Why Acquisitions of VC-Backed Startups Have Fallen To Decade-Low Level

With so many tech companies laying off or furloughing talent, the days of the "acqui-hire" - acquiring a company for its skilled staff - are over for now.

And as venture investors become choosier about which startups to support, this has become a problem for early stage companies looking to hang on as investment dries up and the markets remain choppy. The result is desperation, especially for those not able to claim they are AI-focused. JL

Nate Bek reports in GeekWire:

As venture capital becomes scarce and investors put more weight on profitable startups, some cash-strapped early-stage founders are looking for buyers to avoid going out of business or raising cash on unfavorable terms. “We are seeing a lot of really good companies forced to evaluate M&A because they raised too much money at too high a valuation.” Strategic acquisition deals (are) often viewed as the “logical next step” in situations where capital is difficult to raise. But acquisitions of VC-backed companies fell to the lowest level in a decade during the first quarter of this year as larger companies cut costs. “With (big) companies doing layoffs and hiring freezes, the appetite to acquire talent is lower and a strategic rationale is critical to an acquisition.”

When Rebekah Bastian set out to raise funding for her startup in April, she had less than two months of cash runway left on her balance sheet.

The CEO and founder of Seattle startup OwnTrail was confident she could pull off the funding in a short timeframe because she previously raised $1.5 million for the business and just completed the TechStars accelerator program.

But after more than 30 meetings with venture capitalists, Bastian could not find the required capital. With just six weeks before the company ran out of cash, she pulled together her advisors to brainstorm a plan B.

They decided to sell the company.

“The reality is, the market conditions forced me to exit earlier than I wanted,” Bastian wrote in a blog post. OwnTrail, a life and career social platform, announced its acquisition by Miami-based startup Teal last week.

As venture capital becomes scarce and investors put more weight on profitable startups, some cash-strapped early-stage founders are looking for buyers to avoid going out of business or raising cash on unfavorable terms.

“We are seeing a lot of really good companies being forced to evaluate M&A because they raised too much money at too high a valuation,” said Kirby Winfield, general partner and founder at Seattle early-stage venture firm Ascend.

Jordan Allen, the founder of home-bidding platform Doorsey, said the decision to sell his company was a “no brainer.” The Spokane, Wash.-based startup, acquired earlier this year by Auction.io, made real estate transactions more transparent through a home-bidding platform that displays real-time prices and sales terms.

“Had we not been acquired, we would have only had one path in this market, get profitable fast,” Allen said. “Raising new capital would have been nearly impossible with our profile.”

Patrick Ringland, managing director at Seattle’s Meridian Capital, said the M&A advisory firm has recently heard from a number of founders thinking about selling their companies in strategic acquisition deals. He said it is often viewed as the “logical next step” in situations where capital is difficult to raise.

But despite more early-stage founders considering M&A, acquisitions of VC-backed companies fell to the lowest quarterly level in a decade during the first quarter of this year as larger companies looked to cut costs, according to the PitchBook-NVCA Venture Monitor.

Acquisition activity has significantly declined in the Pacific Northwest in 2023, according to GeekWire’s M&As and IPOs tracker. Startups managing an exit this year include Loftium, Apptentive, Zapproved, and others.

Amazon hasn’t made a single acquisition this year after buying six companies in 2022. Microsoft acquired just one company in 2023; it bought 14 in 2021. Salesforce disbanded its board M&A committee in March amid cost-cutting moves.

So even for founders that are looking to get acquired as a “soft landing,” there may be a smaller pool of buyers given market conditions.

James Newell, partner at Seattle VC firm Voyager Capital, said the biggest adjustment in M&A activity is the fact that larger tech companies are no longer acquiring companies for their talent.

“With these companies doing layoffs and hiring freezes, the appetite to acquire talent is substantially lower and a strategic rationale is critical to building an acquisition case,” he said.

Newell said there is still significant capital available to companies that have hit milestones appropriate to their stage, including product launches, product-market fit, unit economics, and other factors.

“But the majority of founders today have only done so in an environment of near-zero interest rates, so it feels incredibly challenging by comparison to recent years,” he said.

Startup M&A makes sense for startups that have exhausted all of their potential growth opportunities, where additional runway will not “lead to anywhere interesting,” said Aviel Ginzburg, general partner at Seattle pre-seed venture firm Founders’ Co-op.

“They’re not going to get to a fundable moment,” he said. “But they may be at an acquirable moment.”

Winfield, who sold his last two startups because he could not raise additional capital, said companies looking for an M&A deal need to allocate six months for the acquisition process and identify up to 100 potential buyers, some of which can be found in public filings or earnings call transcripts.

After posting her acquisition announcement on LinkedIn, Bastian said she has been taking calls from a number of other founders who are struggling to raise capital and considering M&A. She said it’s important for founders to be honest and transparent in the process, keeping employees, investors and potential acquirers all on the same page.