11 January 2023 |

Actually, Maybe We Won’t See More M&A in 2023


As many of you know via reading Fintech Today over the past year or so, I’ve been openly hypothesizing more M&A in the fintech ecosystem. My theory isn’t remarkably unique; it really just follows basic business theory—capital is drying up and companies are struggling to raise, and founders may opt to sell their business instead of prolonging the inevitable by raising a down round and running a “zombie” company.

But, over the past few weeks, I’ve been playing devil’s advocate to my own theory—I wonder if we actually might not see more M&A activity in fintech. We may instead see companies die and fold completely, or raise down rounds and continue the slog, hoping to find a better exit later on.

This time next year it’ll be interesting to take a look at 2023 M&A levels and see where they’re at compared to previous years. In the past I’ve guessed that a) we’ll see a higher quantity of deals but potentially low exit numbers as companies will be cognizant of the inherent risk of big deals in a bear market b) we might see more M&A in the early stage markets (at least from an acquiree perspective, acquirers will probably be all over the board but more likely on the late stage company or public market side.)

But, here are a few reasons why those might be wrong:

The Biggest Reason—There Might Not Be Much To Buy:

I hate to say this out loud but honestly…it’s looking less likely that there’s a lot of actually acquirable assets within fintech companies, particularly in the early stage market. Unfortunately, customers and brand aren’t really acquirable—customers will flee to the market leader or a competitor if their current product doesn’t exist and goes bankrupt, and brand usually deteriorates post-acquisition because it always feels like the acquired company is “selling out.”

From an IP perspective there also isn’t a lot here—acquiring companies really need to think about a very thorough buy vs build analysis here (there’s a great thread from GGV’s Jeff Richards on how to think about M&A here.) But the key is to have a buy vs build analysis ahead of acquisition talks—figure out whether or not it makes sense to buy something in the market instead of building it in house, why, and the potential negative effects. Then, go out and seek what you’re looking for in the ecosystem. Fielding inbounds from flailing companies doesn’t feel like it’s a great M&A recipe.

Actual tangible IP in fintech is rare—its kinda hard to find a company that isn’t building something that isn’t replicable. Let’s take Chime’s 2 day early direct deposit for example—for years, this seems like a huge value add for users and was largely not copied by other neobanks. Then, in October, JPMorgan rolled out early access to direct deposit for Secure Banking customers.

Fintech is built on the idea that you copy the best strategies from your competitors and make it your own. With so many infrastructure and enablement companies out there helping consumer fintech companies get to market and expand their product suite, its hard for a consumer fintech to have a competitive advantage on the product side; a smart infrastructure provider will enable it within their stack and make it available to all their customers. There might be more IP at the infrastructure level but figuring out acquirers are harder—public companies and late stage companies are all focused on feature parity.

Industry Layoffs Make Acquihires Less Attractive

Part of my original hypothesis around fintech M&A this year was around the fact that acquirers might want to acquihire teams and have them build in house; back when I was writing, talent was extremely expensive to source and close.

But fintech has been hit really hard with layoffs over the last few months, and I don’t expect that to let up anytime soon. Does it make sense to acquihire a company for X amount of dollars, or let them run out of money and hire their engineers on the cheap? Sounds a bit savage but, in order to win in a bear market, that’s the mindset you need to have.

Acquihires are now are super unattractive in my opinion—you’ll probably be overpaying for a team and buying the whole company will create a litany of potential problems around integrating tech and culture. With great fintech talent readily available, it might make sense to just get better at recruiting—after all, that’s a much better strategy long term.

Unnecessary Hit To Runway

Another huge potential issue is the cash you need to shell out for an acquisition, or equity. In either case, it might not be worth it—equity can be used to juice up compensation for your current or new employees, and cash is king in a bear market. It doesn’t make any sense to spend 6 or 12 months of runway on a big acquisition if you’re not in a really strong financial position and have the opportunity to raise capital over the next 18 months (at a higher valuation too.)

At Vol. 1 Ventures we’re recommending companies keep burn lean and raise enough capital for 18-36 months. Obviously we’re preseed investors so take that with a grain of salt, but most investors are saying that across the board. Increasing burn through an acquisition and depleting your runway isn’t a smart move.

In order for an acquisition to make sense the company needs to be at least breaking even—that way you’re not taking on the additional costs of more employees. You also probably should raise more than enough than you’d need for an acquisition, well ahead of time too.

All of these point to acquisitions becoming more of a headache than a founder needs—it’s appealing to use a bear market to get bigger and dominate the market, but it might be more fiscally irresponsible than it seems from the outside. You probably hate talking to your investors but they probably have seen this before and can shed a lot of light into how you should be thinking about this—definitely think about talking through all this with them. (If they’re not, Stevie and I are happy to help to; Stevie’s advised on a lot of acquisitions as a KKR consultant and would be the perfect person to help you think through a lot of this.)