In 2022 when the market turned, large acquirers pulled up their drawbridges. M&A deals slowed to a trickle. Salesforce CEO Marc Benioff even disbanded the company’s M&A committee last year.
But judging by Salesforce’s $1.9 billion cash purchase of Own earlier this month, even reluctant acquirers are now being tempted by today’s discounts.
For Own’s later investors, Alkeon Capital Management and B Capital Group, it was far from an ideal outcome. The sale came at a 40% discount from their $3.35 billion Series E valuation in August 2021.
Such a discount is par for the course for companies in this market.
"[It was] very unsurprising,” said Andrew Luh, chair of law firm Gunderson Dettmer‘s M&A practice. “Eighty percent or more of the first [letters of intent] that I see lobbed in to the clients I’m supporting at an exit are at a discount to the last round.”
No position to negotiate
The founders of struggling startups who get offered a deal from a corporate buyer are typically not in a great position to negotiate. Buyers often threaten to walk away if they hear that the founder is shopping around a term sheet.
“Sometimes it’s an empty threat, but it tends to have a chilling effect on a real auction getting going,” Luh said.
And for founders facing rapidly depleting cash reserves, spooking a buyer is often riskier than it’s worth.
Few companies raise more than two years’ worth of cash runway, so for those that raised back in 2021 and 2022, it’s crunch time.
“Now they’re either looking for an exit or going belly-up,” said Andre Thiollier, a partner at law firm Foley & Lardner.
Saving face
Many VCs are pressuring some of their low-performing companies to consider a sale, so that the fund can return at least a portion of capital back to their LPs.
“If a company isn’t working and feels like it’s going to zero, getting 50 cents on the dollar is actually a great outcome,” said Andy McLoughlin, managing partner at VC firm Uncork Capital.
Increasingly, these discount M&A deals are disclosed without revealing the price tag, saving face for founders and their backers. Public companies in the US need only disclose the price of an acquisition if it is considered ‘material’ to shareholders.
“There are more deals being done that don’t rise to the level of materiality requiring disclosure,” according to Christina Pearson, global head of corporate and securities technology at law firm Pillsbury.
For the deals that have reached the threshold of requiring disclosure, valuation step-ups have slowed. The median valuation step-up at exit for US unicorns, companies worth more than $1 billion, went from 1.46x in 2021 to just 0.56x in 2024, according to PitchBook data.
Of course, the opposite is true for AI acquisitions.
An AI escape hatch
AI companies have been raising capital at such a rapid clip over the last year that many haven’t even bothered to hire investment banks, even for multibillion-dollar deals, according to a senior investment banker on Evercore‘s tech team.
“A lot of AI capital raises are being done without outside advisors,” said Stuart Francis, senior managing director for Evercore’s technology group. “We don’t see a lot of AI companies calling into investment bankers asking us to go out and raise some money. But I think that’s going to change.”
Still, as competition for AI companies balloons, some founders are eyeing the escape hatch through an ‘acquihire'-style maneuver. Most recently, a flurry of staffers at AI robotics startup Covariant, including its founding team of OpenAI veterans, were snapped up by Amazon. Amazon also recently hired several key executives from Adept to build out its AGI team, and earlier this year, Microsoft hired a large chunk of Inflection AI staffers.
These deals are especially lucrative for employees: Luh has seen buyers set aside pots of cash intended to attract and retain high-flying machine-learning talent.
“For a senior employee, the prospect of millions of dollars a year of guaranteed value—just as long as you stay at your desk and are contributing—can be fairly attractive,” Luh said.
As the playing field gets increasingly competitive, growth startups outside of AI that are taking discounts signal an early warning to AI employees of what could be coming down the pike if the AI boom doesn’t last—and why an early exit might not be so bad.
Featured image by Chloe Ladwig/PitchBook News
