A funding crunch has prompted cash-strapped tech start-ups to consider selling themselves to larger companies in order to survive. The recent series of takeovers of artificial intelligence (AI) companies by bigger players has revitalized Silicon Valley’s market. Databricks acquired MosaicML for $1.3 billion, Thomson Reuters purchased Casetext for $650 million, Robinhood bought X1 for $95 million, and Ramp acquired Cohere.io. These deals have provided a glimmer of hope for venture-backed companies that have faced challenges in a tech downturn, resulting in low valuations and layoffs.
However, these acquisitions also highlight the growing trend of start-ups seeking to sell themselves to larger companies or being pressured by their investors to merge with competitors. Many start-ups are running out of cash as venture capitalists have scaled back their investments, and IPOs are not generating the desired returns. Ryan Nolan, global co-head of software investment banking at Goldman Sachs, noted that around 1,000 unicorns (tech start-ups valued at over $1 billion) are struggling to find a clear path to liquidity.
Lux Capital co-founder Josh Wolfe stated that many large start-ups in his portfolio are acquiring smaller rivals to drive growth. Defense tech group Anduril and biotech firm Eikon Therapeutics are among those expanding by acquiring companies, assets, and talent, thus securing their market share. Wolfe believes this trend is just getting started.
In addition to start-ups seeking acquisitions, large public companies are also making acquisition plans. Salesforce announced its intention to invest $500 million in AI start-ups, doubling its budget. Technology groups are becoming more aggressive in approaching start-ups for potential acquisitions.
Further activity is expected if US and European regulators approve several big tech deals currently under scrutiny due to antitrust concerns. The outcomes of Microsoft’s purchase of Activision Blizzard, Broadcom’s acquisition of VMware, and Adobe’s takeover of Figma will significantly impact the strategic buyer activity of large tech companies, according to Goldman Sachs banker Ryan Nolan.
Meanwhile, the planned IPO of UK technology group Arm, backed by SoftBank, in September could provide a positive signal for larger tech start-ups looking to go public. However, until then, founders in capital-intensive sectors such as robotics and battery manufacturing are running out of options as their cash reserves deplete rapidly. The situation has been exacerbated by rising interest rates and the collapse of Silicon Valley Bank, a major provider of loans to small start-ups.
Notable start-up collapses have already occurred, such as payments start-up Plastiq declaring bankruptcy and robot pizza delivery start-up Zume shutting down. Venture capital firms have been reducing their spending over the past year, with investments totaling $80 billion so far this year, compared to $246 billion in 2021, according to PitchBook. Industry experts have warned of an “extinction level event” for US start-ups. Kruze Consulting, which provides accounting services to over 800 venture-backed start-ups, has seen a doubling in the failure rate among its clients over the past year, indicating potential challenges for the venture market.
Venture capitalists have noted that valuations of tech start-ups are aligning more closely with publicly listed companies, with down rounds becoming more common. The preferred equity of start-ups, held by venture investors, has dropped by 25% since early 2022. Founders and investors fear that this funding crunch could lead to a similar scenario as the dotcom bust in the early 2000s, resulting in the collapse of internet start-ups and substantial financial losses.
In this challenging environment, VCs are being selective in their support for start-ups. Limited capital means that not all struggling companies can be saved. This has left founders with diminishing cash reserves faced with the choice of selling their companies or facing collapse. The public market has hit rock bottom, but the private market has further to go, according to Masha Bucher, founder of early stage venture fund One Day Ventures.
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