Startup M&A worldwide: a $1.2 trillion market led by US and Europe.
The Old Continent strengthens its connections with Silicon Valley
The M&A global market is stable and increasingly a prerogative of US and Europe, according to the annual report “Tech Startup M&As” presented today by Mind the Bridge together with Crunchbase and with the support of global law firm Orrick, Herrington & Sutcliffe LLP.
There’s more: the other news (source: “European Innovation Economy in Silicon Valley” Report, by Mind the Bridge) is that Europe is playing an increasingly stronger role in Silicon Valley, with many of the Silicon Valley startups (including several Unicorns) founded by Europeans, a handful of EU-based venture capital funds active in the Bay Area as well as a variety of corporate venture capital outfits, and almost 60 large European corporates having a stable presence in the Valley and actively contributing to the innovation ecosystem.
“The M&A market is large and complex. Coming to grips with it from a macro point of view requires looking at a very big picture that can be quite intimidating at times – commented Alberto Onetti, Chairman of Mind the Bridge – “This involves asking some key questions: are there worldwide trends we can find for startup exits? What are the conditions under which companies sell and buy, and how do they change by region? Who are the top startup acquirers and where do they come from? Which industries are more active? Which technologies and verticals are attracting the interest of buyers? What is the typical profile of a startup that makes it all the way to the exit? That’s what we tried to answer in this Report.”
The M&A Report outlines the essential traits of the entire market of M&As based on the analysis of the Crunchbase dataset: over 21,800 startup exits have been tracked worldwide since 2010 for a total deal value of about 1.2 trillion dollars. 2018 shows to be a substantially flat year, with only 118 additional new exits recorded, a 5% YoY increase in volume and a slight decline in deal value. To be noticed that 2017 had represented a substantial change of pace over the prior years with a +29% YOY growth in terms of number of deals registered.
“Technology markets in both Europe and the Bay Area have continued to grow in the past 12 months – added Matteo Daste, Co-Chair of Orrick’s SF Bay Area Europe Desk – The trends outlined above may signal that, in the future, new business paths and fluid interactions between Silicon Valley and Europe may emerge alongside those traditional channels that are anchored around specific geographies”.
According to the data analysis, US and Europe seem to lead the rank (India, Australia, Israel, China, Singapore, and Brazil follow) with a clear preference for each other: 86% of the transactions (about 18,700) and 80% of the money spent involved startups from these two regions, despite a significant contraction in 2018 in the last one, though balanced by a weak growth in the first one. The remaining 14% involved a buyer from a country from the rest of the world, like Canada, Japan, India, Australia, China and Israel (20% of the capital involved) with additional 1853 startups.
US still dominates with 68% of all the transatlantic transactions: slightly less than 13,000 exits and twice more startups acquired than Europe (5,917 acquisitions, for $209 billion dollars invested, representing 22% of all value invested in startup transatlantic M&A deals). Silicon Valley alone produces a number of exits that is half of all exits generated in Europe (2.978) for a deal value equivalent to 83% of the money paid for all European acquisitions. In Europe, the United Kingdom follows behind in second place, though the gap remains significant. Even with 2,544 recorded exits UK still remains at one fifth of US exit volume.
25 out of 30 of the world’s top acquiring companies are from the US (the top 10 are all US-based) with 15 from Silicon Valley. The UK confirms to be the “exit” capital in Europe. Followed, at a distance, by Germany and France.
“As established companies look to remain competitive and extend their life cycle, acquisition becomes a more viable and attractive strategy. Not the only one, but surely the fastest route in a world when time is the most valuable resource” added Gene Teare, Head of Content, Crunchbase.
The research shows also that both US and EU companies prefer to acquire in their own region: 86% versus 81%, respectively (last year they were 87% and 75%). But while the first ones poured the 82% of capital in domestic acquisitions, the second dedicate only the 51% of the total capital to acquire in their own region.
“Compared to last year, European companies seem to look more at the European ecosystem for M&As – commented Isidro Laso Ballesteros, Head of Startup Europe at the European Commission – Though there might be early signs of the global wave of protectionism, we believe that it reflects the growing maturity of the European startup ecosystem”.
