# Amid an M&A pullback, the market for selling your startup is shifting

Author: Kevin Dowd  
Published date: February 21, 2023

M&A activity is up year over year. But it’s also decreased in each of the last three quarters. Here’s how founders should think about the M&A landscape.

On an annual basis, startup [M&A](https://fund-forecasting@carta.com/learn/startups/exit-strategies/mergers-acquisitions/) activity is surging. Private companies on Carta were the subject of 647 mergers and acquisitions during 2022, a 23% increase from 2021.

On a quarterly basis, however, deal counts are slipping. Just 129 of those 647 transactions took place during Q4 2022, compared to 179 in the first quarter of the year—a decrease of 28%. What’s behind the dropoff?

It isn’t a lack of potential targets, according to Jon Keidan, founder and managing partner at early-stage firm [Torch Capital](https://torchcapital.vc/). For many founders, a tightening market for raising new venture funding has actually made the idea of a sale more appealing.

Instead, the decline is largely due to factors outside founders’ control. One culprit is the Federal Reserve. A series of [sharp rate hikes in 2022](https://www.cnbc.com/2022/12/14/fed-rate-decision-december-2022.html) made it [much more difficult and expensive](https://www.bloomberg.com/news/articles/2022-11-15/wall-street-s-38-billion-loan-backlog-crimps-new-buyout-lending) for potential buyers to raise the sorts of large loans that fuel the merger market.

Another major headwind to M&A: A steep decline in tech valuations. In some ways, it’s the same situation that’s led to declining deal counts in the market for both [primary venture fundings](https://fund-forecasting@carta.com/data/state-of-private-markets-q4-2022/) and [secondary transactions](https://fund-forecasting@carta.com/data/liquidity-report-q4-2022/). Investors saw public tech valuations plunge and sought commensurate discounts in the private markets. Private companies resisted the idea of slashing their valuations. That disagreement led to fewer deals.

## To sell, or not to sell?

The shift in valuations means that many current M&A targets aren’t operating from a position of strength, according to Kirk. Most companies with ample financial runway are choosing to wait out the market rather than sell at a discount to their last valuation.

From a founder’s perspective, however, some potential buyer profiles might be more appealing than others. The objective of an acquisition matters.

The takeover math has changed significantly for a purely financial acquirer, such as a private equity firm, says Keidan. Much like venture investors, these financial buyers are now more focused on current profitability and less on future growth than they were during the frothier market of 2021. Many are seeking to buy at substantial discounts.

There might be different considerations for a strategic acquirer, such as a corporation that absorbs a startup into its larger organization. These deals are driven by a desire to improve the acquiring company, whether through offering a new product, moving into a new market, consolidating market share, or creating other synergies.

## The megadeal market

The complexion of deals getting done also shifted during the final months of 2022.

Transactions worth less than $5 million accounted for 55% of M&A activity in Q1, but that figure fell to 44% in Q4. Meanwhile, the rate of megadeals over $100 million jumped from just 3% to 11% in Q3, only to fall back to 7% in Q4.

As 2023 unfolds, Keidan expects to see more of these large mergers and acquisitions—particularly sales to strategic buyers. If the [IPO](https://fund-forecasting@carta.com/learn/startups/exit-strategies/ipo/) market remains [as chilly as predicted](https://www.cnbc.com/2022/12/29/tech-ipo-market-collapsed-in-2022-next-year-doesnt-look-much-better.html), late-stage founders in need of an exit might consider other paths.

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Author: [Kevin Dowd](https://fund-forecasting@carta.com/author/kevin-dowd/)

Kevin Dowd is a senior writer covering the private markets. Prior to joining Carta, he reported on venture capital and private equity at Forbes, where he wrote the Deal Flow newsletter, and at PitchBook, where he wrote The Weekend Pitch.