Merging Forward: How VC Platforms Can Navigate the Startup Graveyard through M&A
The startup journey is a treacherous one, paved with challenges and uncertainties. A recent report by the Startup Genome paints a grim picture: a staggering 90% of startups fail to make it to their 10th birthday. In 2023, the landscape has become even more unforgiving, with over 543 startups shutting their doors, according to Carta.
Among these casualties lie 87 startups that had raised a significant $10 million or more. In Africa alone, we’ve witnessed a lot of our favorite startups demise — https://startupgraveyard.africa —within a very short period of time, with the most excuse being inability to raise more funds, lack of product market fit, founders’ recklessness, dispute and/or tough economic environment which forms our main focus for today.
Unfortunately, the death pandemic isn’t only an Africa or Emerging market problem, according to NYT and Pitchbook, more than 3,200 private venture-backed US startups that have collectively raised $27.2 billion have gone out of business this year. As the "startup graveyard" — https://startupgraveyard.io — expands, the need for innovative solutions becomes ever more pressing. And this is where venture capital (VC) platforms can step up and play a pivotal role.
The VC Platform role is a core component of ensuring portfolio companies are nurtured into achieving the VC goals — outsized returns, thesis objectives alignment among other things. Death of portfolio companies creates a gap in achieving those goals and inadvertently put a lot of pressure on other companies to bridge those gaps and create a liquidity event suitable enough to compensate for the loss.
Instead of solely focusing on creating liquidity events for investors, VC platforms can leverage the power of mergers and acquisitions (M&A) as a strategic tool for not only salvaging investments but as a proactive approach to preventing total losses (death) of portfolio companies and fostering synergies between companies with shared visions and complementary strengths.
M&A can be a lifeline for struggling startups, providing them with an exit strategy and a chance to find new life within a larger entity. For surviving companies, it presents an opportunity to acquire valuable assets and expertise, accelerating their growth and expanding their market reach. Examples like the acquisition of Payday by Mercy Corps Ventures’ Bitmama, Abeg (now Pocket app) by Ventures Platforms’ Piggyvest etc. shows that this is possible within the African/Nigerian landscape.
The key lies in identifying companies with distinct advantages that seamlessly align with and enhance each other's strengths. By playing a proactive role in orchestrating strategic mergers, VC platforms can transform themselves from mere investors into architects of resilience within the startup ecosystem.
This shift in focus, from financial gain to building stronger, more resilient entities, is not just a response to the current economic slowdown and tech winter. It's a forward-thinking strategy that can mitigate losses for Limited Partners (LPs) and VC firms alike. By actively participating in shaping the destiny of distressed startups, VC platforms can navigate the storm and emerge with enhanced portfolios.
As the startup landscape continues to evolve, VC platforms have a unique opportunity to be catalysts for positive change. By embracing M&A as a strategic tool, they can transform challenges into opportunities, fortifying the startup ecosystem against prevailing headwinds. Now is the time for VC platforms to act, not just as investors, but as architects of resilience and growth in a volatile startup landscape.
As an employee in a startup, I can relate with the issue of start ups kicking the bucket, most of them within the first five years of their existence.
You're right that M&As may be a viable solution to this challenge. Such a move will certainly force a positive structural and leadership change in startups that are badly administered. Nice write-up.