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Venture Capital

VC-backed M&A spoils predictions, falling to decade low

VCs and market participants have been predicting an uptick in M&A activity, but fewer startups were bought in 2023 than in any year over the past decade.

VCs and market participants have been predicting an uptick in M&A activity for at least six quarters, but their forecasting powers keep failing them.

2023 turned out to be the worst year in a decade for acquisitions of VC-backed companies, according to the Q4 2023 PitchBook-NVCA Venture Monitor. Companies purchased nearly 700 startups at a combined value of $26.7 billion, about a quarter of the value sold during the 2021 peak.

Recession concerns, higher interest rates, antitrust risks and increased emphasis on profitability are among the reasons why corporate acquirers weren’t jumping at the chance to purchase less-expensive startups.

Even some of the biggest and most cash-rich tech companies were reluctant to purchase startups last year. NEA partner Vanessa Larco said one of her portfolio companies was discussing a potential sale to a large tech company. But the buyer walked away.

“They didn’t want to take on [a startup] that’s burning cash right now,” said Larco, adding that she doesn’t fully understand that rationale. “For a huge corporation, a million dollars a month of burn is a rounding error.”

She declined to name the target or its failed suitor.

Public tech companies have been rewarded by investors for keeping costs at bay. For instance, Meta‘s stock price more than doubled in 2023 amid an effort that the social media giant’s CEO, Mark Zuckerberg, called “the year of efficiency.”

Aly Love Simons, an M&A partner with law firm Debevoise & Plimpton, said that while 2023 dealmaking was much slower than many anticipated, most people in the industry are predicting this year to be much stronger for M&A.

“The largest acquirers are going to be returning to the table. They are looking at their balance sheet [and] stock price and saying ‘now’s the time to do some acquisitions,’” Simons said.

Even if dealmaking finally ticks up, few investors should expect a meaningful payday.

Simons predicts that most deals will be on the small side.

Another obstacle to realizing significant returns through M&A are startups’ complex cap table structures. Since many startups will sell for a price lower than their last valuation, not all investors should expect to make a return on the sale or even get their money back.

Simons calls these situations “sour spots” because rewards are uneven among shareholder classes, and in the cases where a sale price is very low, common stockholders may not get anything at all.

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