What’s behind the wave of startups buying other startups?

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It’s far from sunny and rosy these days for IPOs.

The stock market continues to struggle this year, with tech companies in particular feeling the brunt of the correction. (The Nasdaq Composite is down about 15% since the start of 2022.) And while private companies aren’t immune to some of the dynamics causing turmoil in public markets – see: inflation, rising interest rates, the war between Ukraine and Russia – they are more isolated than state-owned companies, some of which have thus tightened their purse strings.

It looks like we’re starting to see how this dynamic has affected mergers and acquisitions. According to an illuminating new report from Crunchbase reporter Sophia Kunthara, the first quarter of 2022 saw a decline in the number of public companies acquiring venture capital-backed startups; there were only 99 such acquisitions in the quarter, compared to 150 in the same period last year.

Instead, the first quarter saw more VC-backed startups foray into buying other startups – an interesting consolidation trend in the private startup sector, and one that offers founders and investors a another way out following the slowdown in public company interest in mergers and acquisitions. According to Crunchbase, there were 124 acquisition deals between startups in the first quarter of this year, compared to 118 such deals in the prior year period.

This doesn’t mean that the factors that caused public companies to pull out of acquisitions won’t eventually trickle down to startups – it may only be a matter of time before M&A activity is also not quieting down among VC-backed startups. Also, as Foley & Lardner partner Louis Lehot told Crunchbase, the first quarter is generally relatively quiet for public companies. (And it’s not like all was quiet on the M&A front in general: the first quarter saw Microsoft launch what would be the video game industry’s biggest acquisition ever, its 69 billion to buy Activision Blizzard.)

If this momentum persists, it will be interesting to see how private startups navigate the choppy conditions and chart their exit strategies without being able to rely on solid interest from public companies. Those betting on the arrival of a big player may have to sit back for a while or reassess the trajectory of their business. — Keerthi Vedantam

What we read elsewhere…

– HP’s gaming division, HyperX, is renewing its partnership with esports company New Meta Entertainment.

– Karma Automotive unveils its new luxury electric vehicle: the 2022 GS-6.

– Twitter’s board announces “poison pill” measure to prevent Elon Musk from making a buyout.

– AMC Theaters will now allow you to purchase movie tickets with Dogecoin.

– Meta is developing a web version of Horizon Worlds with no VR headset required.


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