Investors Predict a More Pronounced Consolidation Scenario in the Startup Ecosystem The Indian startup scene would likely experience further consolidation from the perspective of investors. This happens as a result of the market's increasing rivalry and investors' ongoing search for methods to minimise risk and increase returns.
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Only four of the 23 Indian startups that reached unicorn status in 2022 (a valuation of USD 1 billion or more) have reported profitability, according to Tracxn, which is surprising. This suggests that despite their rapid growth and market dominance, the majority of these highly valued startups are still losing money.
Startups that struggle to make money or raise enough capital, usually due to factors beyond their control like the Covid-19 pandemic or economic downturns like recessions and inflation, typically shut down completely, change their business models, or are acquired by larger companies.
An illustration of this is NestAway, a platform for renting out homes that was once stunningly valued at USD 227 million but is now being acquired by Aurum PropTech for just USD 10.9 million. The acquisition of NestAway has been approved at an astonishing 95% valuation reduction. This startling fall highlights the significant challenges the housing rental market experienced in the wake of the Covid-19 outbreak, which affected market dynamics for almost every sector.
Funding for Indian startups fell by almost a fifth in the first five months of 2023 compared to the same period last year, with no end in sight to the worsening financing winter.
According to Prashanth Prakash, Accel's Founding Partner, merger and acquisition activity will pick up in the coming months. He forecasts that funding sources for late-stage companies would be scarce for the next nine to ten months.
"Some late-stage companies will need to reset their business models, including a few which will need a total reset. We'll see a lot of startup consolidation in the upcoming six months," Prakash said at an industry event in Bengaluru on June 1.
As the startup environment continues to develop, the consolidation scenario would become more prevalent in the coming years, commented Gaurav VK Singhvi, Co-founder at We Founder Circle. By combining or buying similar firms, this strategy "offers investors opportunities to improve their portfolios and maximise returns, reducing fragmentation in the industry and strengthening market dominance."
Why consolidation occurs
The funding winter, which is expected to last for a few more quarters, will fuel the wave of consolidation in the startup ecosystem, as per Rakesh Gupta, Founder and Managing Partner of LoEstro Advisors.
"Given the macro challenges, smaller companies that need cash to sustain and grow are unable to obtain finance; for them, consolidation becomes the only means of survival. The timing is opportune for larger firms with cash on their balance sheet to buy strategic businesses that fit into their game plan because valuations have tapered and assets are also available," he said.
The sectors that will be most impacted
Ecommerce, fintech, healthtech, and food delivery are among the sectors that will be significantly impacted by this trend of consolidation, Singhvi highlighted. These industries have experienced fierce competition and rapid growth, which has made the market crowded. Consolidation in these sectors can help weed out weaker players, foster collaboration, and enable stronger market leaders to emerge.
"Other disruptive sectors like transportation, logistics, and edtech are also likely to see increased consolidation as startups aim to leverage synergies and gain a competitive edge," Singhvi stated.
How it will impact the ecosystem as a whole
The overall ecosystem, according to Singhvi, will be influenced in a number of different ways. Consolidation through mergers and acquisitions strengthens the startup ecosystem by combining resources, expertise, and networks from different companies. For the surviving players, this promotes a more stable and sustainable environment, spurring innovation and growth.
"Investors that support consolidated firms with stronger market positions enjoy enhanced efficiency and decreased risk. Additionally, the consolidation trend may draw more attention and investment, resulting in a more developed and investor-friendly ecosystem," he said. "Profitability will rise, and we'll witness the emergence of more fundamentally strong startups. In the end, consolidation may result in the development of novel goods, services, and technology for the good of society."
While cost savings and innovation are advantages of consolidation, Co-founder of Agility Ventures Dhianu Das emphasised that concerns about lower competition and potential monopolies necessitate cautious navigation for sustainable growth.
As a result of the consolidation, bigger, more powerful enterprises will emerge in some areas, perhaps reducing the number of smaller startups. This can make it harder for new businesses to enter the market, but it might also lead to a more stable and established one. According to Ashish Bhatia, Founder and CEO of India Accelerator, consolidation may also give investors more exit possibilities if mergers and acquisitions increase in frequency.