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M&A of seed-stage startups outshines mature companies

2023 was a dismal year for VC-backed M&A, but it wasn’t as bad for seed-stage startups.

2023 was the worst year in a decade for acquisitions of VC-backed companies. And while buyers were broadly picky, they were much more likely to snap up younger startups—a byproduct of a market that now entices founders to sell early.

Corporate acquirers scooped up 151 seed-stage startups last year in the US, according to the latest PitchBook-NVCA Venture Monitor. That count was the lowest since 2017, but M&A of more mature companies fared much worse: Acquisitions of Series A and later-stage companies have all fallen to a 10-year low.

“2023 was by far the absolute largest number of clients leaving us because they got acquired, and we’ve already had another five M&A deals close in January,” said Healy Jones, vice president of financial strategy at Kruze, an accounting firm for young startups. About 70% of those companies were at the seed stage, a higher percentage than normal.

Founders of young companies may have more reasons to sell now than they did during the boom days.

Jones said that a surprising number of startups sold at valuations as large as $50 million. At the seed stage, founders still own a large percentage of the company, which could mean their financial outcome from a sale is as much as $10 million to $20 million.

Before the downturn, fast-growing companies were more reluctant to sell early. There was the promise of creating a large business, and it wasn’t uncommon for founders to receive as much as $4 million through the sale of secondary shares in conjunction with their Series A.

Raising new capital has become far more difficult in this environment. Moreover, secondary share sales at the Series A stage are pretty much unheard of now, according to Jones.

“If someone wants to acquire them for a decent amount of money, and they still own a lot of business, it’s hard to resist that check,” Jones said.

But investors may not be thrilled about these deals because returns from the sales usually don’t move the needle for the funds.

“I’ve actually heard some VCs complaining that one of their top companies took a really early exit,” Jones added.

Other common types of sales in 2023 were so-called soft landings. In these situations, a company isn’t growing at the expected rate and investors get all or a part of their money back when the startup is purchased.

Related read: The Seed Blip

Featured image by Micha Pawlitzki/Getty Images

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