Exits and liquidity aren’t just on the minds of venture capitalists lately — it seems many of their portfolio companies are eager to get deals done too.

Last year, there were nearly 400 deals in which startups bought other startups — a 31% surge — per Crunchbase data, with the year ending particularly strong. In 2023, barely 300 such deals occurred.

While last year’s number is well off the highs of 2021 and 2022 with nearly 1,000 deals in which startups bought other startups, it still topped 2020, which had fewer than 300 such deals.

Big deal?

Although it can be easy to dismiss VC-backed startups buying their brethren as just small companies eating up smaller companies in miniscule-dollar deals, last year saw some large transactions.

• In October, fintech giant Stripe announced it would buy stablecoin platform Bridge for $1.1 billion.
• In June, market intelligence platform AlphaSense agreed to buy Tegus in a $930 million deal.
• In August, digital pharmacy provider Truepill was acquired for $525 million by LetsGetChecked.
• Cloud security startup Wiz made two good-sized deals last year, first acquiring New York-based cloud detection and response startup Gem Security for $350 million in March, then buying security remediation and risk management startup Dazz for $450 million in November.

Perhaps not surprisingly, all of the above acquirers raised large rounds before making their buys — with Wiz raising a massive $1 billion round at a $12 billion valuation and AlphaSense locking up $650 million at a $4 billion valuation.

M&A upswing?

Venture capitalists have been struggling to return money to their limited partners in recent years. This issue has been attributed to challenges with distributed-to-paid-in capital, which refers to the capital returned to LPs following exits by portfolio companies through IPOs or other means.

Although 2024 wasn’t a peak year for the M&A market, the number of deals involving venture-backed companies rose compared to 2023. Not only did more startups buy other startups, but deal activity for VC-backed startups overall also increased from the previous year.

That’s not to say that sellers are getting the prices they want. Many startups are still coming to terms with the valuation cuts that followed the overheated market of 2021 and 2022. And many deals involving startups were likely only finalized after the companies accepted a price well below their expectations of just two years ago.

Louis Lehot, a partner in law firm Foley & Lardner’s private equity and venture capital, M&A and transactions practices, said while M&A in general has begun to revert to historic norms, that has not been the case in the tech sector due to the government’s recent regulatory posture.

He said that overall deal-making with VC-backed startups is likely due to investors consolidating their portfolios. This is because the more successful startups are buying others that had few options due to the difficulty of obtaining venture funding and the overall state of the tech M&A market.

Lehot added it’s still hard to get a full read on the M&A market moving forward, even with the new presidential administration and changes at the Federal Trade Commission and U.S. Department of Justice.

“I think by the second half of the year, we should know where we stand,” he said.

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Illustration: Dom Guzman