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The Wave of M&A of Startups… Has Not Arrived!


The rationale was — and still is — solid: considering that more than US$22 billion were invested in Brazilian startups in the last 5 years, that naturally most startups do not reach maturity and given the very strong adjustment of the capital market last year , we were all certain that a large flow of transactions, of all sizes, would not only feed the market for financial advisors, legal advisors and large banks, but also the large number of more traditional companies that need technology, teams and innovation to grow .

In fact, according to the District, in 2021 there were more than 250 M&A transactions involving startups. But what could explain the drop to 200 transactions in 2022, precisely the year of adjustment and, based on the news we follow, a relative calm between the last quarter of 2022 and the last month of January?

It is impossible to say with certainty what is happening, but we have good evidence that a set of known factors have combined to delay or even hold back a significant increase in transactions involving startups.

Many of the startups we spoke to recently are adjusting their operations, reducing expenses, prioritizing projects with shorter paths to cash generation, and redesigning their organizational structure.

Those that started this process earlier and/or have revenues or resources raised that give them enough “lead” to execute and capture the benefits of these measures, will probably take a while to actively return to the capital market, whether to raise resources or seek alternatives. of mergers and acquisitions.

At the same time, we see a good number of companies with operations with insufficient business models, technology and/or scale, but which, through a set of adjustment measures, input from existing partners and investors, are awaiting a divestment opportunity. For many of them, the problem will be that they have neither revenue scale nor technologies good enough to become targets for potential buyers.

And we see a smaller group of companies, which are sustainable, but which are waiting for a better time to access the markets.

In another dimension, we know that changing individual expectations takes some time, but changing expectations and adjusting incentives and contracts takes even longer in an organization with some governance. In other words, even if individual business operators know that they will have to make adjustments to their operations, valuation, fundraising, M&A, and goals regarding the company's future, these adjustments take some time to permeate organizations and transform into consistent actions, how to look for a buyer.

Startup buyers were also affected

At the same time, among buyers, a group of publicly traded companies has been very active in recent years, for example, Magazine Luiza, Linx, Locaweb, Totvs, B2W, Afya and Ifood, which jointly acquired 104 startups in 2022, according to the Distrito. But despite this high degree of activity, if we look at the frequency of advertisements, they decreased significantly throughout 2022, a sign that buyers were also affected by the adjustment in the capital market.

In addition to the more uncertain scenario, the increase in the cost of capital and the need to concentrate resources on projects with greater potential or proven results also affected buyers, at least increasing their level of demand in relation to potential targets, whose value has been adjusted to below in relation to the multiple references we saw in 2019, 2020 and 2021.


The competitive dynamics between Venture Capital funds, which fueled part of the past asset bubble, changed the level of value references from the middle of the last decade. Multiples of 3x revenue that were (and are now again) very significant for almost any business, and which often took off from discounted cash flow projections, gave way to multiples of 7x, 8x or even 10x revenue in the expectations of the founders .

With the exception of really unique and high-quality businesses, these value references no longer make sense, but they have been used in much of what has been done in recent years. This reduction in capital market activity, with adjustments to operations, expectations and contracts, is acting as a breakwater on the potential wave of M&A involving startups.

However, with signs of improvement coming from the USA, considering that Brazil began a cycle of controlling inflation much earlier and hoping that our new government maintains some balance of accounts, it is possible that we will see an improvement in conditions throughout 2023 and 2024 and which could catalyze many operations that need to happen.

Startups that use this time well, decisively adjusting their operations and preparing to access markets, will have a greater chance of success.


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