In today’s high-interest-rate environment, exits continue to be limited, with venture fund distributions (DPI) at historic lows. The industry has shifted toward early-stage M&A, on pace for $98 billion in exits this year—well below the 10-year average of $191 billion in the US.
Should investors and operators feel optimistic, or is it time to prepare for continued stagnation in an already sluggish M&A market?
The 10-year Treasury yield, now at 4.3%, sets the market and drives PE hurdle rates. In today’s high-yield environment, required returns on investments increase, making riskier bets, like cash-burning SaaS startups, less attractive. The era of near-zero interest rates in 2021, along with the deals that came with it, feels like a distant memory.
So, what needs to happen for venture M&A to pick up? Two things: hurdle rates come down and/or the performance of ventures increases.
According to Carta, approximately 40-50% of the 309 M&A deals involving venture-backed startups in H1 2024 were at the pre-seed or seed stage. Moving forward, for founders to achieve exits at strong multiples, they will need to prioritize the uniqueness of their competitive advantage and nail product-market fit in the right markets. While this isn’t new information, ultimately, it underscores that now, more than ever, we need disruptive technology to make up that delta.
Interest rates in the U.S. are projected to decline gradually in 2025 and 2026, with the federal funds rate potentially reaching around 3.4% by the end of 2025 and 2.9% by the end of 2026, according to the Federal Reserve's median projections. Consequently, the 10-year Treasury yield is expected to decrease to approximately 3.8% by mid-2025 and further to around 3.5% by early 2026.
One final, often overlooked exit path for startups is the secondary market. With discounts in the secondary market bottoming out last year, founders and boards may view the narrowing of these discounts, going from 42% from last priced round in March 2023 to 24% today, as a signal that now may be the time to exit, especially to exhausted shareholders, driving M&A activity.
As we look ahead to declining interest rates and a recovering secondary market, will we see a resurgence in venture-backed exits, or will founders continue navigating a tough M&A landscape?
