Startup Buying Power — VC-Backed Companies Are Hunting For More Startups

It’s not exactly a shopping spree, but with overall M&A down, more startups are hunting for other VC-backed companies in the U.S.

In fact, startups buying other startups is on pace to make up the largest slice of the M&A pie in years when it comes to overall VC-backed, U.S.-based startup dealmaking. This is a noteworthy development in the current environment where venture capitalists and their limited partners are thirsting for liquidity amid a frozen IPO pipeline and quiet M&A market.

Through the first two-thirds of the year, 252 deals were consummated involving startups buying other startups in the states, per Crunchbase data. That number represents 39% of all M&A deals for U.S.-based startups — the highest percentage in at least a decade.

The percentage is especially striking when considering from 2015 to 2020, startups buying other startups in the states never made up more than 29% of all M&A deals for U.S.-based startups. Last year, that number was 35%.

Such deals this year also are outpacing 2023’s deal count numbers — which saw only 296 deals total.

Biggest deals

Of course, representing a larger portion of M&A in a year when dealmaking is down won’t make most investment bankers turn their heads. However, it is important to note that aside from the aberration of 2021 and then 2022, startups are on pace to buy more startups in the U.S. than in any other year in the past decade.

Also, while there have yet to be any billion-dollar deals of startups buying U.S.-based startups this year like Databricks’ $1.3 billion acquisition of OpenAI competitor MosaicML in 2023, there have been some notable ones. The three biggest acquisitions dollar-wise to date are:

In June, AI-driven market intelligence platform AlphaSense raised $650 million in funding at a $4 billion valuation while also announcing 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 LetsGetChecked plans to raise approximately $150 million via a convertible note offering to help finance the deal.
In March, cloud cybersecurity firm Wiz bought cloud threat prevention startup Gem Security for $350 million in a cash deal. Just two months later, Wiz locked up the biggest cybersecurity round of the year thus far as it raised $1 billion at a $12 billion valuation.

More buying power

Those deals also likely illustrate some trends as to why more startups are buying startups domestically.

First off — and likely most obviously — is the size of many VC-backed companies now. All three acquirers are unicorns — $1 billion valuation or more — and Wiz’s valuation is a whopping $12 billion.

Companies can reach such high valuations more easily than ever as venture has poured into the market — it is now a significant asset class — and allows startups to stay private longer and get bigger. As those companies grow, they simply begin to act more as we expect large public companies, including their desire for inorganic growth for innovation, talent or even revenue. In fact, LetsGetChecked’s deal reportedly was mainly through stock — a very public company-like move.

The other common trait of the above three deals — which relates to the first — is these companies’ ability to raise capital when necessary to complete a deal. Both AlphaSense and LetsGetChecked raised (or reportedly raised) cash in connection with consummating their deals. Wiz raised a massive round just months after its Gem acquisition.

Of course, there are other reasons too. Valuations on many startups have dropped in recent quarters as the venture market has cooled, which likely has made some VC-backed companies in the U.S. more easily persuaded to sell.

However, the trends of more mature, venture-backed companies hitting high valuations and looking to become bigger, and those companies being able to raise large sums of cash when necessary, likely is not changing anytime soon.

With that being the case, you can expect more startups eyeing their brethren for dealmaking in the future.