The startup landscape for deals is drastically changing

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The big story

PE meets SV

With startups’ exit opportunities becoming few and far between, a new hero is coming to the rescue.

Private equity is filling the gap left by a frozen IPO market and corporates unwilling or unable to cut deals, writes Business Insider’s Melia Russell.

Hearing “private equity” might send shivers down your spine with visions of cost cutting and headcount reductions. But the PE-startup marriage seems to be working out well thus far.

For startups, PE represents a deep-pocketed buyer willing to move quickly, pay a premium, and potentially help the business by tapping into complementary companies in their portfolio.

Perhaps most importantly, a PE deal means equity holders get cash immediately, unlike an IPO that has some holding periods.

As for PE, the industry has been sitting on a record amount of cash — $2.59 trillion at the end of 2023 — as it waits out an uncertain economy. And with multiple startups often competing in similar fields, there is plenty of opportunity for consolidation, a PE specialty.

The PE-startup relationship has already taken hold in Europe.

Startups turning to PE comes with risks. Private equity’s push for efficiency, and eventual profit, can sometimes get ugly.

But any port in a storm, and right now the startup waters are extra choppy.

PE isn’t the only exit opportunity for startups that’s trending.

Acquihires where the brains behind buzzy AI startups sell themselves (instead of the entire company) to bigger players are in vogue, writes BI’s Ben Bergman and Sri Muppidi.

On paper, deals like this make a lot of sense. Big Tech has to tread lightly when it comes to acquisitions, lest it draw the attention of regulators. And the usefulness of certain AI tools remains up for debate.

But no one doubts the value of the people who know how to build and work with AI.

Still, acquihires can get messy. You can’t expect the same results when going from a free-wheeling startup to a big corporation with guardrails. Google’s deal for Character.AI meant its two cofounders are returning to a place they previously left due to frustrations over bureaucracy.

Of course, they’ll be a lot richer this time around, which will ease the pain. The same can’t be said for their investors, who won’t get the same type of return they’d expect through a traditional deal or IPO.

But not unlike startups courting private equity, VCs don’t necessarily have the benefit of being picky.

News brief

Top headlines

3 things in markets

1. I hope you like market volatility, because it’s not going anywhere. Regardless of what happens to the economy, the recent stock-market chaos might be the new norm. The winners and losers of this new environment aren’t evident, just that there will be plenty of ups and downs along the way.
2. The clock is ticking on AI stocks. There’s a lot of chatter about tech companies’ investment in AI, but some of that hardware won’t stay valuable forever. Depreciation costs to massive GPU chip investments pose a huge risk for AI companies.
3. Taylor Swift + Olympics = inflation? They could cause a fresh surge in global inflation, according to UBS. Mega-events like the international sports competition or the Eras Tour could create sudden shock demand, the European bank said.

3 things in tech

1. Fisker owners struggle to keep cars on the road after the company’s collapse. Weeks after Fisker declared bankruptcy, some owners who paid up to $70,000 for electric cars have found themselves with falling-apart vehicles. One compared his car to a “lawn ornament.”
2. Behold, the “Mythical Reel Pull.” Instagram Reels may seem pretty weird lately. Users are stumbling across odd videos, often posted by creators who had no intention of going viral. The strange videos are referred to as “mythical reel pulls,” and there may be a reason for their sudden ubiquity.
3. Sorry, Musk. Looks like Zuck won this round. Elon Musk’s eternal goal of one-upping his rival Mark Zuckerberg is looking more and more like a lost cause. His ongoing fights with advertisers and controversies over false information threaten to set X further behind Zuck’s social-media empire.

3 things in business

1. Flying might get better. Airplane travel is the worst it’s ever been, but the Biden administration wants to make it less disastrous for passengers. The message they’re sending to the airline industry: You’ve had too many screwups to be left to your own devices.
2. American workers are stuck in their jobs. It’s tough to find a job in the US right now — and it’s causing workers to feel trapped in their current gigs. This is likely due to a looming fear of a recession, which has historically caused workers to hunker down.
3. PE firms <3 public healthcare companies. Revenue cycle management company R1 RCM announced its acquisition by two PE firms for a whopping $8.9 billion, making it the third of its kind to take a buyout this summer. It could be a good sign for startups.

In other news

What’s happening today

• Donald Trump is interviewed by Elon Musk.
• Buzzfeed and other companies report earnings.

The Insider Today team: Dan DeFrancesco, deputy editor and anchor, in New York. Jordan Parker Erb, editor, in New York. Hallam Bullock, senior editor, in London. Amanda Yen, fellow, in New York.