Category: investment banking

Contact: Brenon Daly

The quintessential Silicon Valley deal is drying up. Sales of VC-backed tech startups, which once provided a steady flow of money to entrepreneurs and their backers, are down sharply so far this year, compared with recent years. And while the impact of the narrowing of that exit will be primarily felt along Sand Hill Road, the cause of the slump traces back to Wall Street.

So far this year, just 235 VC-backed tech companies have sold, according to 451 Research’s M&A KnowledgeBase. That paltry level represents the fewest startups sold in the first five and a half months of any year since 2010, even as the overall tech M&A market has broadened and increased the current number of total tech transactions by nearly 15% since the start of the current decade. Year to date, M&A volume for VC-backed vendors is running 13% lower than the average number of deals over the past five years, according to the M&A KnowledgeBase.

The sharp decline in exits comes as the ranks of the startups are swelling, with thousands of businesses receiving venture investment each year. So if the slowdown isn’t coming from the supply side, that leaves only the demand side. And indeed, we can narrow the cause of the recent slump to one particular set of startup buyers: US public companies.

For the first half of the current decade, according to the M&A KnowledgeBase, NYSE- and Nasdaq-listed vendors accounted for more than 40% of the purchases of VC-backed companies. In some years, that approached nearly half of the transactions. So far this year, the tech industry’s big fish have gobbled up the minnows in only slightly more than one-third of the deals. If the classic startup-sells-to-tech-giant transaction isn’t playing out as often as it once did, that’s primarily because many of the tech industry’s one-time biggest buyers have themselves been bought.

Some behemoths have been consolidated by fellow behemoths, with the net effect that the combined entity – perhaps still struggling with integrating a business that does hundreds of millions of dollars, or even billions of dollars, of revenue – doesn’t have the capacity to do anywhere near as many deals as the two stand-alone companies did. Consider the relative M&A rates for Dell and EMC on both sides of that blockbuster pairing. In other cases, tech giants have gone private, with buyout shops that tend to focus on financially optimizing existing businesses, rather than trying to bump up revenue growth through potentially costly acquisitions of shiny new startups. For instance, BMC has done only three purchases since its leveraged buyout four years ago, down from an average of four acquisitions in each of the three years leading up to its take-private.

Source: 451 Research’s M&A KnowledgeBase

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Contact: Brenon Daly

After a prolonged period of restructuring and refocusing their own businesses, tech bellwethers are once again in the market for startups. Many of the industry’s biggest names are putting their record levels of cash and record-priced equity to work as they return to paying significant valuations for largely unproven companies. This year’s return of the recently rejuvenated ‘usual suspects’ of tech M&A comes after a few years when the big names were somewhat overshadowed by unconventional buyers rolling the dice on technology vendors.

For instance, the list for 451 Research’s M&A KnowledgeBase of who has printed significant acquisitions of VC-backed companies this year includes Cisco, CA Technologies and Hewlett Packard Enterprise. In 2017, there aren’t buyers like General Motors, as there was in 2016, or Delivery Hero, as there was in 2015. To generalize broadly, we might suggest that the driver in the startup M&A market has swung from fear to greed. What we mean by that is several of the 2015-16 big VC exits appear to be motivated by fear, specifically – as kids these days say – fear of missing out. The threat of being disrupted by technology appears to have driven earlier transactions such as Unilever’s $1bn purchase of Dollar Shave Club last July and old-line Ritchie Bros. Auctioneers’ $759m pickup of online platform provider IronPlanet last August.

This year’s resurgence of the well-known tech giants, which have both the means and the need to acquire faster-growing startups, has helped boost the number of significant VC exits in 2017 to almost as many transactions as the same period of the two previous years combined. According to the M&A KnowledgeBase, buyers so far this year have announced six deals valued at more than $500m. (That total includes transactions for which 451 Research has a proprietary estimate of the unannounced terms.) For comparison, the same period in 2016 and 2015 produced a total of just seven VC exits valued at more than a half-billion dollars.

Probably no group is happier to see renewed demand from these tried-and-true acquirers of startups than the main supplier of startups, Silicon Valley. VCs overwhelmingly rely on sales of their portfolio companies to generate returns and, thus, keep their firms in business. The acceleration in the pace of big deals for startups is helping to offset a rather lackluster IPO market, which offers the other exit for their portfolio companies. Not that many startups are taking that exit, as we detailed in our special report on the fertile, but barren, tech IPO landscape.