in the midst of a company Funding slump and lack of IPO activity have found startups a new way to spend their time: buying other startups.
The idea of startups taking over other VC-backed companies is nothing new. Meta bought venture-backed Instagram a month before Facebook’s IPO in May 2012; food delivery company GrubHub merged with Seamless in 2013, when they were both still on venture capital. But until a few years ago, these transactions were mainly large and rare. Now they are getting smaller and more frequent.
In 2021, according to data from Crunchbase, 1,283 transactions took place with startups on both sides of the table. That compares to 689 in 2020 and 599 in 2019. So far this year, 663 startups have been acquired by other VC-backed companies, with more than half of 2022 to go.
Why is this happening now, during a recession? The venture finance bull market of the past decade has created a barbell of startups. Last year saw a record number of startups cross the $1 billion valuation threshold at the same time, while early stage funding broke its own record. Now that the funding fever has stalled, the market is filled with late-stage companies with a ton of cash — and no real exit opportunities — and a plethora of early-stage startups.
This has created a perfect storm for an increase in the number of startups taking over other VC-backed companies, said Kyle Stanford, senior analyst at PitchBook.
“There are more than 7,000 venture-backed companies and a record number of seed deals,” Stanford said. “There will be a lot of companies this year that will struggle to raise money, which will be an easy target for companies looking to acquire.”