Co-Head of Global Investment Management
Will Startups Become Popular Again?
With cash-strapped tech companies reeling from the banking crisis, experts say leaders are already hoping for a good old-fashioned Silicon Valley fire sale—the kind that could jump-start their own company.
There are some caveats. With recession fears looming and the cost of borrowing the highest it’s been in over a decade, experts say leaders are taking a more pragmatic approach—to this kind of deal as well as others. Indeed, M&A acquisitions, while up 9% over last year, have cooled considerably since 2021's record buying spree. “Most companies right now are cash constrained, and cash is king,” says Chad Astmann, Korn Ferry’s co-head of global investment management. Still, he adds, the lower pricing potential could make this a good time for firms to pull the trigger if they were considering making an acquisition of a specific company prior to the current banking crisis.
Such purchases won’t guarantee success—the Harvard Business Review reports that between 70% and 90% of mergers and acquisitions fail. Many firms are drawn to the innovative technology start-ups create. “But buying them is not a great strategy unless you can create revenue out of it,” says Astmann. He adds that monopolies are rare in the start-up space, so even if one service provider goes away, another is likely to step in to replace it.
Experts say the real benefit of buying a firm could be its workforce, rather than the specific service it provides. Despite recent tech layoffs, there are still over 10 million job openings nationwide, including 3.4 million in cybersecurity as of the end of last year. “A firm may need to shore up some of its software talent,” says Chris Cantarella, a senior client partner in Korn Ferry’s global technology market.
Another compelling reason to press the “buy” button is to take a start-up off the board and away from competitors, particularly if the company has developed cutting-edge technology. But the decision still comes down to ROI and other economic decisions for corporate development and CFOs, says Brad Frank, senior client partner in Korn Ferry’s Technology practice. In the third quarter of 2021, the median pre-money valuation of venture-backed Silicon Valley start-ups was reportedly $42 million. Even at a lower price, “executives need to ask how much market share and revenue can be increased by taking the company off the table,’” says Frank.
Lest leaders’ mouths start watering at the thought of bargain-basement prices, experts warn that the deep discounts might be wishful thinking in many instances. “These entrepreneurs are very tough, and they’re backed by venture capitalists who are going to try and tell the story that the company is still worth twenty times revenue,” says Cantarella.
For more information, contact Korn Ferry’s Technology practice.