Why 2024 could be the year of Musical Chairs M&A

It’s an adult take on a children’s game: musical chairs for startups.

Think Squid Game meets fintech.

Businesses rarely die because you run out of ideas. They die because you run out of money.

When you’ve reached profitability, you control your own destiny. Until then, however, you’re up against the clock – you have finite reserves in your bank account which get depleted month after month and you need to raise a new round before your balance hits zero. In stark contrast to two years ago, it now takes ages to raise and the error bars are huge.

When cash is flowing easily, as it was in the ‘Champagne Days’ of 2020, fundraising is not too much of a headache. Valuations ballooned and term sheets were issued without diligence even for companies that hadn’t shown substantial progress since the prior round.

But once that funding dried up, the path to survival became far less certain and much more urgent. Enter: the ‘Ramen Days’ and the era of doing more with less.

The obvious approach is to cut costs – in many cases, that has meant widespread reductions in force, or RIFs, a euphemism for layoffs, or significant cutbacks to marketing spend, new S-curves and science experiments.

If you don’t cut deep enough, you will simply run out of time. If you cut too deep, you might not be losing money and your company may technically still survive, but at what cost? A huge risk is you could end up a zombie.

If a company had 1,000 employees, scaled to 3,000 during a grow-at-all-costs mindset over the following 12 months and has now slashed all the way down to 500, is it even sustainable?

That brings us to today.

Startups raised rounds at inflated valuations during the super cycle of 2021-22. They’re now coming up for air and many are unable to secure the capital they need, despite multiple rounds of job cuts, sweeping G&A reductions and dialing back to the bare bones. Those that do successfully raise are certainly not doing so at the valuation they enjoyed two years ago.

Their cost bases are too high relative to revenue and there are no costs left to take out. 

It leaves them with two options.

The first is a simple consolidation play. Two companies with similar products merge, take out the costs of their operation and benefit from economies of scale. Think of it like a traditional horizontal merger – this is what most banks do year after year.

The second is your vertical merger where one company with a phenomenal product acquires a second company with a complementary product. The new entity increases synergies and reduces costs while increasing its customer base. In this instance, one plus one equals three, sometimes as a result of cross-selling, other times as a result of going from a monoline to multi-line.

So, what’s the rub? 

There are only so many companies in the space, and they need to do deals sooner rather than later. That’s where the musical chairs come in.

As companies battle to find a partner, the number of potential partners remaining gets smaller and smaller. As at a children’s party, you don’t want to be the person standing up when the music stops.

At this point, many consumer fintechs, scale players worth hundreds of millions of dollars, are down to less than 12 months of runway left with no funding lifeboat on the horizon. As boards watch the burn continue, the speed of the music will only accelerate. At some point, it will be a sprint for the few remaining chairs.

2024 could very well be the year of M&A, the start of that sprint.

There has been a disappointing lack of deals recently. Part of this dynamic is because of unrealistic value expectations, but part is because two merging company CEOs feel like they should be the one to guide the new, hopefully sustainable company to safety and success. It’s a major obstacle for getting deals done, even in a world where neither company may survive if hubris preempts stubbornness.

Too many companies have a product rather than a business, and these are the ones that may be most at-risk. To that end, expect more movement toward a series of super apps – companies with a full vista of products and a large, sticky customer base.

For those that succeed, the panoply will serve as a true and complete set of armour, suitable for kids’ games and business battles alike.