Carta data and what it means for M&A

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Peter Walker of Carta released his latest analysis last week. It should be required reading for all founders. Check it out. I’ll focus on M&A, GTM and hiring in this post but there’s a ton more in there worth thinking about, like equity grants, time between rounds, and more.

Carta’s data on M&A

Let’s start with good news. M&A is on the rise in 2025. This matters because M&A is correlated across companies, and that impacts outcomes. If doing M&A at a board level is viewed as not smart, most potential acquirers will not pursue M&A. That means that if you do manage to get an offer, you might only get one. And it will be harder to get anyone to make an offer.

When M&A is viewed as a good idea, it can be contagious. Board members across companies will bring that idea with them, and be more likely to approve an inorganic growth strategy. More companies will be acquisitive and not only is a founder more likely to get an offer, but also they are more likely to get multiple offers–which is how you get the best outcome.

If M&A is on the rise, it’s cyclical and likely to pick up even more. You can see the chart in 2021 and 2023-2024–deals beget more deals, until the music stops. If you are considering an exit, now might look like a good time.

Three additional thoughts. First, that doesn’t mean outcomes will be great. You can’t count on taking your $250k ARR startup to market and sell it for 50x revenue. Or even 10x. It just means that board members won’t vomit on the idea of M&A the second an exec brings it up. Which, at times, they do.

Second, there are more startups in general–especially including seed stage, unfunded startups–than there were even 5 years ago. So this shouldn’t be taken as a probability of getting acquired. If anything that likelihood went down, even with more deals being done.

Finally, feels good to know I led ~2.5% of the deals that closed in Q4 2021. Just saying.

GTM is (still) the sine qua non of startup success

Sure, you need a good product and yes, using AI will help you raise and at a higher valuation. But the ARR goalpost has moved–from $1 mm in ARR at Series A to an average of $2.9mm. Now $1 mm puts you in the bottom quartile–a place nobody wants to be. You’re not raising from top tier VCs with a bottom-quartile key metric, unless you (a) are an exited founder with a proven record or (b) you achieved that extremely quickly.

This goal post has always been moving. In the 20-teens it moved on me mid-raise, or at least it felt that way. I don’t think it’s just inflation. I think there are two drivers. First, people are really dialing in their GTM. They get it, and get it early, and just do everything “right”. If you were an investor would you want to invest in someone who figured out how to win the game, or someone who might figure that out–but hasn’t yet?

Second, there are a ton more startups. Y Combinator is doing 4 batches a year with ~400 startups in each batch. There are something like 5 companies every batch doing what skyp.ai is doing, for one example. Investors pick the one of those five who has figured out GTM. That company will then have a war chest to extend its lead.

The chart does not include gross margins, LTV, CAC payback, or other key business metrics. So while the goal post moved, realize that raising to hit these metrics might be a losing game for you as a founder. Sell 20% of your company for $10 million so that yes, you can hit $6mm in ARR but at the cost of burning $12mm / year and needing to raise a Series B quickly. You may find yourself running to stand still at any moment.

Know the game you are playing. If you are raising venture, you have to play the game on the field. That means if you’re not at at least $3mm in ARR in 2025 raising a Series A will be hard. At $1mm ARR it might be impossible. Lower multiples, worse investors, longer time to get a round done. Plan accordingly! Invest in GTM early–maybe even before your product is done so that when your product is fully built you’ve got a waitlist, or customers, or some running start. There is no GTM channel that takes less than a quarter to ramp up. Most take several.

Later stage ARR

It’s not in here but worth mentioning. If you’ve been at it for 5+ years, raised your Series A back when $1mm was the requirement, and are now sitting at $3ish–you’ve got a problem. You can’t raise another A, for obvious reasons. But you have Series A metrics.

Your best shot in that scenario is to either bet the farm on growth (not necessarily a recommendation–it depends) or to start thinking about M&A. Trim down costs, “run it like a business”, maybe raise prices, and see if you can get an outcome while the M&A window is open. It may not be the outcome you want–but you will like the terms on that not-quite-Series-B term sheet even less.

If you have supportive investors and they want to bridge you or continue to fund you, that is awesome. But really do the math on the dilution. Because…

Dilution is (still) a bitch

While we’ve always known that dilution sucks for founders, this deck really puts it in black and white. Investors own over half the company at the Series B–but founders own less than half after the Series A.

I’ve worked with founders–YC founders in particular–who raised $3-10 million on post-money SAFEs, over a few raises, without ever doing the math on dilution. They come into an M&A or Series A raise to discover they actually own <25% of their company. Be careful. And note that chart is for all founders–not just 1 founder. So if you have a founding team, each might own a ex-co-founder you fired might still have a big chunk of that orange slice in the chart.

