A lack of liquidity is pushing some software startups to consider early exits. Lower valuations across the public and private markets have made growth capital less accessible.

The median amount raised in a typical Series A startup funding round has declined 14 percent in the first quarter of this year, compared to the last quarter of 2021, according to data published by Carta. Meanwhile, initial public offerings have declined 51 percent year-over-year during the same quarter, according to EY.

The impact is palpable. Several tech startups have already announced aggressive cost-cutting measures and layoffs. Fintech firm Bolt and Edtech firm Section 4 have reduced their workforce by 33 percent and 25 percent respectively, according to data published by CrunchBase.

As growth funding evaporates, some startup founders are seeking exits with strategic buyers and private equity investors. “The valuations are going to be driven by public comps, precedent transactions and fundamental operating metrics,” said Carlyle Group CEO Kewsong Lee at a recent Alliance Bernstein conference. “You’re seeing multiples on the public side and maybe on the transaction side coming down.”

Healthcare investor Frazier Healthcare Partners recently announced a partnership with BD (NYSE: BDX) (aka Becton, Dickinson and Company) to acquire pharmacy automation provider Parata Systems for $1.525 billion. Meanwhile, private equity firm Cinven also announced a deal to acquire a controlling stake in Euro Techno Com Group (ETC) from Carlyle.

These deals highlight how private equity and corporate giants are seeking opportunities in the beaten-down tech sector. They could also indicate the importance of tech-enabled cost savings during a wave of inflation. “We’re seeing companies that have made a lot of changes in using technology to drive margin and to increase productivity,” said Carlyle’s Lee.

If rates and inflation continue to trend upward and valuations continue to drop, cash-rich private investors could see similar opportunities in the months ahead.

Vishesh Raisinghani