In 2022, many predicted we would see a spike in M&A due to the economic downturn and the steep drop in startup valuations.  However, last year was not the M&A blockbuster that was predicted, and we even saw a drop-off in dealmaking from 2021.  To be fair, there was still a robust level of dealmaking that occurred last year, it simply was not at the level predicted.

That said, there is speculation that we could actually see that spike materialize in 2023 as the downturn continues and startups continue to face a more difficult time securing funding in later stages and have more limited options for exits.

While interest rates remain elevated, valuations also remain down, and startups continue to need to raise capital to survive and grow.  On the one hand, valuations, when coupled with the dry powder that VCs and private equity investors have in reserve, creates a prime environment for an increase in acquisitions. On the other hand, when company valuations are trading in middle single digit multiples, sellers may want to hold on, avoid selling, and wait for better times to return.

A recent Crunchbase article looked into this issue, highlighting some specific sectors where we might see the most M&A activity this year.  Dan Nash with Cohen & Co. Capital Markets told Crunchbase that the IPO drought has disproportionately affected some areas, including healthcare, fintech, and consumer tech.  So, these could be ripe for acquisitions, with fintech a particularly attractive area for potential buyers.

Nash also brings up a very interesting point in the Crunchbase article. Larger companies have made cutbacks, which can often stifle innovation.  This could lead them to begin looking for targets to acquire that can fill in those gaps and fuel their innovation pipelines.

The bottom line is that regardless of interest rates and the current expense of borrowing money, there are large companies and investors who are looking for the right opportunities to acquire innovative startups.  And there are startups with depressed valuations, struggling to raise money. They will eventually have to make an exit move. This environment seems to be perfect for M&A to really take off this year.

As always, those who capitalize on this opportunity will be those who are prepared and ready to jump when the right opportunity comes their way.  Downturns often lead to some very successful and lucrative acquisitions, and this could be a very exciting time for both startups and investors.