In the venture capital world, the role of mergers and acquisitions (M&A) has proven to be pivotal for the evolution and expansion of startups. Given their involvement and stake, venture capital funds are now increasingly seen as indispensable allies, providing vital counsel and aid in navigating the M&A landscape. This piece unravels the rationale behind the essential function of venture capital funds in facilitating startup M&As and discusses the present M&A climate within the sector.
M&A transactions serve as a powerful fuel for startup progression. These corporate maneuvers allow startups to seamlessly tap into fresh markets, adopt innovative technologies, and attract skilled talent. As illustrated by PitchBook’s recent analysis, 2022 saw M&A occurrences within the venture capital realm reach an unprecedented pinnacle.
Venture-backed startups frequently use M&A activities as an exit strategy to secure profitable returns for their investors. Such a mechanism becomes particularly crucial for venture capital funds, typically operating within confined lifespans and bearing the responsibility to yield returns within set timeframes. As per CB Insights ‘ report, M&A emerged as the preferred exit strategy for venture-backed startups in 2022, representing 52% of all exits.
M&As also serve as strategic tools enabling startups to consolidate their respective industries and carve out a competitive edge. By integrating with other ventures, startups can generate economies of scale, curb competition, and boost their market share. This strategy is significant in sectors teeming with numerous small competitors vying for market domination. Industry behemoth McKinsey affirms that this consolidation trend has recently shaped the technology industry as large corporations seize smaller players to consolidate their market positioning.
Furthermore, startups often leverage M&As to diversify their business operations, mitigating risk. By integrating with ventures from varying industries, startups can distribute their risk and minimize reliance on a single market or product line. As EY’s report suggests, diversification strongly influenced M&A activities within the tech sector in 2021.
In terms of notable M&A cases that are aligned to this vision:
1. Credit card giant Visa is acquiring Brazilian payments infrastructure startup Pismo, for $1 billion in cash in what is likely one of the largest fintech M&A deals taking place this year so far.
Founded in 2016 by Juliana Motta (CPO), Ricardo Josua (CEO), Daniela Binatti (CTO), and Marcelo Parise (VP of engineering), São Paulo–based Pismo has quietly racked up a list of big-name customers, including Citi, Itaú (one of Brazil’s largest banks), Revolut, N26, Nubank and Cora. The startup processes almost 50 billion API calls and $40 billion in transaction volumes annually, and powers almost 80 million accounts and over 40 million issued cards.
2. Banco Santander bought the Uruguayan startup New Age Data, through the fintech company PagoNxt, which brings together Santander’s payments business, completed the acquisition of the Uruguayan company, a purchase that will allow it to make use of its own network of terminals in the South American country. This is part of Santander’s larger plan to invest US$6 billion in Latin America through 2024.
3. DispatchTrack acquired Chilean startup Beetrack in December 2021 to reach the Latin American market. By purchasing Beetrack, dedicated to route planning and order monitoring software, DispatchTrack expanded its global presence with the addition of more than 850 customers in 20 Latin American countries, including Chile, Peru, Argentina, Colombia, Mexico and Costa Rica.
Satish Natarajan, co-founder and CEO of DispatchTrack, told Bloomberg Line that, after a decade, it decided to expand and position itself in not only the U.S. but also the Latin American market.
In summation, M&A strategies have ascended to a position of paramount importance for startups operating within the venture capital sphere. With their essential role, venture capital funds are uniquely positioned to offer the needed support and expert guidance in this field. M&As serve as formidable growth catalysts, a mechanism to deliver investor returns, a method to gain competitive advantages, and a means to diversify, hence minimizing risk.
