At Contrary Research, we have dozens of Research Fellows, a handful of collaborative writers, and the broader team at Contrary including engineers, data scientists, writers, investors, and more. Across that team, we’re constantly sharing what we’re reading and that’s what makes up some of the links that we share below.
However, this week there were three common news items that spoke to a larger trend going on. First, cyberinsurance startup Coalition acquired Jumbo, a mobile app for online privacy. Second, Crowdstrike is in talks to acquire Bionic.ai, a security posture management platform. And finally, Upgrade, a personal credit platform acquired Uplift, a BNPL startup. Several of these acquisitions were priced at ~$100 million - $300 million.
With the market correction we’ve seen over the course of the last 18 months, a lot has been said about the immense slowdown in tech M&A activity. PwC recently published a report highlighting the drop off.
While the last 18 months have certainly seen a decline in the number of deals, but trends in the size of potential deals have even bigger implications for how the venture landscape is changing. Obviously, there are still mammoth acquisitions on the horizon like Adobe’s $20 billion acquisition of Figma, or Microsoft’s $69 billion acquisition of Activision. But those are exceptions, rather than the rule. And that may increasingly be the case. The same could be said about companies like Snowflake and Cloudflare trading at 15x forward revenue (or more). Exceptions, not the rule.
Sam Lessin, an investor at Slow Ventures, made an important point on this idea of adjusted expectations for how big company outcomes can be (whether through M&A or IPO). In May 2022, Lessin published an essay explaining how capital is effectively a supply chain. Early-stage investors invest in what later-stage investors want to buy, and later-stage investors want to buy what they buy because they believe that is what public market investors want to buy. But what happens when nobody knows what the other wants to buy?
This week, Lessin published another essays on the impact it has on seed investing when the public markets have decided that the average run-of-the-mill tech company isn’t worth very much. When I look at acquisitions from this week, like Bionic or Uplift, at $100 million - $300 million, you have to realize that those valuations fall in a typical Series B valuation range, even today after a lot of valuation correction. In 2021, Series B rounds were getting done at $300 million or even $1 billion valuations.
What about “run-of-the-mill” tech companies that went through IPO? Companies like Braze, Amplitude, or Expensify saw valuations in 2021 as high as $4 billion - $8 billion. Others like Asana were as high as $26 billion. Today? All four companies are between $600 million and $5 billion in market cap.
Of all the venture-backed startups out there, only ~11% go public or get acquired. So for early-stage investors, the math becomes a lot more difficult to make work if only 1 in 10 of your bets will make it, and of those bets that do make it the size of the outcome is, on average, probably $500 million to $1 billion outcomes. Those smaller outcomes mean investors need lower entry valuations, and higher ownership to justify the returns they’ve promised to LPs.
Will the exceptions continue to exist, like Databricks’ $1.3 billion acquisition of MosaicML? Definitely. But more outcomes may look like X1’s acquisition for $95 million, Mode Analytics’s acquisition for $200 million, Berbix’s for $70 million, or Paperspace for $111 million. Don’t get me wrong, those can be exceptional outcomes. But not if investors are investing at those prices to begin with. That’s why we may see big changes in which companies get funded, and at which prices.
