Record number of startup closures to supercharge M&A growth in 2024, expert says

A combination of soaring interest rates, persistent inflation and general economic uncertainty has resulted in a 40% reduction in global M&A deals in the first half of this year compared to H1 2020, according to Dealogic. However, Claire Trachet, M&A expert and CEO/Founder of business advisory, Trachet, asserts that a new wave of dealmaking activity is on the horizon as thousands of startups that raised in the fertile fundraising environment of 2021 will now struggle to find cash injections to stay afloat amidst a much more challenging landscape. In light of this, Trachet urges these firms to take an honest view of their cash runway and ensure they prepare for an exit before hitting the red zone in order to secure the most favourable terms.

Serving as testament to this, recent data from Carta reveals a 44% downturn in venture investments in the first half of 2023, the most sluggish half-year for activity since the beginning of 2018. This decline stands in stark contrast to the numbers from H1 2021. Adding to this, according to Bain & Company, fundraising is predicted to fall 28% when compared with 2022, and the number of funds closed looks set to fall by 50%. As a result, further data from Carta reveals that Q2 of 2023 witnessed the highest number of startup closures ever recorded. Despite these harsh realities, data from Evelyn Partners has found that a staggering 36% of founders are holding off on trying to secure an exit, expecting a more favourable deal in the near horizon. Trachet asserts that this ‘founder attachment’ to the current vision and path is often one of the main factors leading to startup closures.

Despite the landscape for fundraising rounds being challenging, slashed valuations throughout the startup arena mean that opportunities are rife for larger-scale investors with deep pockets and dry-powder piles that have been built up over the past two years of inactivity. Estimates put the total amount of this unused capital at a staggering $3.7tn, and Trachet asserts that it is this capital which will help fund the revival of the global M&A market. However, it is vital that founders are honest in terms of the long-term viability of their businesses and start planning for an exit as soon as the end of the runway is in sight. If not, Trachet explains, dealmakers can often capitalise on last-minute desperation leaving startups with a less than favourable deal, compared to if they had acted from a point of strength.

Trachet commented:

“In today’s unpredictable economic environment, startups are faced with the undeniable challenge of securing their future amidst a challenging economic environment. To navigate these choppy waters, it’s crucial that they arm themselves with foresight, continually assessing their financial health and the real-time implications of the broader market. Blind optimism without a grounded strategy can lead many into a perilous situation where their dreams are compromised by stark realities.

“The fundraising environment, once a fertile ground for emerging businesses, has evolved. As these businesses look to the horizon, expecting favourable deals, they may find themselves trapped in a situation of their own making, a ‘founder attachment’ that hampers their ability to pivot and adapt. It’s not merely about securing the next round of funding or achieving inflated valuations; it’s about building sustainable, long-term value. This requires both a visionary approach to business and a pragmatic understanding of the ever-shifting market dynamics.

“It’s about ensuring that you don’t wait for the storm to hit before you start looking for shelter. Plan for your exit when you’re operating from a position of strength. Anticipate, strategise, and act before desperation sets in. This is not just about securing the best deal but about ensuring the longevity and legacy of the enterprise you’ve built. Far from representing the end, an M&A can represent a really positive new beginning which is backed by solid foundations from the acquirer.”