The Rise of Small Exits for Lightly Funded Startups: Why Investors and Founders Are Benefiting

Ethan Lu

February 17, 2023

Small startups that have not raised large amounts of capital are seeing a surge of acquisition offers. This is due to bigger companies looking to fill technology gaps and acquire companies with traction that are synergistic with their normal course of business. These deals are typically good deals for VC Syndicates and angel investors who will receive a nice return on their capital.

For example, a company that has sold $5 million in equity via an early-stage round and is valued at $20 million post could see a $40 million exit, which would give the investor 2x their money in a short period of time. Although this isn't the type of return that a VC typically shoots for, quickly returning capital early in a fund's life can allow the VCs to "recycle" the money and invest it in the fund as if it were fresh capital.

These small exits can be life-changing for the founders, who typically own 70% to 80% of the company. With a $40 million exit, the management team could split $28 million amongst themselves. This is not only life-changing money, but it's also a win on the scoreboard that sets the founders up for life and makes it easier to fund their next startup.

As a firm, we are excited about the small M&A trend for lightly funded companies. We believe that we are one of the best CPAs for startups in helping founders be ready for these exits and due diligence. For the acquiring companies, these acquisitions are bread and butter work that can extend product capabilities, add another vertical to sell into, and do something very synergistic in a downturn. These are very smart acquisition ideas by the business development and corporate development teams at these bigger companies, and their M&A teams are set up to efficiently process and run due diligence on these acquisitions.

In August of 2022, we saw three acquisitions of $25 to $45 million for startups that only raised $3 to $8 million in capital. The investors are sitting on lower, more reasonable valuations, and these deals are good, not great, for the VC Syndicate or the angels that invest in them. Despite the NASDAQ being down quite a bit, bigger companies are doing some bargain hunting and are actively seeking out smaller startups that fill a technology gap and have some traction.

In summary, the trend of small exits for lightly funded startups is gaining momentum. These deals are good for investors, life-changing for founders, and beneficial for acquiring companies. As the market continues to evolve, it's important for startups to be prepared for these types of opportunities and have the support of experienced professionals to guide them through the process.

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