These numbers are medians but are totally in line with what is common. Unless your company is on fire, when more capital drives more growth, raising more equity tends to benefit investors (who can invest more and keep their ownership percentage stable). I mean this in terms of outcome–what you make from the sale of your company.

Take a simple example using the above numbers. You raise a Priced Seed. You then get an offer for $20 million to acquire your startup. This is only ~5mm above the valuation at the last round (of $15mm). But with the ownership of 56%, founders take home $11.2 million. Not bad. Perhaps they turn the $20mm offer into a competitive process and get an exceptional outcome: $50mm. In that case, founders would get $28mm. Either is a great outcome for a founder. Obviously the $50mm one is better.

Let’s say that they turn down the $50mm offer and press on. This happens all the time – Maxiumus Greenwald recently posted that Warmly turned down an offer to press on with growing a big business. There are stories aplenty of venture investors refusing to sell. Digg, perhaps, the most famous recent one–where Newscorp offered $60 million plus a $20 million earn out, but the board refused. Things went south from there.

Back to our example. Let’s say the founders press on, and get through to Series D. I’ll try to avoid complexity, but the average Series D was ~$65mm in Q4, 2024 with a premoney of ~$600mm and for this example, let’s assume Series D investors get participating preferred rights.

A few years later, the company gets an acquisition offer for $665mm, the post-money valuation of the last round. At this point the founders are tired, ready to move on, and the market has changed. There’s no obvious path to a better outcome, so founders and the board agree to take the offer.

Because it is participating preferred, the D investors get their $65mm back off the top, so $600mm is available for distribution (and the Series D investors participate in that, too). The founders get 11.4% of $600mm, or $68.4 million. Yes, that’s better than $28mm. But how much time has gone by?

It was 7 years between that priced seed and the Series D. Nobody sells for exactly what they raised their last round at immediately–they struggle longer. Years longer. This offer was not the ideal scenario, it was another 3-5 years of struggle later so roughly a decade since that first offer.

If the founders had just taken their $28mm a decade earlier and invested at 7%, they’d have $51 mm. Not to mention any retention equity or juicier big company salary or benefits. And a better golf handicap.

This example is flawed because it focuses on a pretty good scenario. Plenty of Series D companies don’t make it–they get sold for $200mm. Or $0 million. At that point, the founders get less cash 9 years later than they would have if they sold early. But founders are an optimistic bunch, myself included. You don’t plan this out thinking “mid- to worst-case”. Maybe you should? The mid outcome early on ($20mm) sure beats most mid to worst case outcomes later.

Other thoughts for later posts

The data on hiring and employee grants is interesting. Basically–employees don’t get much equity anymore, after the first one. Hiring is also very slow. These may be related. Perhaps employees are joining when there is far less risk and the business is further along. Why give someone 5% if the business is already established?

There’s something else in that data. Nobody gets to $2.9mm ARR with zero employees. Well, maybe a few do, but it’s rare. There are either a lot of founders (Anthropic had 7) or contractors working without equity. I’ve noticed a lot of very successful “3 person companies” actually rely heavily on expensive and well staffed outside agencies.

Peter also talks aobut the AI trend towards fewer employees. The AI trend feels real. Yes, hiring fell because funding fell off in 2024. But now it feels very much like more is getting done with AI. That doesn’t mean zero hires–it means more is expected of each one. Why hire a marketer and a copywriter when you can just hire a marketer? Why hire an engineering manager and two engineers when you can just hire an engineering manager and zero engineers? Anyone whose job was to write data queries should feel very nervous: it’s far easier to ask ChatGPT to write a BigQuery query and iterate on it than it is to ask a human, who is possibly in a different time zone, off at lunch, or working on someone else’s query request.

I think we’re shifting to hiring people who know how to play the game, and then using AI to actually play the game. Versus needing both people in leadership positions who know the game and people in player positions to play the game. The implications go far beyond startupland.

Some conclusions

Figuring out GTM is critical early–and at all stages. You have more time between rounds to get it right, but the bar is much higher. There is more noise and more competition.

Dilution comes at a greater cost than ever. If you have a favorable offer early–when you own half or almost half–take it seriously. It’s exciting to read about so-and-so’s $500mm exit in TechCrunch, or picture yourself bragging to your fellow YC classmates (yes, it is bragging) but a $50mm exit now might actually be a better outcome for you even on cash terms, let alone the time value of money. And of your life as a founder–resting and vesting is easier than the grind.

We did not need Carta data to know this. This is not news. Mark Suster talked about it in 2011. But the Carta data makes it clearer than ever.

One thing I haven’t touched on much is alternative financing. There are new funding methods for later stage companies that can massively lower the cost of capital while increasing growth rate. Perhaps I’ll get to those in a future post… Any interest? Drop me an email.