Startup exit activity in Europe has plummeted to its lowest since 2013, with a 72.8% decrease in exit value during the first three quarters of 2023, totaling €9.1 billion. This downturn reflects a broader hesitancy in capital markets, grappling with high interest rates, moderate inflation control, and a valuation gap between buyers and sellers. However, central banks’ recent signals towards interest rate reductions have spurred a slight rally in public markets.
In this tight liquidity environment, M&A emerges as a favored exit strategy, representing over two-thirds of exit values in 2023. While public listings have dwindled, save for some activity in the Nordics, M&A offers a less risky alternative, particularly for tech startups and VC firms. This avenue not only provides a financial lifeline but also strategic synergies with larger entities, albeit often at the cost of some governance control.
The crux of the current M&A slump is the valuation gap, exacerbated by a 55% decrease in European M&A deal values in early 2023. The discrepancy between startup valuations and acquirers’ willingness to pay is stark, with startups needing to recalibrate their expectations to align with the more cautious investment strategies of potential buyers, who are now more focused on core operations and financial resilience.
Despite these challenges, early-stage startups, particularly those unable to secure Series A funding, are increasingly open to M&A. This shift is driven by the need for survival and growth, with a potential 20-30% valuation gap needing to be bridged for a resurgence in M&A activity. The emerging interest from non-European buyers, especially from the US and the Middle East, could inject much-needed dynamism into the European startup M&A landscape.
Strategically, startups are exploring various M&A avenues early on, from dual-track processes that balance fundraising with exit strategies to mergers with industry peers that offer synergistic benefits. Others consider being part of a larger build-up strategy or selling directly to corporates or private equity firms. Each path offers unique opportunities and challenges, underscoring the importance of careful planning, cultural fit, and post-acquisition integration for success.
As the market evolves, so too must startups and acquirers adapt their strategies to navigate the complex dynamics of the current M&A landscape, keeping an eye on long-term sustainability and growth.
About The Author
Janus Andersen
Advice on Strategy | Innovation | Transformation | Leadership Helping growth strategies and M&A transactions for 20 years