The Nuanced Outlook on M&A and Startup Exits in 2025

Uncertainty abounds in exit prospects for VC's in 2025

As we enter 2025, the question of whether this is truly the long-awaited M&A rebound for startups remains complex. While signals of renewed activity are present, it’s wise to approach with cautious optimism, especially in a year shaped by new economic pressures and evolving regulatory frameworks.

The renewed activity is no illusion—factors like the Federal Reserve's recent rate cut and pressures on limited partners (LPs) to see returns on long-held investments have indeed lifted buying activity, especially among private equity and corporate players. This was evidenced in the third quarter by substantial acquisitions, such as Blackstone and Vista Equity Partners acquiring Smartsheet for $8.4 billion and Blackstone’s $16 billion acquisition of data center provider AirTrunk.

Despite these signs, the M&A landscape for startups and growth-stage companies is complex and far from uniform. Market players expect deal activity to pick up significantly in Q4 2024 and early 2025, but this is contingent on a convergence of several economic and regulatory factors. As Mike Ellis, co-head of Proskauer’s global PE and M&A group, notes, “We’ve seen a ton of sale processes that have been going on in the background, so I do think we are going to start to see, in Q4 and Q1 of next year, a marked increase in deal volume.”

However, optimism should be tempered. For many startups, the exit landscape remains challenging due to factors beyond M&A volume alone. New requirements from the Federal Trade Commission (FTC) and the Department of Justice have increased regulatory scrutiny for large PE firms engaging in mega-deals, likely extending the timeline and complexity for those deals. This impacts startups aiming for exits via acquisition by major industry players, as it may delay or reduce such opportunities.

Furthermore, impatience is an undercurrent to consider. Many investors are anxious for returns, having waited through historically long holding periods. This pressure might drive firms toward smaller, quicker deals, but those exits may not deliver the returns some startups expect. According to Jeff Grabow, EY’s US venture capital leader, “There’s a lot of people that would like to see [a recovery]... But wanting to see it happen and having it happen are two different things.”

For startups, the takeaway in 2025 may be to view the light at the end of the tunnel as a cautious opportunity rather than a green light. While exits are likely to increase, they may come with unexpected hurdles, and the anticipated flood of returns may end up as a more measured flow, making patience and adaptability critical qualities for founders looking toward M&A as an exit route.

Ultimately, while the M&A rebound is taking shape, it’s prudent to approach it with an understanding that growth-stage exits will remain nuanced. For startups and their investors, success in 2025 may depend on navigating a landscape where both opportunity and uncertainty persist.