With Series A funding harder to come by, founders of good but not great start-ups are looking for earlier exits as a way to cash out and move on.
No matter the broader market conditions, there’s always a healthy run-rate for exits of venture-backed companies to strategic buyers, says Steve Ryan, global leader of Pillsbury’s emerging companies & venture capital practice.
“The difference now is that a Series A financing is more difficult to get, which is putting more founders that have built something interesting but not amazing in the bucket where they’re selling to strategics as their way to off-ramp [so they can] go do the next thing,” he tells Venture Capital Journal. “And where they have the opportunity to exit, when they have relatively low traction, is to a larger competitor that has that strategic fit with their existing customer base.”
He argues that the volume of other kinds of M&A activity, including big blockbuster deals, is down, creating the optics that strategic exits are more of a new trend than they actually are.
Another factor driving earlier exits for companies that realize they won’t be breakout winners in the near term and are having difficulty fundraising is that high-performing members of their founding teams start to get demotivated and want to work on another opportunity, says Ryan.
With all the opportunities in AI, “it’s tough to keep those high-performance team members engaged and excited about the current opportunity if the signals are not there,” he notes. “For a VC-backed company that hasn’t had significant traction, the prospect of recruiting executives to replace those founders, at that stage, is really difficult.”
For VCs, the option of continuing to develop and invest in a portfolio company, without the founding team in place, introduces additional risk with decreased odds of success, driving the VC to support and accept a middling exit to a strategic buyer, in order to get their capital back, so they can invest that capital into more promising opportunities, he adds.
In contrast, private equity buyers are gravitating toward larger, later-stage acquisitions overall, which includes target companies backed by venture capital.
For big private equity buyers that have middle-vintage funds with a lot capital on the books that they want to deploy, “big deals are efficient,” says Benjamin Kern, a partner at Winston & Strawn in Chicago.
“If they feel like the price is right, larger deals are a much more efficient way to try to get returns for investors than trying to aggregate small deals. With variability in valuations and market conditions, small deals are all over the place,” Kern tells VCJ.
Although aggregated data show declining M&A deal volumes and larger-sized deals in dollar terms, that does not describe all parts of the market, Kern adds.
“I’m seeing a good number of smaller deals getting done in specific markets,” he says. “On the ground, I am seeing more deals moving forward than has been the case in the last couple years, and it is busier at the earlier stage part of the spectrum right now.”
And while Kern says he would expect to see PE buyers bargain-shopping, he is also seeing deals that represent good outcomes for founders and investors. He notes activity in areas such as private credit, digital assets and a combination of healthcare, pharma and life sciences where growth and valuations have been strong. Strong growth in specific types of private companies “reflect overall market trends” in areas of growth for public companies.
“The deals we are seeing on the large PE buyer side are not down rounds. They’re not punitive. They’re coming out at pretty decent valuations,” he says.
But there is also no shortage of distressed company deals right now. Among buyers showing interest in distressed assets, strategic buyers account for roughly 75 percent of the activity, with PE firms showing up in perhaps 25 percent of the transactions, he notes.
The more troubled exits at lower valuations are for companies innovating in conventional industries like construction products, heavy equipment, clean tech, and cybersecurity, says Kern. He attributes that to the greater uncertainty “in industries that are heavily reliant on components or anything where physical goods need to cross borders, or where industries have grown a lot based on there being very roughly speaking a pool of government money that they can go after.”
While healthcare, pharma and life science companies are more inclined currently to raise more growth capital than to exit, fintech and private credit companies are seeing a lot of M&A deal flow, triggered by some high-profile acquisitions of private companies in that sector by big asset managers such as TPG and BlackRock, says Kern.
There’s increased interest “in buying, aggregating and firming up product offerings in that market just because it is a relatively new and exciting and still a very high-growth market,” he says.
Kern’s team is working with several companies whose successful business models enabled them to keep growing over the last few years despite market headwinds. There’s a sense among founders that now is a good time to capture that value for a good payout if they can find the right buyer, as opposed to continuing to grow for another few years and exiting for a spectacular valuation, he notes. None of his clients have told him they want to sell right now to get ahead of a projected recession.
