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Deals Galore – Why Are Startups In India Opting For Acquisitions Amid Dry Funding?

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Deals Galore – Why Are Startups In India Opting For Acquisitions Amid Dry Funding?
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A startup is an entrepreneur’s baby. Why would it like to part with it? There could be several reasons under healthy circumstances. Talent and product acquisition, increasing market reach and improving operational efficiencies, are some of the most common triggers for a deal.

However, even as funding turns dry and there is a never ending cry of negativity in the environment, the startup ecosystem is witnessing a string of deals. With several miniature-sized deals coming in daily, the hottest and most-talked about deal was the Tiny Owl and Roadrunnr deal, earlier this month.  Post the merger, Tiny Owl has been making several stringent modifications to its business model, which goes to show the gloominess of the scenario.

Empty pockets

In today’s scenario, when a startup is unable to raise funds they often see the benefit of getting acquired, rather than completely shutting shop. “The stakeholders in the company make a conscious decision to cash out even if it is at low value or trade the stock in their company for stocks in another company that holds better prospects,” Suresh Shanmugham, co-founder and managing partner of Saama Capital.

"Follow on funding has been a challenge for startups whose revenue models have not become clear and sustainable despite multiple round of funding. So a lot of Acquihires and stock swapping is happening among startups," Vinay Rao, venture partner at Venture Factory.

A total of $9.4 billion in funds has been injected into this space since January 2015 to 26th May this year according to Tracxn data.

Innovation

At times the quality of a particular technology triggers the possibility of the company getting acquired. When a startup sees the opportunity in increasing its market reach by using the technology of another company, it prefers to buyout the technology. In scenarios like these, the technology is the sell-out. In today’s scenario, a technology could be an asset to the company, if it helps lower costs and increase efficiencies.

Saama Capital’s Suresh said, “Snapdeal decided acquiring Freecharge was an important strategic move to bring on a payment capability that they felt was needed to compete more effectively in the ecommerce market.  Snapdeal offered a price for Freecharge that the promoters and investors felt was attractive enough to become part of Snapdeal and continue to build and grow their business

According to Sid Talwar, Venture Capitalist at Lightbox, an acquisition at times helps a startup take a product to market quickly. 

Fazal Ahad, Director at Mersis Advisors said that among other reasons, when a company desires for a particular technology or a product and realizes that it would take them some considerable amount of time and money in creating the same, it opts to buyout a company to suit the purpose.

"Recently lot of good companies got acquired which were not in position to scale but their tech part was certainly good for acquirers, like Twitter acquired Zipdial, Facebook acquired Little Eye Labs, similarly companies got acquired by likes of Yahoo, Google and even by Flipkart, Snapdeal, Inmobi etc," Anil Joshi, Managing Partner at Unicorn India Ventures said.

Fasten growth, lower costs

At a time when startups are on a mission to cut down costs and churn out real numbers, companies are forced to make acquisitions to serve that purpose. In most cases, common investors catalyse this process – just like in the cases on Tiny Owl and Roadrunnr. 

“Startups are poised for growth and scale and need to be market leaders to deliver the promise to their shareholders, hence the organic growth path becomes too risky as tables can turn very fast with one funding round. Your target acquisition can all of sudden be in a position where they are trying to acquire you or they have fresh capital to compete fiercely with you and slow you down. Acquisition can deliver faster growth, lower the cost of acquiring new customers and remove unsustainable pricing pressures,” Jaspal Sarai, co-founder of Jaarvis Accelerator.

 

Total Acquisition in the India tech startups  according to Tracxn: 195 for the time period (1st Jan 2015 till 27th May 2016)

Top Acquisition Deals:

Company Name

Company Status Details

Acquired Amount

TaxiForSure

Acquired by OlaCabs 2015

$200M

CommonFloor

Acquired by Quikr 2016

$200M

FreeCharge

Acquired by Snapdeal 2015

$400M

 

Eat out your competitor

When two lions cannot exist in the same jungle, they decide to join hands. In the case of Flipkart and Myntra, the situation was more like two kingpins of the industry joining forces to battle it out with U.S. giant Amazon, similarly in the case of Ola and Uber.

Industry experts beieve that if the ecosystem continues to experience funding constraints and operational challenges, mergers and buyouts will continue to make headlines !

 

Edition: December 2016

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