Startups need to grow, and one of the fastest ways for them to grow is through the acquisition of another company. The acquisition can mean near-instant increases in sales, new assets, greater industry awareness and a potentially exciting future for the startup’s investors.


Venture-backed startups are buying other startups at the fastest pace in at least a decade. In 2021, 1,283 transactions involving startups on both sides of the table took place, according to data from Crunchbase and reported in TechCrunch. That compares to 689 in 2020 and 599 in 2019. As of June 2022, 663 startups have been acquired by other VC-backed companies, with the rest of 2022 still left to go.


Startups are no longer these cash-poor companies desperate for growth at any cost. “Last year simultaneously saw a record number of startups crossing the billion-dollar valuation threshold while seed-stage funding broke its own record,” explains TechCrunch. “Now that the funding fever has come to a screeching halt, the market is filled with late-stage companies with oodles of cash on hand — and no real exit opportunities — and a plethora of early-stage startups.”


What Is a Startup Acquisition?

A startup acquisition is an acquisition by a startup company of the financial, intellectual property (IP) and other assets of a target company, which could be a startup itself, for growth.


Acquiring another company might be seen as a strategy undertaken by mature companies that could not find opportunities for growth on their own, otherwise known as organic growth, but that is not the case. As explained by TechCrunch above, some startups are well-funded and highly valued and have the ability to enter into a liquidity event if the opportunity, timing and synergies exist.

How Does a Startup Acquisition Differ from Other Types of Acquisitions?

The reason for a startup to conduct an acquisition is actually no different from that of a larger, more mature company. However, some key differences occur.


Sources of Funding

The startup will most likely be using its venture capital to fund the transaction. Mature companies might have other funding sources to finance the acquisition, such as equity, debt financing or other instruments. However, startups often lack access to multiple alternative sources of capital, and so they will most likely use the funds they’ve raised through venture capital investors.


Post-merger Integrations

Startups are usually smaller businesses, and an acquisition could be seen as attractive from an operational standpoint because post-merger integration activities would be smaller and less complex than, say, when two Fortune 500 companies merge, affecting thousands of employees and hundreds of operating locations.


Why Would a Startup Want to Do an Acquisition?

As cited above, a startup needs to grow and demonstrate return on investment (ROI) for its investors, usually when sales and revenue growth lead to profitability. Oftentimes, a startup might be managing its own sales efforts, but it could dramatically increase those efforts via an acquisition.


By acquiring another company, the startup is acquiring the target company’s assets, which include its IP, people and the ability for that target company to generate revenue. The target company could be a startup itself, a small business or even a mature company. 


Assuming that business operations would not be interrupted by the acquisition, the acquiring company can lay claim to future revenues generated by the target company.


Another reason for acquisition, even by a startup, is to remove the competition. By purchasing a rival, the acquiring company is essentially leveling the playing field, ensuring market dominance. Even startups are capable of buying out a competitor and acquiring all of the customers in a particular market.


How Do Startups Conduct Startup Acquisitions?

It might seem counterintuitive for startups to engage in acquisitions. Many believe that merger and acquisition (M&A) activity is something that only larger, more mature companies engage in. However, this is not the case: M&A can occur between companies of any size and at any stage of their operations.


Startups wishing to make an acquisition usually look to their venture capital investors: VC firms usually invest in startups, and that startup capital is intended for growth. If the startup company believes that its best option or growth can come from an acquisition, then it can work with its VC backers, who often have access to investment banking, legal, accounting and other professional services talent, to help the startup navigate the transaction.


Best Practices for a Startup Acquisition

The first step in a startup acquisition is leaning on trusted advisers, often from the venture capital firms that provided the startup its seed or Series A capital. Such advisers can provide a shortlist of potential candidates that would make a good fit for acquisition.


Moving on from there, due diligence on these potential candidates would need to take place, to determine the financial, legal, accounting, IP and technical feasibility of incorporating the target company’s assets and operations into those of the acquiring company.


Complex M&A transactions need simple yet robust technology to get the deal done with speed and accuracy. A virtual data room (VDR) from CapLinked offers enterprise-grade security and features that make startup acquisition document management easy and secure. CapLinked has years of experience providing data rooms for sensitive and complex M&A transactions for startups and companies at all levels of maturity. Sign up for a free trial today.


Jake Wengroff writes about technology and financial services. A former technology reporter for CBS Radio, Jake covers such topics as security, mobility, e-commerce, and IoT.



TechCrunch – Startups are on track to acquire more VC-backed companies than ever in 2022. Here’s why.

They Got Acquired – How does a startup acquisition work? 4 experts on how to approach the sale process