Fernway DiarySM

Sep 15, 2022

While big IPOs may grab headlines and attention in the startup ecosystem, going public is not the only exit strategy available to founders and early investors. Acquisitions are a far more common exit, one that can hold benefits for both sides. In the current difficult venture capital market, IPO activity has virtually ceased, with startups advised to trim expenses to extend their current runway rather than trying to seek additional funding rounds, which may have startups reevaluating their preferred exit strategy. However, the depressed valuations and slowdown that have affected startup funding appear to also be impacting startup M&A in 2022.

According to Crunchbase News, the first half of the year saw a few large M&A deals, including the purchase of logistics and fulfillment startup Deliverr by Shopify for $2.1 billion, the e-commerce software company’s largest acquisition to date. Only a month before, chipmaker AMD had bought venture-backed Pensando, a developer of new edge services and programmable processors for enterprise and cloud computing, for $1.9 billion. In the first quarter of 2022, VC-backed companies acquired other VC-backed companies at the highest rate in a decade, with a total of 124 acquisitions in that period.

By contrast, the “Big Four” of American companies—Apple, Amazon, Google, and Microsoft—have been notably slow in acquiring private, VC-backed companies through the end of August 2022. Between them they have made only 5 acquisitions this year, only one of which had a disclosed purchase price: Google’s purchase of security automation and response provider Siemplify, founded in 2015, in January for $500 million. In addition, Apple purchased Credit Kudos, a provider of tools for measuring creditworthiness based in the U.K.; Amazon acquired GlowRoad, a reseller based in India, and Veeqo, a provider of fulfillment tools based in the U.K.; and Microsoft bought Minit, a provider of process mining tools based in Slovakia. Given that the American companies collectively have over $300 billion in cash, their acquisition of only a handful of companies, none of which were known unicorns, signals a clear hesitation in their startup M&A activity.

Overall, Crunchbase data shows that M&A activity involving VC-backed startups has declined significantly since 2021. Just under 1,600 VC-backed companies have been acquired globally so far in 2022, compared to over 3,000 in 2021. The U.S. market shows an even steeper decline. Only 745 VC-backed startups have been acquired this year, while nearly 1,700 were bought in 2021.

The Q3 outlook for global fintech M&A in the third quarter is similarly gloomy, according to TechCrunch. They report that dealmaking was down in Q2 in financial services, with aggregate deal volume declining from 2,087 in Q1 to 1,442, a drop of 30.9{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f}. Deal value over the same period dropped 14.8{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f}, from $191 billion to $163 billion. The rapid decline in valuations has had a profound effect on fintech. Pricing in some categories has fallen by almost 60{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f}, and digital and crypto companies are down over 65{d61ad4666dda706b731686a225909392f074403d16c1288901cab8f2cf34ab1f}.

Experts feel that the challenging venture capital market could potentially drive more M&A activity in the future. Startups unable to raise capital at new, lower valuations influenced by the decline in public stocks may be forced to sell. Acquirers with available funds may also be holding out to purchase at prices well below the peak of the once-overheated market. Of the acquisitions that are taking place, market leaders categorize them as product buys to drive or accelerate revenue growth, with the acquisition of new talent as a secondary benefit.

Overall, near-term forecasts seem to emphasize constraints that may be imposed by the current economic environment and challenges faced by founders in driving additional rounds of fundraising or commanding appropriate valuations for exits. Startups should hence be prepared for heightened scrutiny as investors proceed with caution with greater emphasis on founders demonstrating profitability, or a path to profitability. To withstand challenging market conditions, accurate financials and advice surrounding due diligence processes are vital. Fernway Solutions offers a full range of advisory, corporate structuring, tax planning, compliance, and accounting services to ensure your startup has what it needs at each stage of growth.

For more information, please contact your US tax advisory team at youradvisor@fernwaysolutions.com or visit us at www.fernwaysolutions.com.

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