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It’s not just VC funding that’s through the roof in 2021–over $3.6 trillion in deals have closed so far this year, and there’s more where that came from. But startups or companies looking to scale may be wary of inorganic growth; after all, doesn’t slow and steady win the race?
Understanding the macro factors that have led us to an unprecedented boom in dealmaking and getting the right growth balance can be critical to scaling a startup and ensuring long-term success in competitive markets. But even if the current deluge of dealmaking is short-lived, inorganic growth is likely here to stay.
Feeding frenzy
Growth via M&A was once reserved for only the most well-capitalized enterprises. Even through the advent of the internet and the Silicon Valley boom, a balanced, carefully crafted organic growth strategy has long been considered the safest and most sustainable way to scale a business.
Today, however, a confluence of market factors and shifting paradigms have created an environment in which growth via M&A is seemingly ubiquitous across virtually every industry and size of business, bringing us to a point where even startups are looking to implement acquisitions into their growth plans.
Worldwide, there were 28,175 M&A deals done in the first six months of this year–a 27 percent increase over the first half of 2020 and 7 percent higher than the first half of any other year since at least 1999. In the U.S. alone, total deal value is up a dramatic 264 percent over last year. So what’s causing this, and is it sustainable?
Public market gains trickle down to private markets
Despite a multitude of “Main Street” economic indicators having yet to return to pre-pandemic levels, Wall Street seems ready to put the COVID-19 recession in the rearview mirror. The Dow is up over 16 percent from its pre-pandemic high in February 2020, while the VIX currently sits at less than a quarter of its all-time high, reached in March of last year. Moreover, history has shown that strong public markets bode well for private market activity, and this latest economic ramp is no exception; swelling valuations in the public markets have helped drive the frenzy of M&A activity in 2021.
The logic makes perfect sense: As public companies increase in value, their stock becomes a currency that can easily be exchanged for equity in an acquisition target or sold off for cash that can similarly be used to fund M&A deals. As acquirers’ valuations balloon, they can afford to pursue targets more aggressively and pay premiums to get deals done fast. These higher price tags, in turn, make the prospect of selling more appealing to targets, who might otherwise be wary of parting ways with the businesses they’ve built. Further, the overall frothiness of the M&A market has corporate leaders eyeing the acquisitions made by their competition, which creates a sense of urgency to go out and make a splashy purchase or two of their own.
An unprecedented number of buyers with money to burn
With what one can only hope is the worst of the pandemic now behind us, market uncertainty is on the decline, bringing renewed strength to capital markets. In addition to moneyed corporations, private equity groups are now sitting on record levels of uninvested capital that they’re now eager to deploy as pandemic-related turbulence subsides.
Adding even more fuel to the fire is the emergence of the SPAC, from which more than 500 companies have IPO’d to date this year. In addition to helping accelerate the growth stories of companies coming out of private markets at a pace not previously feasible under the traditional IPO process, SPACs provide their newly public companies with access to capital that can be used for acquisitions of their own.
This is all underpinned by near-zero interest rates, which the Federal Reserve has indicated will likely hold at least until 2023. Low borrowing costs, in tandem with the vast amounts of dry powder in private markets, allow for an environment in which deals can be financed with relative ease compared to times past.
A new era of innovative thinking?
Even if the current pace of M&A can’t be sustained indefinitely, don’t expect things to go right back to the status quo in a few years time. Just as the pandemic has reshaped so many aspects of our daily lives, it stands to reason that this period in economic history will reshape common thought around business growth strategy.
The aftershocks of COVID-19 will have far-reaching effects in every corner of the world, so there’s no reason to think that wouldn’t apply to the startup ecosystem. The era we’ve found ourselves in has led to acceleration and intensification of digital everywhere; we’ve rapidly adapted to work from home, telemedicine, home grocery delivery and a wide range of other tech-enabled services that were likely on the precipice, but would not have enjoyed adoption rates anywhere near this high if not for the pandemic.
Customers everywhere have new needs due to COVID-19, and a bumper crop of startups has emerged to help meet those needs. Beyond those playing in COVID-adjacent spaces such as e-commerce and telemedicine, it’s encouraging to see the amount of businesses trying to innovate around issues pertaining to climate change, food supply and carbon-neutral transportation.
