Startups Merging in Funding-Starved Sectors: A Trend Analysis

Startups are merging in sectors where funding has dried up.

It's a common sight in venture capital to see similar startups securing significant funding around the same time. This year, it's generative AI. A couple of years ago, there was a flood of funding in various niches, including D2C, homebuying, and consumer fintech. However, these hot sectors rarely remain that way, especially in areas with large funding rounds close to the market peak.

Now, in sectors where investment has shrunk, heavily funded startups are merging with former competitors and others to stay competitive or even survive.

Here's a breakdown of some key industries and companies that have undergone consolidation:

E-commerce Aggregators

In 2020 and 2021, e-commerce aggregators received billions in investment. Companies like Thrasio, Perch, and Razor Group used these funds to acquire smaller brands and boost their sales on platforms like Amazon. But funding dwindled in 2022 as the market declined, leading to many companies scaling back and cutting staff. This resulted in a wave of consolidation.

SellerX, a Berlin-based aggregator, was an early mover, acquiring Elevate Brands in an all-stock deal. Razor Group, also from Berlin, acquired four e-commerce brand roll-up startups, including Perch, a SoftBank portfolio company that raised over $900 million.

Real Estate Buying and Investment Platforms

Real estate buying and investment platforms saw significant funding when mortgage rates were lower and home sales were brisk. Recently, venture investors have shifted away from this space, leading to consolidation.

In May, Roofstock and Mynd, two Oakland-based platforms for single-family rental property investors, announced a merger. Flyhomes, a home buying and selling platform, acquired the assets of ZeroDown, a Sam Altman-backed startup offering renters a path to building equity and eventually purchasing a home.

Fintech and BNPL

A few years ago, fintech was the largest sector for startup funding globally. In 2021, companies in this space received more investment than any other, fueled by investor enthusiasm for buy now, pay later (BNPL) platforms and neobanks.

While adoption is increasing, venture funding has cooled down. Public BNPL companies, like Affirm and Square (which owns Afterpay), are recovering but still below their previous highs.

This shift has led to consolidation among later-stage startups. This spring, Empower, a provider of app-enabled cash advances and credit cards, acquired Petal, a New York startup extending credit to underserved groups. Last summer, Upgrade, a provider of online banking and loans, acquired Uplift, a Silicon Valley-based BNPL provider.

Logistics

Logistics was another sector that peaked later than others. In the first three quarters of 2022, investors poured over $7 billion into the space, with Convoy and Flexport being the largest recipients. Funding significantly decreased in the following year, and companies faced challenges. Convoy, a Seattle-based trucking logistics startup, announced the shutdown of its operations due to a freight recession, with Flexport acquiring its assets in late 2023.

While mergers between well-funded rival startups aren't exclusive to down markets, acquisitions in a down market differ in nature. Some acquired companies have shut down or were on the verge of doing so. Others faced a difficult fundraising environment, making a venture round unviable.

The hope is that this consolidation will lead to stronger growth for these companies with fewer competitors to contend with.