With Series A funding harder to come by, founders of good but not great start-ups are looking for earlier exits as a way to cash out and move on.
No matter the broader market conditions, there’s always a healthy run-rate for exits of venture-backed companies to strategic buyers, says Steve Ryan, global leader of Pillsbury’s emerging companies & venture capital practice.
“The difference now is that a Series A financing is more difficult to get, which is putting more founders that have built something interesting but not amazing in the bucket where they’re selling to strategics as their way to off-ramp [so they can] go do the next thing,” he tells Venture Capital Journal. “And where they have the opportunity to exit, when they have relatively low traction, is to a larger competitor that has that strategic fit with their existing customer base.”
He argues that the volume of other kinds of M&A activity, including big blockbuster deals, is down, creating the optics that strategic exits are more of a new trend than they actually are.
Another factor driving earlier exits for companies that realize they won’t be breakout winners in the near term and are having difficulty fundraising is that high-performing members of their founding teams start to get demotivated and want to work on another opportunity, says Ryan.
With all the opportunities in AI, “it’s tough to keep those high-performance team members engaged and excited about the current opportunity if the signals are not there,” he notes. “For a VC-backed company that hasn’t had significant traction, the prospect of recruiting executives to replace those founders, at that stage, is really difficult.”
For VCs, the option of continuing to develop and invest in a portfolio company, without the founding team in place, introduces additional risk with decreased odds of success, driving the VC to support and accept a middling exit to a strategic buyer, in order to get their capital back, so they can invest that capital into more promising opportunities, he adds.
In contrast, private equity buyers are gravitating toward larger, later-stage acquisitions overall, which includes target companies backed by venture capital.
For big private equity buyers that have middle-vintage funds with a lot capital on the books that they want to deploy, “big deals are efficient,” says Benjamin Kern, a partner at Winston & Strawn in Chicago.
“If they feel like the price is right, larger deals are a much more efficient way to try to get returns for investors than trying to aggregate small deals. With variability in valuations and market conditions, small deals are all over the place,” Kern tells VCJ.
Although aggregated data show declining M&A deal volumes and larger-sized deals in dollar terms, that does not describe all parts of the market, Kern adds.
“I’m seeing a good number of smaller deals getting done in specific markets,” he says. “On the ground, I am seeing more deals moving forward than has been the case in the last couple years, and it is busier at the earlier stage part of the spectrum right now.”
And while Kern says he would expect to see PE buyers bargain-shopping, he is also seeing deals that represent good outcomes for founders and investors. He notes activity in areas such as private credit, digital assets and a combination of healthcare, pharma and life sciences where growth and valuations have been strong. Strong growth in specific types of private companies “reflect overall market trends” in areas of growth for public companies.
“The deals we are seeing on the large PE buyer side are not down rounds. They’re not punitive. They’re coming out at pretty decent valuations,” he says.
But there is also no shortage of distressed company deals right now. Among buyers showing interest in distressed assets, strategic buyers account for roughly 75 percent of the activity, with PE firms showing up in perhaps 25 percent of the transactions, he notes.
The more troubled exits at lower valuations are for companies innovating in conventional industries like construction products, heavy equipment, clean tech, and cybersecurity, says Kern. He attributes that to the greater uncertainty “in industries that are heavily reliant on components or anything where physical goods need to cross borders, or where industries have grown a lot based on there being very roughly speaking a pool of government money that they can go after.”
While healthcare, pharma and life science companies are more inclined currently to raise more growth capital than to exit, fintech and private credit companies are seeing a lot of M&A deal flow, triggered by some high-profile acquisitions of private companies in that sector by big asset managers such as TPG and BlackRock, says Kern.
There’s increased interest “in buying, aggregating and firming up product offerings in that market just because it is a relatively new and exciting and still a very high-growth market,” he says.
Kern’s team is working with several companies whose successful business models enabled them to keep growing over the last few years despite market headwinds. There’s a sense among founders that now is a good time to capture that value for a good payout if they can find the right buyer, as opposed to continuing to grow for another few years and exiting for a spectacular valuation, he notes. None of his clients have told him they want to sell right now to get ahead of a projected recession.
