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VCs expected an M&A wave. Dealmaking fell to a decade low instead.

Big acquirers are curtailing their shopping habits, a blow to startup founders and their investors.

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Last year, many investors predicted a wave of M&A activity in early 2023 amid dramatically lower valuations and a closed IPO window.

But so far, M&A dealmaking waters have been calmer than ever thanks to an unpredictable course of interest rates, geopolitical instability and a renewed focus on profitability for large tech companies.

In Q1, acquisitions of VC-backed companies fell to the lowest quarterly level in a decade, according to the latest PitchBook-NVCA Venture Monitor.


“I think there was an expectation that M&A would be more robust [by now],” said Michael Torosian, a partner at law firm Baker Botts who works with VC firms and startups.

Last year, venture capitalists began to encourage their weaker portfolio companies to look for a “soft landing” by selling to a corporate acquirer at a discount. But since M&A processes take a long time, investors anticipated many of those efforts wouldn’t come to fruition until early 2023. While there were conversations between large tech companies and startups in the fall, those discussions have not led to an uptick in deals so far.

It’s a tricky environment for strategic acquirers.

“On the one hand, [valuations] have come down 30%, 40%, 50% from where they were in 2021,” said Ted Smith, co-founder and president of Union Square Advisors, a technology-focused investment bank. “On the other hand, we still have interest rate uncertainty and geopolitical concerns. Nobody wants to do a bad deal even if it’s cheaper than it would have been 12 months ago.”

As a result, deal processes, which include due diligence and negotiations, are taking much longer, Smith said.

Despite attractive acquisition prices, many corporate boards and activist investors discourage larger companies from spending time and resources on M&A. Salesforce, one of the most active tech acquirers, plans to curtail its company shopping habit and will instead focus on improving profitability.

Torosian said that even companies with previous plans to do roll-up and add-on deals are now more cautious about pursuing transactions.

That’s not great news for startups—or their investors—eager to find a buyer or risk going out of business.

Wayne Kawarabayashi, partner and head of M&A at Union Square Advisors, is hopeful that there will be some rebound in acquisition activity in the latter part of the year.

One bright spot is that compared to last year there is no longer a large rift in price expectations between buyers and sellers, Kawarabayashi said. Dealmakers are also starting to be more open to creative deal terms such as earnouts, when a part of the price is contingent on reaching specific milestones in the future, and seller notes, a guaranteed payout to the seller at a later date. These terms help make purchases more palatable in this uncertain environment, he said.

Kawarabayashi also added that he has noticed a pickup in inbound calls from potential buyers recently.

“It’s not in the numbers in the first quarter. But I think as we proceed through this year, we’re going to see a much more active [M&A] environment,” Kawarabayashi said.

Featured image by mycteria/Shutterstock

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    Written by Marina Temkin
    Marina Temkin covered the venture capital ecosystem from 2021 to 2024, based in San Francisco. Previously with Venture Capital Journal, Marina wrote about the VC industry, and she was a reporter with Mergermarket in New York and San Francisco. She also has been a financial analyst and is a CFA charterholder. Marina received an economics degree from the University of California, Davis, and she attended the CUNY Graduate School of Journalism.
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