Startups Becoming VCs Themselves

July 8, 2019

When one thinks of a firm involved in mergers and acquisitions (M&A), the idea of a startup generally does not come to mind.  Rather, when most people think of M&A, they likely think of large, multi-national corporations acquiring a company that has been through multiple rounds of funding and has proven successful at its craft.

Oh, how the world has changed.  With private companies staying private longer, so-called startup companies (if you can call them startups) have turned to M&A for growth opportunities.  The following are notes out of private equity data provider Pitchbook on the emergence of startups as M&A dealmakers.

M&A Activity by US VC-backed Companies

Figure 1 below has the deal count and deal value by US VC-backed companies in M&A activity.  The left axis is the deal value, in billions of US dollars.  The right axis is the number of deals.  The chart goes from 2009 (the depths of the global recession) through June 4, 2019. 

In 2009, startups made $10.3 billion in M&A deals across 315 deals.  This grew to $43.5 billion in 2015 across 720 deals.  In 2016, M&A activity by startups slowed a bit to $35.6 billion in value across 643 deals.  Then, in 2017 and 2018, deal values totaled $44.8 billion and $39.4 billion, respectively.

Fast forward to 2019 – through the first five months of startup M&A activity, startups have acquired $19.5 billion worth of other companies across 242 deals.  That’s a massive jump from the 2009 doldrum figures of just $10.3 billion.


Source: PitchBook

What’s Behind the Rise?

Why the rise in M&A activity by so-called startup companies?  At least two recent trends explain most of the rise of the “startup M&A”.

First, startups are staying private longer.  Firms such as Uber, Lyft, and others had more than enough private money searching out a profitable private investment that they did not need to turn to the public markets.  In general, the longer an owner can stay private in a company that has the resources it needs to grow past unicorn status, the more money the owner of the company will make.  It’s as simple as that.

The second reason for the rise is the massive amount of money venture capital and private equity firms have at their disposal to work with startups.  It used to be the case that startup companies would compete for a very limited supply of high finance money.  The situation has flipped.  High finance investment firms are competing with each other for the best investment options.  Companies wait to be wined and dined.

Conclusion

In a shift from the historical norm, startup companies are moving into the M&A scene.  These private companies gain growth without having to look to the public markets for financing – likely a sign of a changing financial world.

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