As economic uncertainty continues to plague markets across the world, new data from CB insights has revealed that there was a staggering 23% drop in funding for startups in Q2 compared to the previous quarter. With just $108.5 billion invested across 7,651 deals, this marks the biggest drop seen in 10 years. Now, late-stage startups with high cash burn are struggling to stay afloat in the absence of funding, and Claire Trachet, CEO and founder of Trachet – a leading business advisory helping entrepreneurs accelerate growth – highlights the option of an exit for firms in this position and suggests there could be a flurry of M&A activity towards the end of 2022.
Despite global funding having plummeted, a high-inflationary environment means that there is still a wealth of private investors looking for places to park their cash. This is evident as data from PwC has found that the number of M&A has remained strong this year, with further analysis from the company highlighting that deals done during times of economic downturn often provide buyers with better returns. Valuations have been slashed across the board, and although this may result in founders getting far less than they would like in any potential deal, it may mean they attract interest from dealmakers that would otherwise overlook them.
Ultimately, this may be the only option many startups have in the current climate. However, in order for a deal to go smoothly, financial advisors are key in helping to facilitate the process and gain the best terms for the firm involved. According to data from Deloitte, nearly two-thirds (63%) of businesses report that the success of their M&A was moderately or highly dependent on a successful transformation – often led by a senior level and external advisor. In order for startups to take advantage of the exit opportunities, Claire Trachet outlines the importance of bringing an experienced CFO or COO – in an interim capacity – to implement transformational changes to working capital, reorganisation, increasing cost reduction, and legal entity restructuring to secure the best deal possible.
Claire Trachet, CEO of Trachet, comments on the the shift in mentality that has driven the sharp increase of entrepreneurs in the UK:
“Venture capital tends to work as a reactive market, each startup depends on the next stage (either a subsequent round of financing or an exit) for their short-term success – usually every 16 – 18 months. The startup ecosystem has enjoyed a generation of businesses that have only experienced a bull market, where funds and good terms have been widely available. As the world enters a bear market, it is the late-stage startups with a negative cash flow (a lot of them) and that have raised money at high prices, that are going to be the most compromised – the well of free money has dried up.
“We’re entering uncharted territory, forcing a conversation across all management teams will help create communication and agility. Startups would benefit from having a process in place for sudden changes within their immediate competition, industry, or the global economy. It’s important amidst these challenging times to assess end goals – perhaps in light of what’s happening, a better course of action may be to consider an exit, or conversely there may be another company worth acquiring to fortify and expand existing operations.
“Then startups should focus on extending the runway, so to speak – be diligent with the business’s working capital by optimising cash flow, review the contracts you have with your clients and minimise accounts receivable. Applying this mentality to the whole of the organisation is going to be key in the next year, whether you’re entering a fundraising round or considering an exit, ideally startups should be doing both.”