History suggests that, given the sheer volume of these upstarts, untold numbers of them will fall by the wayside for one reason or another and be forced to shutter. No doubt, individual companies will come and go, but even if they fail to achieve commercial success in the near-term, they’ll seed learnings for others and countless new solutions that will emerge in the future, helping tackle the next generation of global issues.
Looking beyond pandemic-related disruption, the current crop of startups and the thinkers behind them are not just innovating within their chosen fields, they’re innovating how they innovate.
A new model is overdue
For 20+ years, the Silicon Valley model has reigned supreme. Under this paradigm, we see entrepreneurs working tirelessly to satisfy the requisite metrics to get in front of venture capital firms with the hopes of receiving financial backing that comes with a set of expectations centered around the VCs’ own needs for return on invested capital.
From there, the crucible continues, and countless promising founders and their companies end up failing due to VCs picking which horses in their stable of companies to back with their time, energy and future funding. If your business is not among that group of prized horses, you can easily find yourself hung out to dry with limited access to the connections you need to survive.
The Silicon Valley model cannot, and should not, last forever. Moving fast and breaking things is only valuable if it’s virtuous, and the virtues of this model are subsiding with each new social networking app and urban food delivery platform. For as much as the Silicon Valley approach and its corresponding set of assumptions has produced, innovation is what happens when you reframe those assumptions, challenge traditional thinking and solve real market problems with viable business models that can scale, and continue to anticipate and adapt to changing customer needs and expectations.
The problems of tomorrow–and plenty of those that face us today–will require reframed thinking and structural changes in how we enable businesses to scale and prosper. Without that shift, we’ll stymie positive change and end up with stagnation both in terms of innovation and, consequently, overall quality of living.
Yes, but the Great Resignation brings risks
It’s important to not put the cart before the proverbial horse here. The current dealmaking flurry only began in earnest in the second half of 2020, when pandemic restrictions began to ease and the aforementioned set of anomalous market conditions provided for this ripe M&A market. What remains to be seen amongst all this mania is how these acquisitions will work out.
There’s a long history of headline-garnering acquisitions with eye-popping price tags that ultimately didn’t meet their objectives. AOL’s disastrous $165 billion acquisition of Time Warner comes to mind, as do other catastrophic deals in recent memory. While virtually every acquisition is made with ambitions of a harmonious, revenue-maximizing combination, successfully integrating any given business with another is by no means a straightforward task.
Yet another previously-unthinkable phenomenon emerging from the pandemic is the unprecedented rates at which workers are voluntarily quitting their jobs. Dubbed the “Great Resignation,” this ongoing game of musical chairs indicates latent cultural issues that have led to dissatisfaction in every corner of the labor market. While there are clear, immediate implications of this trend for employers everywhere, it’s also indicative of an oft-overlooked aspect of the M&A cycle.
No business can operate without talent, and the talent that makes up the lifeblood of any acquired company has a decision to make once a deal is completed. Does a hotshot coder at a given startup want to keep working for the legacy conglomerate that swallowed up their once-cool employer? The current talent crunch has put the power in the hands of employees to an extent never seen, and that only serves to elevate the amount of risk associated with any acquisition.
No matter how great a deal looks on paper, acquirers lacking outstanding, leadership and careful integration planning will prove unable to retain the talent they’ve collected, thus seeing their acquisitions disintegrate.
The final word
Copious amounts of time is spent in boardrooms and executive offices debating whether to build vs. buy the capabilities that businesses require. The cost-benefit analysis that occurs in this setting and the subsequent decision can have wide-ranging and long-lasting consequences.
Given the immense uphill battles associated with successful acquisition and integration, strategic partnerships are an oft-overlooked third option that should be considered in the build vs. buy analysis. Although strategic partnerships look entirely different on a cash flow statement, they present a substantially lower risk to the overall health of a business than acquisitions, while satisfying many of the same objectives.
Amy Radin is a startup adviser, director, strategist and problem-solver who brings 25 years of experience as a Fortune 100 marketing, digital and innovation operating executive to boards and executive teams. Radin is an executive in residence at Progress Partners, a full-service merchant bank providing M&A, capital raise and SPAC advisory expertise for emerging tech companies.
