Will mergers be the new start-up funding?

In times of crisis, like the Covid-19 pandemic, investors hardly ever look for new early-stage investments. However, corporate companies have lots of interest in them

Life is all about timing. The current Covid-19 crisis has been very bad for most start-ups. It made it almost impossible to gain new funding, unless of course, your start-up is already backed by a venture capital who will want to protect its investment, or if your start-up addresses previously unforeseen opportunities created by the current crisis, and your company actually profits from it.

Assuming that neither of the above is relevant to you, and your start-up is among the 98% of early-stage companies that are badly affected by the pandemic, you’ll have to look for a lifeline, which judging from the trend we have seen early this year, will not come from investors.

However, as unlikely as it seems, a possible solution could come from your leading competitors.

On the one hand, there are start-ups with technology and initial customers who hoped to get funding and grow, but in the current business environment, it most likely won’t get those needed funds.

On the other hand, there are some solid corporate companies, who are always looking for new technology and talented employees. Even before the crisis, those corporate companies likely merged into their businesses what others may have considered being “unsuccessful start-ups”.

However, are mergers really a win-win situation in times of crisis? The answer is simple: it depends on supply and demand.

What choices does the start-up have? Post Covid-19, the markets will be flooded with start-ups trying to survive. Most will shut down, and corporate companies know that.

For those start-up entrepreneurs who need funding for their business in order to survive, merging with a corporate company at the current time could be a lifeline. Such a “tactical exit” will not make them rich, but it will save the company from extinction with things like “credit line”, “salaries”, and helping hands from the corporate teams to fulfil the start-up’s mission.

Many start-up founders I have spoken to when the pandemic struck hard, tell me that they will most likely need to close their companies if they don’t find funding soon. My recommendation to them is: don’t just look for funding, look also for possible mergers.

N.B. This article was originally published by Avihai Michaeli on Medium and has been adapted and republished with permission of the author.