A new trend is emerging in the Startup Ecosystem, where investors are creating funds to acquire companies that have been overlooked or rejected by traditional venture capital firms. These investors, sometimes called “acquirers”, are looking for profitable, scalable and sustainable businesses that can generate cash flow and growth without relying on external funding.
Acquirers are different from private equity firms, which typically buy mature companies with established market positions and revenues. Acquirers target younger companies that have not yet reached their full potential but have proven their product-market fit and customer loyalty. Acquirers offer these companies a way to exit the market without going through an IPO or a trade sale, which can be risky, costly and time-consuming.
Acquirers claim that they can provide more value to the founders and employees of these companies than venture capitalists, who often impose strict terms and conditions on their investments, such as board seats, veto rights, liquidation preferences and dilution. Acquirers say that they can offer more flexibility, autonomy and alignment to the entrepreneurs, who can retain a significant stake in their businesses and continue to run them as they see fit.
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Acquirers also argue that they can create more social impact than venture capitalists, who tend to focus on high-growth sectors such as software, biotech and fintech, while neglecting other areas such as education, health care and sustainability. Acquirers say that they can support more diverse and inclusive founders and teams, who may face discrimination or bias from traditional investors.
Acquirers are not a new phenomenon, but they have gained more prominence and popularity in recent years, as the startup landscape has become more crowded and competitive. According to Pitchbook, a data provider, there were 2,277 acquisitions of venture-backed companies in 2020, up from 1,838 in 2019. The median deal size was $60 million, up from $40 million in 2019. Some of the most active acquirers in 2020 were Thomma Bravo, Vista Equity Partners, Insight Partners and Francisco Partners.
Some examples of successful acquisitions by acquirers include:
Mailchimp, an email marketing platform, was acquired by Intuit for $12 billion in November 2021. Mailchimp was founded in 2001 and bootstrapped its way to profitability and scale, reaching $800 million in revenue in 2020. It had never raised any venture capital funding.
Wrike, a project management software company, was acquired by Citrix for $2.25 billion in January 2021. Wrike was founded in 2006 and raised only $26 million in venture capital funding. It had over 20,000 customers and 1,000 employees at the time of the acquisition.
Calendly, a scheduling software company, was acquired by OpenView Partners for $3 billion in January 2021. Calendly was founded in 2013 and raised only $550,000 in seed funding. It had over 10 million users and 200 employees at the time of the acquisition.
The rise of acquirers poses both opportunities and challenges for the venture capital industry. On one hand, acquirers can provide an alternative exit option for venture-backed companies that may not be able to go public or sell to a larger corporation. Acquirers can also help venture capitalists recycle their capital faster and generate higher returns for their limited partners.
On the other hand, acquirers can also compete with venture capitalists for deal flow and talent, as they may offer more attractive terms and conditions to the entrepreneurs. Acquirers can also disrupt the traditional power dynamics and incentives between investors and founders, as they may have different goals and expectations for the companies they acquire.
Why are SPACs shaking up the venture capital market by raising money to buy out startups?
SPACs, or special purpose acquisition companies, are a new trend in the venture capital market that has been gaining momentum in recent years. SPACs are essentially shell companies that go public with the sole purpose of acquiring a private company, usually a startup, within a specified time frame. SPACs raise money from investors through an initial public offering (IPO), and then use that money to buy out a target company, which then becomes public as a result of the merger.
SPACs offer several advantages for both the acquirers and the targets. For the acquirers, SPACs provide a faster and cheaper way to go public than a traditional IPO, which can take months or years and involve hefty fees and regulatory hurdles. SPACs also allow the acquirers to have more control over the valuation and deal terms, as they can negotiate directly with the target company without the interference of underwriters or market fluctuations.
For the targets, SPACs offer an alternative exit strategy that can be more attractive than an IPO or a trade sale. SPACs can offer higher valuations, more certainty, and less dilution for the target company’s shareholders, as well as access to a larger pool of capital and public market exposure.
However, SPACs also come with some risks and challenges. For the acquirers, SPACs require them to find a suitable target company within a limited time frame, usually 18 to 24 months, or else they have to return the money to the investors and dissolve the SPAC. SPACs also face competition from other SPACs and traditional investors for attractive targets, which can drive up the prices and lower the returns.
For the targets, SPACs can expose them to more scrutiny and liability as public companies, which can be challenging for early-stage startups that may not have mature products, revenues, or governance structures. SPACs can also dilute the target company’s ownership and influence, as they typically give up 20% of their equity to the SPAC sponsors and investors.
SPACs are shaking up the venture capital market by raising money to buy out startups because they offer a new way of bridging the gap between private and public markets. SPACs can create value for both the acquirers and the targets by facilitating faster and more flexible transactions that can benefit both parties. However, SPACs also entail some trade-offs and uncertainties that need to be carefully weighed and managed by both sides. SPACs are not a one-size-fits-all solution, but rather a novel option that can complement or compete with other forms of financing and exiting for startups.
The emergence of acquirers is a sign of the evolution and maturation of the startup ecosystem, where different types of investors can coexist and cater to different types of entrepreneurs. Acquirers are shaking up the venture capital market by offering a new way to buy out startups that have been shunned by venture capitalists.