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Slump puts more startups on path to acquisition by other startups

Startups at risk of running out of capital may have no choice but to sell to larger VC-backed companies.

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These are challenging times for venture capitalists hoping to eke out a palatable exit from a struggling portfolio company.

Many venture-backed companies could soon be facing an undesirable yet straightforward decision: go out of business or be acquired at a fraction of their last valuation.

Investors expect all types of M&A to pick up next year. Acquirers could be publicly traded companies, PE firms or even other startups that are well-funded and, in many cases, profitable.

Although every acquisition is different, investors say that they generally prefer selling to a public company because it provides them with a path to liquidity right away.

But for companies that end up selling to another startup, those exits may feel especially disappointing for shareholders. That’s because VC-backed businesses seldom pay with cash and instead offer a stock swap as currency.

Startup-to-startup deals are more difficult to get done because the target and the buyer need to figure out how much they are worth relative to each other, said Emily Anderson, managing director at Union Square Advisors, a tech-focused investment bank.

Acquisition talks are always complex, but they may become especially arduous in an environment where declining valuations make it harder to gauge what private companies are worth. In this market climate, prospective buyers may have more leverage in convincing the target to do the deal at its last valuation round, which means the seller is receiving fewer shares in the deal.

“You’re left working at a private company with a currency that you don’t feel is fair, and you can’t do anything with,” she said.

While selling to another VC-backed company may seem like the least desirable outcome for founders and investors, it could be the only path to surviving.

That may be the case for rapid grocery delivery startup Gorillas, which is reportedly in advanced talks to be purchased by its larger rival Getir for under $1 billion, mostly in stock. At that price, the deal would represent a sharp comedown from the $3 billion valuation Gorillas was assigned last September when it raised $950 million from investors, including Tencent, AMYP Ventures and Coatue.

Successful startup-to-startup outcomes certainly aren’t without precedent. HotelTonight sold to Airbnb in 2019 for over $400 million in a deal that was reportedly 50-50 cash and stock, but investors got a large payday when Airbnb eventually went public two years later.

But now, as recession looms, such IPO wins feel very far away. Still, startups and their investors are starting to explore sale and purchase opportunities.

“Conceptually, there are a lot of reasons why now might be a time to think about M&A,” said Bill Cilluffo, a partner with QED Investors. “You probably have some pretty interesting companies that are unable to get funding and therefore need homes in a way that, in the boom, they may not have needed. We’ve certainly seen many conversations happening along those lines.”

Through Nov. 17, there have been 213 startup-to-startup M&A deals this year, a count that is on track to surpass totals for every year since 2012 except for 2021, according to PitchBook data. At the same time, tie-ups between two VC-backed companies are trailing every other year since 2015 on a deal value basis.


While many startups could be acquired “cheaply,” larger VC-backed companies are often reluctant to take on incremental cash burn for supporting the product and employees of the target, Cilluffo said.

For now, most serious startup-to-startup M&A conversations are between profitable or cash-rich companies and much smaller startups that are turning out to be just a product rather than a scalable company, said Andrew Adams, co-founder and managing partner at Oak HC/FT. “If there is product-market fit, but you can’t scale it, then it’s good to find a home for it,” he said.

DispatchHealth, an Oak HC/FT portfolio company that provides in-home nursing care, may be one company looking to make small acquisitions known as add-ons and tuck-ins.

“What else can you be doing for that patient?” said Adams about DispatchHealth, which raised a $330 million late-stage round last week. “There’s a bunch of services consumed at home. You can acquire those as opposed to building.”

Investors say that successful VC-backed companies will likely become more comfortable buying struggling startups as the downturn exposes more weak spots in the market.

Cilluffo of QED Investors said he also expects some moderately strong startups to decide to join forces. “In a booming market, you would almost never see that [because] they can get there on their own,” he said. But in this environment, “you could see some companies being better off together.”

Featured image by Rei Imagine/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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