Pitchbook is Late on Startup M&A

A Pitchbook report published yesterday begins with the question "Who is Buying VC-backed Companies," noting with surprise that "the estimated 956 sales involving US VC-backed companies in 2024 are significantly higher than would be expected, given VC’s current condition."

At Cadet Legal, however, we are neither surprised about that sales volume nor uncertain about who the buyers are. This may be in part due to our approach - we aim to analyze transactions agnostically, with no knee-jerk assumptions about "what kind of deal it is." Instead of letting technical practice areas define and limit our capabilities, we use whatever tools we have at our disposal to achieve our client's objectives, regardless of whether they technically fall under the umbrella of M&A, VC, PE or other. In that spirit, we wrote an article last year on how startups should consider function and not just trends in structuring decisions and another about how "M&A Can Rescue Startups and Revive Venture Capital."

I made my start in Big Law over ten years ago, learning how to close billion dollar private equity fund formations and leveraged buyouts. Not surprisingly then, clients still come to Cadet Legal specifically for advice on asset management structuring and guidance in executing acquisitions, albeit in the lower-middle market.

While more traditional PE is in our blood, 2024 also saw us advise and execute on a half dozen M&A transactions involving startups, including some headline-grabbing ones. As of today, we already expect to close another three startup M&A deals before the clock strikes Q2, and have been engaged on, or approached about, multiple other startup M&A deals slated for this year.

Thus, we understand completely when Pitchbook says that in 2024, over a third of US VC-backed startup acquisitions involved another VC-backed company as the buyer, marking a significant increase in this trend over the past two decades. Pitchbook notes that this surge in acquisitions is occurring as similar deals by Big Tech companies decline due to regulatory pressures and changing market dynamics (although we at Cadet Legal still anticipate a consolidation of GenAI assets and companies).

We are seeing VC-backed companies engaging in "buy and build" strategies, capitalizing on lower company valuations and consolidating crowded sectors. We've seen it in SAAS, we've seen it fintech (and insurtech), and we're seeing it with GenAI, among other verticals. Per Pitchbook, in 2024, 277 acquisitions were completed by VC-backed companies, making it the third-highest total in the past decade. These companies often face less regulatory scrutiny than public counterparts, have high financing volumes, and benefit from lowered price expectations from sellers.

Since market factors are inducing companies to stay private longer and raising more capital (VC or otherwise), the value of making acquisitions has become clear. The most active VC-backed buyers, such as Databricks and Stripe, exemplify this trend, adapting to an aging startup landscape. These buyers have raised a substantial portion of total VC funding in the US, and are using acquisitions to enhance growth, similar to public corporations. As IPOs become less appealing, VC-backed companies are under pressure to sustain growth and are increasingly turning to the secondary market and debt financing. We have advised on multiple secondaries and debt transactions for startups recently.

With this trend of VC-backed companies remaining active in the M&A market expected to continue, advisors like us at Cadet Legal are not just standing by, but actively pushing this trend forward.

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