Amid a venture funding decline and dearth of IPO activity, startups have found a new way to occupy their time: buying other startups.
The notion of startups acquiring other VC-backed companies is nothing new. Meta bought venture-backed Instagram a month before Facebook’s May 2012 IPO; food delivery company GrubHub merged with Seamless in 2013 when they were both still operating off venture funding. But up until the last few years, these transactions were mainly large and infrequent. Now, they are getting smaller and more frequent.
In 2021, 1,283 transactions involving startups on both sides of the table took place, according to data from Crunchbase. That compares to 689 in 2020 and 599 in 2019. So far this year, 663 startups have been acquired by other VC-backed companies, with more than half of 2022 left to go.
Why is this happening now, during a downturn? The venture funding bull market of the last decade has created a barbell of startups. Last year simultaneously saw a record number of startups crossing the billion-dollar valuation threshold while seed-stage funding broke its own record. Now that the funding fever has come to a screeching halt, the market is filled with late-stage companies with oodles of cash on hand — and no real exit opportunities — and a plethora of early-stage startups.
This has created a perfect storm for an increase in startups acquiring other VC-backed companies, Kyle Stanford, a senior analyst at PitchBook, said.
“There are over 7,000 venture-backed companies and a record number of seed deals,” Stanford said. “There will be a lot of companies that will struggle to raise this year that will be easy targets for companies looking to acquire.”