PE Hunting: M&A on the Rise

Starting 6-8 months ago, I began sharing that PE and M&A were to take center stage this year and over the next couple of years. Lately, I have been regularly pulled into several scenarios and situations for companies. They have been both mid-to-late stage startups and (pre/post) public companies. Here are 12 observations…

  1. VC Funds Peaking – Access to LP and institutional capital is normalizing and, in some cases, will be falling over the next couple of years.
  2. Cross Stage VC Funds – Early stage is moving towards later, Late-stage is moving earlier. Significant funds are moving to hedge funds. These activities create a swirl of M&A.
  3. Unlocking Value > Blind Speed – VC-backed startups remain focused and at blinding speeds. But pivoting becomes harmful the later the stage. Unlocking Value is not about high ‘valuation’ multiples or low-growth dividends. It’s about maximizing potential, translating into larger-sized returns with an end in mind.
  4. Cash Burn on Talent – The great resignation and future of work have created a hunger for talent. In some cases, over product/market fit with mid-late startups. Also, equity is not as much of an incentive to employees. Later stages, RSU and options do help, but cash is now royalty.
  5. Growing Moats – It’s more challenging. With talent, growth, and security challenges, the pace of product roadmaps is slowing. M&A can open mutually beneficial revenue and NDR (net-retention dollar) opportunities. You need a creative culture to create innovation. You can’t ‘growth hack’ your way to it.
  6. Supply Chain Stuff – We are learning to live with less ‘stuff,’ meaning smaller-sized places. Shift from pure money to more culture/purpose motivations.
  7. Enterprise Side – Going upstream for most startups requires different advisors, investors, and executive teams. The share enterprise companies open to buying and tolerating less rigor is shrinking. Competition is rising.
  8. Swelling Secondary Equity Markets – It is one of the best leading rising M&A indicators. More employees and some co-founders are looking to an offramp on their holdings.
  9. Margin-focused, Retention-obsessed – Next-generation early-stage startups are becoming are adopting new business models. Shifts in growth strategies are less dependent on pure VC capital. These companies will become far more attractive than their high-burn counterparts.
  10. First-Time Founder Limits – Going public or exiting is a less sure thing for even growing startups. Partnering via merger or buyout helps reduce first time founders’ opportunity for missteps or maximize certain opportunities. Founders can build a greater resilient company, cashing out equity and all the while learning from seasoned or well-capitalized leads.
  11. Activist Investor Involvement – Being purpose-driven, architecting better deals, carving out potential leadership challenges, active investment is on the rise. It is a natural symptom to peak growth without a sound strategic narrative to grow at any cost.
  12. Valuations are Redlining – An obvious one. Fewer buyers are returning the increasingly expected investor multiples. SPACs are a flop, going public takes significant resources, even more, raise. Options and time are running out. Competitive and complementary companies are taking notice.

The pace will increase depending greatly on macroeconomic factors, inflation trajectory, policy changes, as well as global political shifts. With these indicators in mind, this is an opportunity to reflect how founders, executives, and investors should consider moving forward throughout the next 5-10 years.