As a consequence, US startups accounted about 19% of acquisitions by EU companies, but ate up 49% of the total capital invested: it means US startups are more expensive than European counterparts: the median price paid for EU companies acquiring other EU startups was $23M, while the median price of EU companies acquiring US startups was $101M in the same time frame. On the other side, US companies acquiring US startups paid a median price of $100M, and on average paid approximately $71M for European startup companies. To be noticed that US companies were responsible for slightly less than a third (27%) of European startup acquisitions, definitely a sizeable amount.
“Startup ecosystems thrive where both sides, buyers and sellers, are well represented. But not all ecosystems show a healthy balance between the sellers, read exits, and buyers, read acquisitions – added Marco Marinucci, CEO and founder of Mind the Bridge – This is what we analyze with the “exit/acquisition ratio” indicator that we as Mind the Bridge created to evaluate how startup ecosystems perform. It represents a ratio between the number and value of exits in a certain area and the number of acquisitions performed by companies based in the same area.”
According to data, not all startup ecosystems show a “M&A balance”: North America and the US overall show only a slight M&A imbalance between number of exits and number of acquisitions in favour of the latter. On the contrary, Europe is still characterized by more exits compared to acquisitions, with a negative ratio. These two numbers suggest that the deficit and subsequent drain of startups from Europe is working to the benefit of US companies who are acquiring them. Israel, finally, confirms to be a “net seller” of startups while South Korea, China and Japan are “net acquirers”.
In Europe, the UK shows an almost perfect equilibrium between number of exits and number of acquisitions (1.03), with Belgium and Sweden sitting close below the parity (0.99 and 0.95 respectively). Only six countries are below the parity (net buyers): France (0.80), Norway (0.85), Ireland (0.81 for whom numbers are distorted by Irish domiciled corporations), Switzerland (0.77), and Luxembourg (0.66). Germany, Finland, and the Netherlands show a slightly negative M&A balance (just above 1.2). The Southern countries show higher values (net sellers), ranging from 1.4/1.8 (Italy, Spain) up to 2.6 (Portugal). Similarly the CEECs produce a lot more exits, e.g. Poland (1.54), Hungary (2.08), and Romania (3.14)
For what concerns the most acquisitive industries, IT & Software, followed by Finance and Banking and Pharmaceutical industry, lead the rank. On the sell side, Software (including Enterprise solutions) and Life Science attract the largest share (42%) and value (54%) of M&A transactions. Advertising, Artificial Intelligence and Big Data are also relevant and growing.
The extended bonus of analysing over 22,000 M&A transactions involving startups has finally been the opportunity to identify the characteristics of the startups that have been acquired (the analysis has been focused to the subset of M&A deals with a disclosed transaction price, i.e. 3,332 deals): on average acquired startups have between 50 and 100 employees. The majority (57%) are acquired between 5 and 15 years after founding and have raised between $10 and $100M. The average (median) acquisition price is about $65M.
Perhaps more interestingly, the research reveals that 59% of the exited startups don’t return the capital invested, while only 21% return more than a 3x multiple. European startups tend to return more capital than the US peers (0.85 vs. 0.67).
The European Innovation Ecosystem, in a nutshell
“In recent years European VCs have been raising more capital and improving their activity, and their reach to more profitable exit markets, like Silicon Valley, is starting to become a natural step for the more mature funds” – commented Marco Marinucci, CEO and founder of Mind the Bridge.
According the the newly released report, 67 European corporate outposts exist in Silicon Valley, plus 28 European focused bridge organizations – both public and private, formed with the specific focus to assist European startups looking to engage with Silicon Valley – and over 300 dual companies who have migrated to Silicon Valley, have been recorded. On the investment side (harder to track), the report highlights a few European based funds with a US General Partner with a direct presence in Silicon Valley. Beyond that, Europeans are actively investing into Silicon Valley either directly – as angels – or indirectly – as Limited Partners.
“Stronger connections at earlier stages with startups present value for all European stakeholders, whether investors, corporates, and bridge organizations, as an opportunity to include transatlantic capabilities in the DNA of a company – ended Alberto Onetti, Chairman Mind the Bridge and SEP Coordinator – On the other hand, a continuous open dialogue with European policy makers and regulators is key for Silicon Valley, for both corporates and startups. Building this bridge with regulators from the early days of the business eases friction when the company reaches the maturity to take on European customers.”
There are still steps to be taken in order to further strengthen the connections between Europe and Silicon Valley. Among others, Europe needs to present itself and be perceived – more as a single ecosystem rather than a combination of single national communities.