From Shutdowns to Strategic Buys: The Changing Landscape of M&A in 2024

‍There’s a recent report from a large fund admin indicating a record number of startups shutting down and it will likely have significant implications for the M&A market over the next 90 days. Here are my hot takes on what this could mean:

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Increased Acquisition Opportunities

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1. Fire Sales and Discounted Valuations: Many startups shutting down can lead to more distressed sales. Companies with valuable technology or customer bases who lack the runway to continue operations might get sold at discounted valuations. This creates opportunities for acquirers to purchase assets at a lower cost.

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2. Talent Acquisition & Acqui-hires: With startups shutting down, there’s gonna be a surplus of skilled employees looking for new roles and opps. Larger companies or startups with strong cash positions may capitalize on this by buying companies mainly for talent.

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Shift in Buyer Dynamics

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1. More Active Strategic Buyers: Established companies looking to expand their capabilities quickly may become more active in the M&A market, quickly. They can leverage this opportunity to acquire tech, market share, or talent that would be more expensive or time-consuming to develop in-house.

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2. Private Equity Interest: Several PE firms are known for their liquidity and interest in acquiring distressed or high-potential startups. Firms like Blackstone, KKR, and Bain Capital have big capital reserves and a track record of making strategic acquisitions, fast. 

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These firms may find attractive deals to consolidate struggling startups into their existing portcos, enhancing their value through synergies and operational improvements. Additionally, firms like Silver Lake, which focuses on tech investments, and Vista, known for software and data-focused acquisitions, may also be particularly active in this market.

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Impact on Valuations

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1. Downward Pressure on Valuations: The surge in available startups for acquisition is expected to drive down overall valuations. In deep tech, valuations might drop by 20-30% as companies with cutting-edge technology but insufficient runway face fire sales. 

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SaaS startups could see a 15-25% decrease in valuations, with many seeking quick exits. AI companies might experience a 25-35% reduction, given the high competition and capital intensity in the sector. Buyers will likely leverage this increased supply to negotiate significantly lower prices."

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2. Valuation Adjustment Expectations: Startups looking to be acquired may need to adjust their valuation expectations. Sellers may need to be more flexible and realistic about their company’s worth given the market conditions.

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Due Diligence and Selectivity

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1. Heightened Due Diligence: With more opps available, acquirers may become more selective and thorough in their due diligence processes. In 2024, acquirers will demand detailed financial audits, extensive customer and revenue verification (read: random customer verification), and deep dives into technical and cybersecurity capabilities, which were less scrutinized in 2021-2022. Additionally, startups will need to provide comprehensive documentation on regulatory compliance, especially in sectors like AI and SaaS.

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2. Increased Focus on Sustainability: Acquirers will prioritize startups with sustainable business models and clear, actionable paths to profitability. For deep tech and AI companies, VCs and PE investors are seeking business models that project profitability within 24-36 months. In the SaaS sector, the expectation is even shorter, with a desired path to profitability within 12-18 months. These timelines are significantly stricter than those seen in 2021-2022, where longer periods of operational losses were more acceptable as long as growth metrics were strong. These stricter timelines reflect a shift in investor sentiment driven by recent market volatility and economic adjustments.

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3. Rationale for This Change: The shift towards more rigorous due diligence and shorter paths to profitability is largely driven by the economic environment and investor sentiment. The M&A market in 2023 experienced significant downturns due to macroeconomic uncertainties, inflation, and rising interest rates, which have made investors more cautious and selective. As a result, there is a heightened emphasis on making sure investments are sound and can quickly return to profitability. This shift aims to mitigate risks and secure better returns in a more volatile market.

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Potential Increase in Merger Activity

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1. Collaborative Survival Strategies: Some startups may go after mergers with complementary businesses to survive and thrive. These mergers can create stronger, more resilient entities capable of weathering economic challenges.

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2. Industry Consolidation: Specific sectors, especially those hit hardest by the downturn, may see increased consolidation as companies merge to pool resources, reduce competition, and increase market share. The top three sectors expected to see the most significant consolidation are:

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1. Technology: The tech sector, particularly companies focused on AI and cybersecurity, is facing high competition and capital intensity. This sector is poised for mergers to combine complementary technologies and reduce R&D costs.

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2. Healthcare: Pharmaceuticals and biotech companies are likely to consolidate to share research costs and accelerate drug development. The recent focus on precision medicine and the aftermath of the pandemic have increased the pressure for efficiency and innovation.

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3. Energy: The energy sector, including renewable energy and traditional oil and gas companies, is experiencing significant shifts due to the energy transition. Consolidation is expected as companies aim to scale their operations and invest in new technologies to meet sustainability goals.

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Impact on Funding and Future Startups

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1. Tighter Funding Environment: The shutdown of numerous startups can lead to a more cautious approach from investors. VCs and angels are probably going to become more selective, focusing on startups with clear profitability paths and solid business fundamentals.

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2. Shift in Startup Strategies: Future startups may adopt more conservative financial strategies, prioritizing profitability and sustainability over rapid growth. This could lead to a more balanced startup ecosystem in the long run.

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Overall, the shutdown of many startups is likely to create a buyer's market in the M&A space, with increased opportunities for acquisitions at lower valuations. Acquirers will need to be strategic and selective, focusing on sustainable and high-value targets, while startups and investors will need to adjust their strategies to navigate this changing landscape.