Tech Startups Rolled-Up in 2023? Sure, If You're Genghis Khan

Don't Expect Startup M&A Volume To Surge

Constellation Software is probably the software industry’s greatest roll-up of all-time. With a market cap of ~$35b and an unmatched high volume acquisition strategy, Constellation has perfected the art of finding & closing willing sellers of software businesses.

If we zoom out across time and industry, I’d have to nominate Genghis Khan’s Mongol Empire as the greatest roll-up, period. Genghis started small, merging a few local tribes in the late 1100s (Mongol is a must-watch if you’re interested in the life of young Genghis). After finding tight PMF with brutally swift & maneuverable cavalry, he embarked upon history’s greatest (land-based) roll-up campaign. At its peak in the late 1200s, the Mongols controlled ~18% of earth’s entire land-mass.¹

Recently, many tech prognosticators have been predicting a spike in tech startup deal volume in 2023. Sure, someone with GOAT-level powers like a Constellation Software or a Mongol Empire might be able to roll-up tech startups in this market, but I’m not optimistic.

The major obstacle for tech startup M&A in 2023 (and most years) is the psychology of anchoring. Startups are heavily anchored to their last round valuation, which was likely from an inflated, bubble-era funding round. Buyers recognize that today’s valuations are dramatically lower - but sellers will resist.

I think it will be a long, hard slog to get potential sellers off of being anchored to bubble-era valuations. While it’s true that some startups are taking mark-downs on paper, selling for a heavily marked-down price is a much, much harder pill to swallow.

If you expect to see venture-backed startups getting rolled-up en masse in 2023, I think you’re expecting someone with Genghis Khan-level persuasion skills. Of course, Genghis operated in a much less regulated environment - I don’t think his pitch of “join us or be annihilated” would clear today’s tough FTC. These were hostile takeovers. Very, very hostile.

In 2023, I expect that the vast majority of struggling startups will cut costs, find bridge funding, and/or do recaps. Because of anchoring, these options will seem more appealing than an outright sale for market-based valuations. For the most desperate startups, there might be no other option but to wind-down or find a face-saving acqui-hire - but I don’t consider those “deals” in the sense of actual M&A since they will generate no proceeds for shareholders.

Meanwhile, buyers will be inundated with potential sellers who harbor delusions of valuation grandeur. Buyers will be incentivized to keep a tight deal filter and be patient.

If you’re a Constellation Software (or one of its many imitators) and you typically buy sub-scale, bootstrapped software businesses, it should be business as usual this year.

But in the world of funded startups, I don’t expect to see high volume M&A in 2023.

1. This is not meant to be an endorsement of his approach. Organic growth can also work well. Also, pacifism is underrated. Dan Carlin has a very nuanced and critical review of Mongol strategy here.