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Will the corporate venture boom lead to an M&A frenzy?

As startups look for corporate suitors, we predict a record 3,000 M&As in Q2


Image Credits: Nigel Sussman (opens in a new window)

The startup exit market has seen better days. Heck, the startup market has seen better days.

After a turbulent and ultimately aggressive 2020 in venture capital terms, startups rolled into 2021 more than hot. Last year saw record-breaking totals of venture capital pumped into upstart tech companies around the world, with some startups raising two or even three times in a single 12-month period if they were particularly in demand.

It wasn’t merely traditional venture firms that were busy last year — corporate venture players (CVC funds) were gunning capital into the market as well.

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As The Exchange explored last August, the value of deals involving CVCs was rising both in dollar and deal terms; corporates were not immune to the bull rush into startup equity that captured the minds and wallets of investors. The trend was pronounced enough that we dug into the pace at which corporate venture capital funds were being put together earlier this year.

At the time, CVCs said that the financial (returns-focused) and strategic (accessing new technologies and nurturing acquisition targets) goals were roughly the same as they were before the boom. But with the possibility of financial returns in decline — or at least lessened by the public-market selloff, falling startup prices, a moribund IPO market and antitrust issues perhaps limiting the acquisitiveness of some major tech companies — it’s the strategic portion of the CVC remit that captures our imagination today.

Subscribe to TechCrunch+If CVCs are not going to have much shot at exits that are encouraging from a financial perspective, they may turn more toward strategic objectives. And that could mean a more active M&A market, with corporates fishing portfolio companies from the private markets.

Let’s dig more into the concept, and then theorize a little about which active CVCs are perhaps primed to get busy with their checkbooks this year.

Why M&A could be coming

Flipping the question for a bit: There are many reasons for startups to look for suitors in the current climate.

As you know for sure by now, public valuations have been taking a hit. For macroeconomic reasons, of course. But also because of mounting doubts about whether double-digit multiples can hold and whether the exits were mispriced in the first place.

The logical consequence of stock market woes is that many tech companies are pausing their IPO plans, not to mention SPAC mergers. Public exits have almost come to a halt in many regions and considerably slowed in others.

What hasn’t stopped is unicorn creation.

According to Crunchbase’s dedicated board, there are currently 1,296 private tech companies with valuations above $1 billion. (Alex used to work for Crunchbase and retains an equity stake in the company due to his employment; we cite Crunchbase and its competitors PitchBook, CB Insights and others regularly, and without bias. We bring up this conflict regularly for the sake of transparency.)

However, an acquisition costing more than $1 billion isn’t exactly an impulse purchase, even for big corporations. There just aren’t many suitors, and they fall more on the private equity side of the spectrum.

When it comes to the bulk of M&As, we expect most of them to target not late-stage, pre-IPO companies, but earlier startups. The kind that might have been looking for their next round in a more bullish cycle, but now wouldn’t say no to a good enough offer.

For earlier-stage startups looking for buyers, it will only be natural to look at their own cap table and give a ring to corporate investors that show up on the list. But many times, it will also happen the other way around, with CVCs turning into lead generators for corporate M&A departments.

Who might execute deals?

If our thesis bears out and we do see elevated M&A activity stemming from CVC investments, who might wind up in the driver’s seat when it comes to deal-making? We have a few ideas.

Two companies stand out in our view: Flexport and Coinbase. This is not to say that they are the only two companies with huge CVC activity that might start snapping up their prior deal flow, but they are useful examples for a few reasons.

First, Flexport is private, while Coinbase is public, so they provide a cross-market viewpoint into the potential trend. And they share a common theme that might apply elsewhere in the market, namely geography.

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Per Crunchbase data, Flexport has made 38 known investments, all of which have come since Q2 2021. Deal-making at the company peaked last quarter and is loosely on track to match that pace this quarter. Coinbase Ventures has 243 known investments, again per Crunchbase data, with activity rising sharply in 2021 and reaching a peak in Q1 2022.

The activity at each shows that going public might help a company cut more checks, but being private is hardly a roadblock to active corporate investing. Now, what’s the geographic point to consider? Both are investing in similar companies in different geographies. This means that the two wealthy firms could decide that with startup prices far under their peak, it might make good sense to snap up smaller, regional companies with similar models to their own as a way to quickly expand their global footprint.

Flexport has invested in OnePort 365, for example, a Nigerian company that Crunchbase describes as “a B2B digital freight forwarding platform.” That sounds familiar! Flexport has also invested in Amitruck, a “Kenya-based trucking logistics platform,” per the same dataset. And the CVC has also put money into Nuvocargo, a startup that works on cross-border trade between the United States and Mexico. Flexport might want to buy it!

Coinbase is not dissimilar: Its venture arm has invested in CoinDCX, a major crypto trading platform in India. Amber Group is based in Hong Kong and Qredo is based in the U.K. Coinbase Ventures has also invested in several wealth-management services that could find themselves inside Coinbase in time, though many of those are based in the United States. There’s ample ground to cover.

Geographic expansion is only one vector along which CVC M&A could sprout, but there are others. Coinbase Ventures shows us that modern CVCs are also investing in businesses that sit alongside their core operations; those could make tasty morsels for cash-rich corporate development teams.

With all these factors in mind, we wouldn’t be surprised if M&As in Q2 2022 passed the 3,000-deal milestone. According to CB Insights, there were 2,983 in the first three months of the year, so it doesn’t seem too much of a stretch — note, however, that breaking the 3,000-deal mark in Q2 would represent a dramatic year-over-year pace increase, one that would contrast sharply with other startup market signals pointing down. But of course, we will check back in a few weeks to see if this comes true.

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