(Expansion) – Markets are experiencing a very difficult year, with the Nasdaq battered and the Federal Reserve attacking interest rates as a magical tool to curb inflation and bring back the stability that both the pandemic and the invasion of Ukraine destroyed in consecutive hits.
Venture Capital (VC) investors have quite considerable sums of uninvested resources, since even in this situation, the capital commitments they have captured have not seen such dramatic reductions. Thus, the ” dry powder ” -which is the committed capital available for investment- is reaching record size.
However, VCs are fearful that their chances of successful exits through initial public offerings or SPACs, which have been very few lately, are not so clear, as well as the lack of certainty in the current and future valuations of the companies. .
In this situation, startups are faced with the need to resist and become stronger. For now they are struggling, adjusting their business plans and creating a plan B to deal with stagnation or limited growth. Your employees are suffering from possible cuts or frozen wages. All those giant markets that were going to attack will have to wait for now. As cash is limited, the only thing that worries them is their runway (the lifetime of the company based on their cash) and the reduction of their cash burn (what they “burn” on a monthly basis building their business).
In this context, both leading companies and those in a difficult situation need to think carefully about the opportunities offered by mergers and acquisitions as a strengthening tool for the future.
Leading startups have a range of opportunities in front of them: beautiful startups with complementary product offerings, additional user bases, and/or good management teams that can be acquired or merged into the main company at reasonable valuations, creating value for the acquirer and the acquiree (as well as for its investors).
Those titans beefed up with even stronger management teams will navigate these times and emerge much more powerful in years to come, when all the dry powder we’re talking about is set to land in its box.
As for companies that are not well funded, it may be time to capitalize on all the value they have created so far. Maybe it’s time to look for your corporate “prince charming” who can acquire them, to achieve an exit strategy before things get worse or your runway reaches zero.
Another interesting option will possibly be to associate with startups that have significant amounts of capital and can create something bigger. Being part of a unicorn may be better than fighting alone these days.
The United States has many examples of successful combinations that have helped create value for investors and the market. In Latin America the examples are still scarce, but valid. The recent merger of Paystand and Yaydoo is one of them and the results will be seen over time.
A transaction that was not public for a long time (due to legal restrictions) was the acquisition by Clip of Swap, a payment app between people that is currently authorized to operate as Fintech by the CNBV. By bringing Swap into the ranks of Clip, Clip not only had access to robust software and a loyal user base, but also brought in a great management and development team that is now part of this unicorn.
I can think of some sectors where great startups can complement other great companies and create a super company. The logistics industry is one of them. Some companies have created distribution networks, others have specialized in last-mile delivery, and others have created software that makes shipping easier. Think about the value that can be created by combining these businesses.
Fintech is another territory where isolated companies can come together and prosper. In the end, those companies are competing against the banks, which, by design, are horizontally integrated. If you can bring some fintech together, with complementary products and a friendly user experience, you could create a formidable competitor for banks.
Unfortunately, the biggest challenge facing these opportunities is not economic. Most of these transactions can make economic sense, if a good strategy is followed. The biggest obstacle will be the egos of the entrepreneurs: Will they no longer be the decision makers? Will they have to consult with someone else and make consensual decisions? Will they give them the credit they “deserve” when all is said and done?
Responsible entrepreneurs will understand that you need to do whatever it takes for the good of the company and that, perhaps, they can help create the next great and glorious unicorn that everyone looks up to.
Editor’s note: Jorge González Gasque is behind the consulting firm G2 Consultores, and the investment funds G2 Momentum Capital and On Ventures. A programmer since he was 13 years old, he consolidated his career creating specialized software for companies. Follow him on . The opinions expressed in this column are solely those of the author.
