It’s been a rough few years for startups looking to exit, but companies, especially late-stage startups, can’t stay private forever. When the exit market didn’t open back up in 2023, as many hoped after a very quiet 2022, investors and founders alike decided that 2024 was the year that the exit market would defrost. Now that 2024 is here, do they still think that?
TechCrunch+ recently surveyed more than 40 investors to get their predictions on a variety of topics heading into 2024, including what they thought the state of the exit market will look like. The vast majority of investors responded that they think exit volume will be higher in 2024 than in 2023 and 2022, but there wasn’t consensus on what those exits would look like.
Some investors are more optimistic about M&A in 2024, while others think we will see a rebound in the IPO market. While most respondents answered this survey before the Adobe-Figma deal dissolved, many VCs acknowledged that startups looking to pursue that route this year will have to be conscious of the current regulatory environment anyway.
M&A
Don Butler, managing director of Thomvest Ventures, said that he thinks the pace of M&A will increase this year. The emphasis on better business fundamentals and economics in the startup realm over the past few years has resulted in a number of startups that have found the sweet spot of reporting solid growth trajectories on top of solid business economics.
“We think that [those factors] will present strategic acquirers with a compelling set of targets, as these businesses will be both at scale (and thus having proven product-market fit) with positive operating cash flow,” he said.
Investors also think M&A will accelerate because the folks who are typically doing the acquiring — public companies, legacy corporations and private equity firms — are well capitalized to buy. Many will be looking for smaller startups that could serve as bolt-on or tuck-in acquisitions for themselves or their portfolio companies.
“You can see this on full display with the acquisitions being made by Broadcom, Intel, Nvidia, AMD and others, who are deploying their R&D budgets by buying already developed companies for billions of dollars,” said Michael Marks, founding managing partner at Celesta Capital.
Sarah Sclarsic, founding partner at Voyager Ventures, said M&A will also likely be up in 2024 because companies will need to exit, and it’s less certain that they will be able to IPO. Some will turn to M&A because it will not only be their best option, but also possibly their only one.
“We expect M&A where there is strong interest and mutual benefit from both parties — and the government is not well positioned to make an antitrust case — will continue to yield good outcomes for startups and their investors,” Sclarsic said. “And, if the IPO market doesn’t open up, more startups may choose this path, resulting in some mega-deals in M&A.”
IPOs
Many investors think that IPOs will start to return to regularity in 2024 as well. No one thinks public listings will return to 2020 or 2021 levels, but VCs are less clear on when the resurgence of IPOs may occur and what that might look like.
Some investors, like the OMERS Ventures team, think that we’ll start to see a handful of IPOs right away in 2024 but there won’t be a stable stream of activity until later in the year. “There are numerous high-quality companies chomping at the bit to go public and generate liquidity for employees and shareholders,” said Jon Lehr, general partner and co-founder at Work-Bench. “Hopefully by Q2, we’ll see many pave the IPO path for others to follow suit in the back half of 2024.”
Many predict that the second half of 2024 will be where things start to get more active. Investors, including George Easley, a principal at Outsiders Fund, think that we will see a strong pipeline of IPOs in the latter half of the year. But others, like Andrew Van Nest, a managing partner at Exceptional Capital, think that IPOs won’t fully come back until 2025.
But others think we’ll see some of both. “We don’t see the environment changing meaningfully until late in the second half [of 2024],” said Larry Aschebrook, a managing partner at G Squared. “The companies that list earlier in the year are likely to price lower, even at a discount to their last round. With valuations still restrained, the companies that can wait to grow into their valuations will — even into 2025. We expect the IPO window to reopen fully in Q4, setting the stage for a robust IPO year in 2025.”
Potential wrenches
The biggest question that seems to remain is exactly when in 2024 exit activity will begin to pick back up. While VCs aren’t sure of the timing, they do know the overarching factors that will play a large role in determining that timeline.
One of those is interest rates. After years of hiking interest rates, the U.S. Federal Reserve will likely begin to start cutting them back down some point this year. Lowering interest rates would make capital less expensive than it was in 2023 and thus help ease some of the restraints on the market. Lower rates could also make holding cash less attractive and help bolster stock market prices more generally, both of which could help IPOs perform well.
On the other hand, 2024 is an election year in the United States, which has traditionally thrown the public markets and IPO timelines off, regardless of other economic trends. “Now that inflation has cooled, and the Fed has signaled a pause on interest rate hikes, I do think the IPO window can open again sometime in 2024,” said Leslie Feinzaig, founder and general partner at Graham & Walker. “On the flipside, there’s big geopolitical forces shaking up markets: two wars, supply chain interruptions, and a very unpredictable election year in the U.S. So it’s really anybody’s guess if the public markets are steady enough to support a real window.”
It’s also worth thinking about what a 2024 exit environment could actually look like. While liquidity is good, many exits will likely be by force over choice and not necessarily at the prices that companies or their investors were hoping for originally. Butler said that many of these exits next year will likely also be due to company shutdowns as opposed to $5 billion IPOs.
Investors said that LPs weren’t hounding them for liquidity, but that’s good for the market. And while the investors that we talked with aren’t sure what the exit market will look like in 2024, they seem pretty sure that it will be more active than 2023.
“I think we’re going to see some strong IPOs and acquisitions as the Fed cuts rates again this year,” said Paige Doherty, founding partner at Behind Genius Ventures. “I’m excited to see the companies that arise as early employees get liquidity and can both start companies and angel invest. Especially given the recent push toward profitability, I think there’s going to be some really strong exits.”