investors are making moves to usher in a significant increase in acquisitions later this year and into 2023.
“There is a lot [of deal activity] in progress right now,” said attorney Aly Simons, a partner and co-chair of the tech M&A practice at Goodwin.
She said merger talks were nearly non-existent in the summer, but it all changed around Labor Day. Now she’s advising on what she called a “massive set” of deals between big tech and VC-backed companies. Deals in the mix are priced in the $200 million range on up to nearly $1 billion, Simons said. She declined to give specifics on deals that are in confidential talks. Last month, Google’s parent company, Alphabet, acquired Israeli climate-tech startup Breezometer for an estimated $200 million.
Startups that have sought out the M&A route are generally having difficulty raising a substantial venture round in this market. Some of these companies were getting ready to go public via a SPAC, but those deals fell through.
Simons said many deals are priced so that all investors get their money back.
Unlike in the recently announced sale of Figma to Adobe, where early-stage VCs could return between 30 and 90 times their invested capital if the deal closes, transactions currently in the works will provide very modest returns to investors.
“We are starting to see more VCs encourage their portfolio companies to talk to us about strategic options,” said Christina Bechhold Russ, head of strategic investments initiatives at Truist Ventures, a CVC arm of the commercial bank. She added that investment banks are now pitching Truist companies that “maybe were struggling to raise earlier this year and recognized that they need to sell, but not from a position of strength.”
Mike Ghaffary, a general partner at Canvas Ventures, is one of the investors advising most startups—even those not in imminent danger of running out of cash—to consider M&A options now.
He said he’s concerned that with the recession looming, it will be even harder to grow revenue and secure more funding next year.
“Founders understand that it is better to convert their stock into another company’s stock or get a little bit of cash rather than run the company to zero,” Ghaffary said.
At a time when IPOs are in a deep freeze, LPs are especially eager to capture returns from M&A exits, no matter how modest.
Ghaffary, who managed strategic partnership and M&A deals at Yelp earlier in his career, said he expects to see a wave of acquisitions soon because corporations could finally buy startups at attractive prices.
Adds Ghaffary: “Corporate development departments of all public companies across the country have been waiting for a moment like this.”
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