Back in June, I predicted that we would see an uptick in startups acquiring other startups this year. At the time, the venture market was souring and starting to show a divide between startups with years of cash on hand — companies that were also, often, overvalued — and those that were low on capital and would likely struggle to raise new funds.
Well, while I was technically not wrong — it is still 2022 for two more weeks — my prediction didn’t really pan out as I thought it would.
According to data from Crunchbase, as of December 13, 1,291 startups have been acquired by other venture-backed companies this year. This compares to 1,292 in 2021. So while this year is on track to see more transactions than last, it won’t be by a meaningful amount.
But a recent acquisition showed both why we haven’t seen much movement yet and why we expect to see significantly more activity heading into next year.
Last week, Turkish quick grocery delivery startup Getir announced it was acquiring similarly flavored German unicorn Gorillas for $1.2 billion. Why will this deal be the catalyst? Because in this transaction, Gorillas got snatched up at a 60% discount to the $3 billion valuation it garnered in 2021. Getir also announced that the combined entity will be valued at $10 billion, which is lower than it was valued on its own, $11.8 billion, prior to the acquisition.
The reason this deal seems to both sum up why startup acquisition hasn’t yet taken off and why we may soon see a wave of them is simple: valuation.
In June, when I originally thought startup-on-startup deal-making was going to ramp up, I erred in thinking that companies were willing to drop their valuations sharply at that time, even if they were desperate. Many potential targets kept inflated valuations and thus were still too expensive to acquire.
This mirrors what is happening in venture deal-making and why we haven’t seen an influx of startups raising down rounds. In October, PitchBook released Q3 data that showed that the median valuation for early-stage and seed-stage companies was still rising.
Kyle Stanford, a senior venture analyst at PitchBook, explained that the reason averages are still ticking up is because most deals just aren’t getting done. The only companies closing rounds right now are the ones who can do so at a higher valuation.
Of course, the startups putting off raising a down round won’t be able to avoid the inevitable forever.
Valuations are beginning to dip. Just last week, Norwegian grocery delivery company Oda — its sector is looking rough right now — raised $151 million at a $353 million valuation, down from its $900 million valuation last year. Yesterday, Snyk announced it was raising $196 million at a modest 12% valuation cut. Klarna was the first to publicly disclose a lower valuation over the summer.
There will likely be more down rounds next year as startups run out of cash. In parallel, startups will acquire other venture-backed companies for the same reason.
What I wrote back in June about these acquisitions stands true: More of these transactions would be a good thing. In a frosty funding environment with an IPO window that is firmly shut, many venture-backed companies would fare better together than on their own.
The funding environment of the last few years has allowed some categories to become overpopulated, with numerous startups offering similar products and trying to land the exact same set of customers. It isn’t sustainable or possible for them to all survive. Consolidation allows for fewer companies to go completely under, and there would likely be fewer layoffs as startups combine workforces.
Over the summer, Work-Bench co-founder and general partner Jonathan Lehr told me that there has also been a proliferation of SaaS startups that should simply be features. However, due to the sheer volume of available funding, they were able to become startups in their own right. Roll-ups of these will make a lot of sense for startups and their customers, who will likely need to cut spending heading into a potential recession. Buying one suite of software will be an easier sell than bills from four different companies.
Plus, it’s worth noting here that if acquisitions do flourish in 2023, it won’t exclusively be companies bailing themselves out. Many startups likely saw how this year went, maybe saw how hard it was to raise and are rethinking their plan on how they want to grow going forward.
We can prepare for a lot of consolidation in the new year.
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