by Brenon Daly
There’s a new exit off Sand Hill Road that’s proving increasingly popular for startups. Rather than following the well-worn path that leads into another venture portfolio, startups are taking an unexpected turn into private equity (PE) holdings at a record rate. For the first time in history, a VC-backed startup in 2018 was more likely to sell to a PE buyer than a fellow VC-backed company, according to 451 Research’s M&A KnowledgeBase.
Last year was a stunning reversal from when ‘inter-species deals’ were the norm. In 2015, for instance, the M&A KnowledgeBase shows almost three times as many VC-to-VC transactions as VC-to-PE transactions. But with ever-increasing amounts of cash to put to work, PE firms have started reaching into VC portfolios much more frequently and aggressively.
The M&A KnowledgeBase shows that buyout shops, which once operated on the diametrically opposite end of the corporate lifecycle from VCs, are now providing almost one out of four venture exits. They are doing this by bolting on startups’ assets to their ever-increasing number of existing portfolio companies, as well as by recapping startups, or buying out an existing syndicate of venture investors.
Altogether, PE firms have doubled the number of VC-backed deals over the past three years. That buying group has increased its startup purchases every single year since 2015, while the number of VC-to-VC transactions has fallen every single year during that period.
Those diverging fortunes have pushed buyout shops’ share of VC exits to an unprecedented 23% in 2018, up from roughly 10% at the start of the current decade, according to the M&A KnowledgeBase. So for a startup looking to sell itself in the coming year, it’s probably more likely to go to a company owned by Silver Lake rather than Greylock, or KKR rather than NEA.
