Startup Buying Power – VC-Backed Firms Are Hunting for More Startups

It’s not your typical buying spree, but given the overall decline in mergers and acquisitions, more startups are looking to the U.S. for other VC-backed companies

In fact, startups buying other startups are on track to take the biggest slice of the M&A pie in years when it comes to overall VC-backed startup deals in the U.S. That’s a notable development in the current environment, where venture capitalists and their limited partners are hungry for liquidity amid a frozen IPO pipeline and a quiet M&A market.

In the first two-thirds of the year, there were 252 deals in which startups bought other startups in the states, according to Crunchbase data. That number represents 39% of all M&A deals for U.S.-based startups—the highest percentage in at least a decade.

This percentage is especially striking when you consider that between 2015 and 2020, startups buying other startups in the states never accounted for more than 29% of all M&A deals for U.S.-based startups. Last year, that number was 35%.

This year’s transactions are also faster than those in 2023, when only 296 were concluded.

The biggest offers

Of course, representing the bulk of M&A activity in a year of depressed deals won’t make most investment bankers turn their heads. But it’s important to note that, barring the aberration of 2021 and then 2022, startups are on track to buy more startups in the U.S. than in any other year over the past decade.

Additionally, while there haven’t been any billion-dollar deals this year in which startups have bought U.S. startups, such as Databricks’ $1.3 billion acquisition of OpenAI competitor MosaicML in 2023, there have been some notable ones. The three largest acquisitions by dollar value to date are:

• In June, AI-powered market intelligence platform AlphaSense raised $650 million in funding at a $4 billion valuation and also announced it had acquired expert research startup Tegus for $930 million.
• Just last month, unicorn LetsGetChecked acquired digital pharmacy startup Truepill for $525 million. It was reported that LetsGetChecked plans to raise about $150 million through a convertible bond offering to help fund the deal.
• In March, cloud cybersecurity firm Wiz acquired cloud threat prevention startup Gem Security for $350 million in an all-cash deal. Just two months later, Wiz raised the largest cybersecurity funding round of the year so far, raising $1 billion at a valuation of $12 billion.

Greater purchasing power

These deals also likely illustrate some trends about why more startups are buying startups in the domestic market.

First—and probably most obviously—is the size of many of the VC-backed companies. All three acquirers are unicorns—valued at $1 billion or more—and Wiz is valued at a whopping $12 billion.

Companies can achieve such high valuations more easily than ever because venture capital has flooded into the market—it’s now a significant asset class—and it’s allowing startups to stay private longer and get bigger. As these companies grow, they’re simply starting to act more like we expect large public companies to, including their desire for inorganic growth for innovation, talent, and even revenue. In fact, the LetsGetChecked transaction allegedly occurred mostly through stock—a very similar move to a public company.

Another common thread across the three deals above — which relates to the first — is the ability for these companies to raise capital when necessary to close deals. Both AlphaSense and LetsGetChecked raised (or reportedly raised) cash in connection with the closing of their deals. Wiz raised a massive round just a few months after acquiring Gem.

Of course, there are other reasons. Many startups have seen their valuations fall in recent quarters as the venture capital market has cooled, which has likely made it easier to convince some VC-backed companies in the U.S. to sell.

However, the trend of mature, venture-backed companies commanding high valuations and looking to grow, and those able to raise large sums of cash when necessary, is unlikely to change anytime soon.

With this in mind, we can expect to see more startups looking at their competitors in the future when it comes to making deals.

Crunchbase Pro Related Lists:

Related materials: