The signs were there at the end of 2024. VC inbounds seeking valuation assessments on portfolio holdings, and looking for insights into market liquidity. The reason for the uptick? Generally speaking, an industry-wide push to cut losses on underperforming assets. And now? Well, not even one month into the new year, and we’ve already seen the trend continue, especially for the VC-backed cohort that raised during peak pandemic valuations.
Just in the past few weeks, SaaS-based Bench, an accounting platform for SMBs, and Level, an employee benefits company, abruptly shut down and were subsequently acquired by opportunistic strategic acquirer Employer.com, a workflow management and business solutions player.
The drivers for this trend, which I expect to continue to accelerate in 2025, are a multitude of factors that have combined to precipitate speedy liquidations from the more speculative end of private equity. And though the trend is real, not every asset being offloaded is being sold for the same reason(s), which in many cases, is providing legitimate, highly strategic buying opportunities for corporates, especially those in the payments tech, lending tech, proptech, and capital markets / wealth tech verticals.
Many of the assets being shopped are in poor financial health. These are startups that raised at high valuations in 2021 and lacked the oversight and/or management wherewithal to employ even a modicum of discipline toward capital efficiency. These assets are still burning today with no pathway to profitability. They need to go.
Venture investors are sophisticated, though their lack of fundamental analysis during the peak pandemic investment years is rightfully questionable. In any case, venture investors aren’t prone to succumbing to the sunken cost fallacy and are dutifully aware of opportunity costs, thus they’re now rightfully cutting their losses and seeking to re-invest realized proceeds into new investments.
Then there are those assets that have simply run out of money – they literally can’t keep the lights on. They need to go too.
The most interesting assets, though, are those that raised in 2021 but had a longer tenure with their VC partners, preceding the pandemic years. Assets in this category are particularly interesting to me. Whereas the aforementioned profiles have been relegated to fire sales of IP/technology, clients, and in some cases, acquihire transactions, this last grouping has revenue, clients, technology and a viable business. But, they didn’t properly anticipate the explosion of generative AI in 2024. They’re competing against newer, AI-forward startups solving the same problems with the most basic generative AI use cases – expert machines and process automation. Now these assets find themselves without the R&D budget or time to catch up to their peers who are AI-capable. It’s analogous to the on-premise software to cloud transition between 2015 and 2019, when not having a cloud-based solution was a value killer to prospective buyers and investors, and ultimately end-users.
At the end of the day, it’s a much needed healthy shakeout for VCs as they rationalize their portfolios. And on the other side, it’s created a window for strategic and corporate buyers to opportunistically pick-up good technology, customers and operators, at a deep discount.
For lower middle market investment banks there’s a real opportunity here as well. Even though they’ve already accepted their losses, VCs want to move quickly and maximize proceeds. For boutique shops with niche domain expertise, the art of matching offloaded assets with active buyers seeking highly strategic tech or best-of-breed customer bases can be a lucrative endeavor.
