Forecast: Startup M&A Could Pick Up In 2023 As Fundraising Tightens Further (2024)

While 2022 was relatively average in terms of M&A activity involving VC-backed startups in the U.S., dealmakers think this year could see a significant jump in volume as companies’ options for money and exits dwindle.

Rising interest rates make money more expensive, but those in the industry say both private equity and strategics have significant capital to get deals done now that prices have come down.

“It’s true debt is more expensive, but valuations are coming down,” said Dan Nash, senior managing director and head of investment banking at .

Although 2022 couldn’t come close to the robust number of deals announced in 2021, it was on par with previous years — with more than 1,070 VC-backed startups in the U.S. getting bought, according to Crunchbase data.

However, it is interesting to note dealmaking in the space did drop off as the year went along. The fourth quarter of 2022 was on pace to be the slowest of the year, perhaps dragged down by an uncertain economy and fears of a recession.

Big deals

Some of the biggest deals of 2022 involving VC-backed startups in the U.S. included:

• In September, Adobe agreed to acquire San Francisco-based collaborative design platform Figma for $20 billion in cash and stock in the largest purchase of a U.S. private, venture-backed company in 2022.
• In January, Aptiv announced it will buy Alameda, California-based device software company Wind River for $4.3 billion.
• Also in January, Sony Interactive Entertainment acquired Bellevue, Washington-based gaming company Bungie for $3.6 billion.
• In May, GSK bought Cambridge, Massachusetts-based clinical-stage biopharmaceutical company Affinivax for up to $3.3 billion.

Three of those deals occurred in the first half of the year, when the market was still riding the tailwinds of 2021. While the dealmaking market started slowing as 2022 wore on, most saw that “wait-and-see” attitude from buyers changing as potential targets started to run low on cash.

“Companies will want to raise capital, but are looking at what will be a dual-track process,” said Nash, meaning startups will be looking at both fundraising deals as well as possible sales.

“Our initial prediction is that volume picks up, but dollars will not” in 2023, said Nash. He added he expects dealmaking to pick up as the year wears on.

Valuations drop

In addition to the need for cash, many startups are not nearly as expensive as they were even as recently as the start of 2022.

The skyrocketing valuations in the private markets and the option to go public via a SPAC left many would-be corporate acquirers on the sidelines, said Don Butler, managing director at Thomvest Ventures.

“The drop in valuations in public markets and the ensuing drop in valuations for many startups will bring pricing back in line,” he said.

Mike Ghaffary, general partner at Canvas Ventures, said even with dropping valuations, the question is whether the buyers will be similarly motivated.

“For the most part, their motivation will be ‘wait and see’ and there isn’t much of a rush, especially because of a perception that the market hasn’t hit bottom,” he said.

However, private equity is sitting on more dry powder than ever before — over $1.5 trillion — and strategics have perhaps been timid because of what had been until more recently a frothy market.

“You have large companies that are scaling back right now,” Nash said. “So they may start cherry-picking really interesting companies.”

Nash said that is especially true as cutbacks at these companies could have stifled innovation, which they may now need to acquire.

Also, big tech companies like Meta, Microsoft and Alphabet have — despite a brutal 2022 that involved layoffs — significant cash and could put it to use now that the market has turned back to their favor.

Affected areas

Where that dealmaking may occur could be the real question.

Nash said the IPO backlog has affected industries including health care, fintech and consumer tech the most. He added fintech could be a good spot to cherry-pick some of the best companies as funding dries up.

Other areas, such as renewables and cybersecurity, also could see activity — although valuations in cyber have not been affected as much in the recent downturn.

Dino Boukouris, founding director of San Francisco-based financial advisory firm Momentum Cyber, said while M&A activity was down year over year, 2022 should still easily be the best year ever for dealmaking, with the exception of 2021.

He expects 2023 to be another big year — certainly in terms of volume.

“As the funding crunch has continued for a bit longer than most expected in 2022, and many companies face considerable ‘down’ rounds in their next capital raise, M&A activity will likely increase, albeit at lower valuations than in prior years,” he said.

While interest rate hikes could curtail some dealmaking, Ghaffary said the market may see companies explore alternative financing plans and an increase in equity components as cash becomes more expensive.

“I don’t think the overall M&A numbers will stay down due to hikes, but we could see certain industries’ numbers fall,” he said. “Overall, I think we will continue to see a steady pace of M&A deals into 2023, but it won’t quite be the historic highs of 2021.”