Tight Money Will Pressure Startups To Sell In 2023
Startups holding out for an IPO or Figma-scale acquisition are likely to be disappointed.
(Bloomberg Businessweek) -- The conventional goal for startup founders is to take their company public, with a top consolation prize being a lucrative sale to a larger company. A prime example is the $20 billion deal announced in September under which software design startup Figma Inc. would be acquired by Adobe Inc. The transaction, which is awaiting regulatory approval, values Figma at more than twice its final private valuation, securing a hefty payout for early investors. Figma founder Dylan Field is set to make $2 billion.
Overall, however, startups weren’t really cashing out big last year. Completed venture-backed acquisitions in the first three quarters of 2022 totaled $81.7 billion, according to PitchBook Data Inc., down 40.7%, from $137.8 billion in the same period the year before. No significant venture-backed tech startups went public.
By contrast, investors are predicting a flurry of acquisitions in 2023. Ryan Nolan, managing director at Goldman Sachs Group Inc., says this year will see “the return of the private company sale, which was largely nonexistent in 2022.”
Many of the startups involved in these deals won’t be as lucky as Figma, though. Nolan says the lack of startup deals last year was largely the result of a disconnect between buyers looking for bargains and sellers who anticipated that their companies would fetch the kind of prices they’d have gotten when the market was booming. “We expect that gap to narrow in 2023,” he says.
Even the deal for Figma, one of the most successful startup outcomes of all time, was an illustration of trouble in the industry. The company had been largely viewed as being on the path for an initial public offering until the turn in the markets closed that window. A company that might have resisted overtures in a different market suddenly found a large acquisition compelling. “It’s a very opportune time for companies to look at what are the right strategic partners,” said Danny Rimer of Index Ventures, a Figma investor, in an interview the day the deal was announced in September.
Before last year, startups had enjoyed an unusually long period of easy money, and many were flush enough to put off hard decisions. Then investors in public markets began prioritizing near-term profitability over fast growth, undercutting the potential for a large IPO and causing venture capitalists to adjust accordingly. This development made it more challenging to raise capital, especially on favorable terms. A recent survey of 450 early-stage startup founders in the US and Europe found that about 80% of early-stage startups didn’t have enough cash to get through another year. Investors who put money in late-stage companies such as Klarna, ServiceTitan and Snyk in 2022 valued them at lower levels than in earlier fundraising rounds.
By CB Insights’ most recent count, there are more than 1,200 private technology companies valued above $1 billion. Uncertainty about how to value these companies in the current market is making it harder for them to raise capital without accepting lower valuations. Many could end up selling at prices below their previous expectations, says Michael Brown, partner at Fenwick & West LLP. “Private companies are slowly coming to the realization that their last private valuations are no longer a valid benchmark,” he says.
Other companies will probably try to ride it out until the market improves. Venture capitalists have been telling startups to be patient, that they will often have no choice but to accept less favorable terms. “Some startups will struggle to raise,” says Carolina Brochado, partner at EQT Partners, adding that the dilemma “will lead to increased openness or even the need to be acquired.” In some cases, she says, it will be “the only option.”
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