Angel Investing/VC Corner: Consolidation
By RocketFuel Team
At RocketFuel, our approach to crypto investing is similar to that of venture capitalists. So we think it’s important to stay educated on the state of angel and VC investing.
One major trend this month is the resurgence of mergers and acquisitions. Google just announced its $32B acquisition of Wiz, a cybersecurity startup, one of the largest ever, which lit up VC and startup interest.
In crypto, the action is heating up too. Coinbase entered talks to acquire Deribit, and Kraken offered NinjaTrader $1.5B. In this case Coinbase was going deeper into crypto and derivatives, and Kraken was heading more towards traditional finance. In previous months, Stripe acquired Bridge ($1.1), a stablecoin company, and MoonPay acquired Iron, another stablecoin platform.
As you can see in crypto, there are some major chess pieces being moved here. In all these strategies, it’s an expansion of the platform rather than acquiring just talent or a technology.
As an early stage investor, it’s probably too early to be thinking like these Corporate Development folks, but to a VC that’s a very large source of exiting their investments. Think about it this way, you are putting an investment into something that has a very low probability of success, with crypto you have early liquidity and to some extent traditional equity also has secondary markets. However, pretty much for everything else you are looking for an investment to either get acquired or to IPO.
Taking a step back, when you choose investments, another way to think about the exit is where they could slot into bigger companies. It might have looked like a weird investment to be an early stage investor in Bridge and Iron, seeing how stablecoin companies do not always have coins, and they also typically don’t get acquired or go IPO. But as Real World Assets (RWA) have gained more traction, they all of a sudden do look like good acquisition targets for traditional finance players.
Now take a step forward, as you look at the landscape, are there projects out there that have maybe fallen too far into correction territory? Are there even stocks now that are undervalued and could get scooped up by other companies? I think there’s a few factors at play here that make things good acquisition targets:
Amazing team, there are companies like Character.ai and Inflection that got “semi-acquired” mainly for their team.
There are assets, this could be IP, GPUs, and even cash, these are all worth something and if a company keeps falling in value those could still be scooped up
As noted in the crypto use cases above, accelerating into a new market is another viable reason
Finally, there’s the notion of a sum is greater than the parts, meaning when a company is acquired it is far more valuable to both
Notice above, really the top 2 bullet points are something you could do research on and predict. The other 2 are harder to predict because you’d have to switch your mindset from the investor in the smaller company to the investor of the bigger company. That being said, here’s a few ways to reframe those bullet points into actionable investing insights:
Basically any good team is a good acquisition target, whether it’s doing poorly or doing well,
Companies that have a lot of assets that could be sold could be better for private equity targets, but those that have specific technology that is special but could only be monetized by larger players could be something you watch for. Just as an example, potentially a hardware company could be acquired by a bigger player, Softbank just acquired Ampere for $6.5B for example, or Coinbase buying Deribit
In summary: I note this section because we are entering in what appears to be a more favorable mergers and acquisitions environment as markets become more uncertain. The Google and Wiz deal appears to have alerted more news attention to this, but if you look at the crypto acquisitions there are some being announced nearly every week now. To me, there’s actually two stories going on here. There’s the companies that are growing so fast that bigger companies want to acquire before they get too big, and there are stagnant companies that are of good value for bigger companies to accelerate or enter new markets from. Use this knowledge to your advantage when thinking about investing in early stage startups, or perhaps companies that “appear” over corrected in a bear market.