Startup Consolidation: Why It’s Needed and the Challenges That Come With It
Even before the corona-virus hit, funding for startups was slowing down and valuation levels were plateauing after years of steady growth. Now, as a global recession appears very likely, venture capital and seed funding will be limited, forcing startups to brace for cash droughts and lower valuations.
Startups that were about to get funded suddenly find themselves in an existential crisis. Many may not have the cash to make it through next quarter. Many more will have to lay off staff or drastically change their projections and plans.
Even startups that did receive funding on the expectation of continued rapid growth now find themselves in a challenging situation as it will be hard to deliver on that promise, as consumer and corporate spending alike are dropping while unemployment surges.
Put simply, it’s a scary time for startups and the future is hazy. The world has changed, and startups must change with it. Nearly all must adapt to a completely different situation.
Consolidation usually has not been in the cards for startups, but it should be now. Mergers and acquisitions may be the best lifeline many startups have.
The potential of consolidation
Merging with or acquiring another business may be the most efficient way for a startup to adapt its business. M&A is not the most common path traveled by startups, especially when they’re still in development or growth stages, but strange times call for innovative measures.
Every startup has competitors in its space and, chances are, many have complementary strengths and weaknesses. Whereas Company A may have more funding and a less mature product, Company B may have more users, a more mature product, but a shorter runway. Through exploring synergies and the potential of combined efforts, founders can ease the burden on their companies and discover innovative ways to stay alive, get to breakeven, or even profitability.
Profitability, of course, is important to all startups but as the global economy creeps towards recession, it’s now essential. Many startups take years to become profitable and until now could survive and thrive on potential alone. Now, being profitable or breakeven will carry significantly greater weight. If two startups together have a better chance of achieving that in a shorter time, then that should be a motivation to consolidate. VCs or seed investors may be less likely to bail out startups now than before.
The challenges of consolidation
As much sense as consolidation in the startup landscape can make at this moment in time, there are some big challenges.
M&A transactions traditionally take time and require extensive and expensive involvement from lawyers, accountants, and corporate finance or M&A firms. Many startups may not have the time or liquidity to navigate this route, as much sense as it may make for them.
And yet, wherever there are obvious synergies and consolidation makes sense for two startups, should happen. We need to find new, more efficient, less expensive ways to facilitate these types of deals. Realistically, we cannot expect governments to support M&A activity, but there are alternatives.
How to promote consolidation
There are many experienced investors out there with decades of deal-making experience. Many of them are now spending less time going to pitch events and actively looking into investments. That community is a significant asset.
Experienced investors and venture capitalists can facilitate cooperation by identifying consolidation opportunities, introducing founders to one another, and brokering M&A deals. To incentivize them, they could earn a percentage of an acquisition fee or get a stake in the new company. Through this process, investors may even get tempted to invest further in these new, more efficient and competitive entities.
It’s not all on investors, however. We can all contribute and help startups navigate this challenging time. Everyone in the startup community should be thinking about who should talk to one another and where there are obvious synergies. Angel networks should be communicating and ecosystems should help promote and facilitate consolidation.
We all have a vested interest in seeing startups survive through the corona-virus pandemic. As a community, we must make it as easy as possible for startups to come together. Consolidation is a realistic and viable option and a way to potentially save jobs, know-how, IP, and creativity from getting lost. Let’s start collaborating.
