Startups turn towards M&A as VC funding becomes inaccessible
These volatile conditions will result in a record number of M&As as startup funding becomes increasingly inaccessible, making exit an attractive option for cash-burning and late-stage startups. In light of this, business advisory, Trachet – experts in accelerating growth for startups – encourages startups to implement a dual track plan which encompasses carrying out a fundraising round while simultaneously looking for M&A opportunities as the best way to mitigate the risks of a volatile financial market.
Startup valuations have plummeted with some indexes like tech heavy NASDAQ seeing a drop of nearly 30%, resulting in VC investors putting away their checkbooks and turning their gaze away from companies with high cash burn, however, there is still a plethora of organisations with substantial reserves looking to acquire companies for at a reduced valuation. Claire Trachet, CEO of Trachet, explains that startups facing difficulties fundraising are now shopping for a buyer instead of VC investors, however without the right players on your team to carry out the transaction, the exit can become hostile.
In order for startups to take advantage of the exit opportunities, Claire Trachet outlines the importance of bringing an experienced CFO or COO to implement transformational changes to working capital, reorganization, increasing cost reduction, and legal entity restructuring to secure the best deal possible. According to data from Deloitte, nearly two-thirds (63%) of businesses report that the success of their M&A was moderately or highly dependent on a successful transformation – often led by a senior level and external advisor.
Business advisor, Claire Trachet, CEO & founder of Trachet comments on the VC pullback of 2022: “Venture capital tends to work as a reactive market, each startup depends on the next stage (either a subsequent round of financing or an exit) for their short-term success – usually every 16 – 18 months. The startup ecosystem has enjoyed a generation of businesses that have only experienced a bull market, where funds and good terms have been widely available.
“As the world enters a bear market, it is the late-stage startups with a negative cash flow (a lot of them) and that have raised money at high prices, that are going to be the most compromised – the well of free money has dried up.
“We’re entering unchartered territory, forcing a conversation across all management teams will help create communication and agility. Startups would benefit from having a process in place for sudden changes within their immediate competition, industry, or the global economy. “
“It’s important amidst these challenging times to assess end goals – perhaps in light of what’s happening, a better course of action may be to consider an exit, or conversely there may be another company worth acquiring to fortify and expand existing operations. Then startups should focus on extending the runway, so to speak – be diligent with the business’s working capital by optimising cash flow, review the contracts you have with your clients and minimise accounts recievables. Applying this mentality to the whole of the organisation is going to be key in the next year, whether you’re entering a fundraising round or considering an exit, ideally startups should be doing both.”