AFTER AN eventful year that was considered a watershed — reportedly as much as $9 billion worth of capital was pumped into the Indian start-up ecosystem in 2015, equal to the cumulative funding in the 2010-2014 period for start-ups — the industry is showing big signs of consolidation. Feeling the pressure from investors, who are demanding more accountability for their money, several start-ups are now shifting focus from growth to efficiency in their businesses or merging with larger entities to secure their future.
Consider these figures: If there were nine merger and acquisition (M&A)/buyout deals worth $38 million in January this year, the figure stood at 16 with a deal value of $61 million in May, as per data provided by Grant Thornton India, a professional services firm. “In fact, in May, start-ups (along with IT and ITeS) ruled the sector trends, contributing almost 45% of the total deal value across sectors,” says Prashant Mehra, partner, Grant Thornton India.
Overall, the industry saw 47 M&A deals involving start-ups in 2016 (January to May), as compared with 23 in the same period a year ago (January to May, 2015), Grant Thornton India data reveals.
The pressure on start-ups to consider M&As is quite evident. After robust investments last year, fund managers are increasingly developing cold feet towards infusing large amounts of capital in the domestic
As per Grant Thornton India, the total amount of PE and venture capital (VC) investments in the country fell by over 8% in 2016 (YTD) when compared to last year. PE and VC firms invested $5,364 million this year (YTD), while last year the invested figure stood at $5,841 million for the corresponding period. In the case of start-ups alone, a report released by global research firm Goldman Sachs on June 15 says private equity funding in India declined by 25% year-on-year from $2.5 billion in 2015 to $1.9 billion in 2016. “As the industry is maturing, there are a lot more large potential acquirers today than before, like Flipkart and Freshdesk. The more interesting part is that in India, even the large public companies are warming up to talent and product acquisitions—like CaratLane being acquired by Titan. This is a very healthy trend for the startup ecosystem,” says Neha Singh, co-founder of Tracxn, a data analytics company that tracks the start-up industry.
A case in point is real estate portal CommonFloor, which was bought by online classifieds firm Quikr in January this year—a distress sale allegedly orchestrated by Tiger Global Management, the influential US-based hedge fund that is an investor in both, say reports. The deal was among the several signs that showed start-ups are consolidating in India amid slowing venture capital funding and growing competition.
Similar is the story of Mumbai-based food ordering platform TinyOwl—once considered a blue-eyed start-up child. Failing to raise further funding after last raising $7.5 million from investors Sequoia Capital and Matrix Partners in October 2015, the troubled start-up was acquired by hyperlocal on-demand logistics startup Roadrunnr early this month.
On the buyers’ side, “every deal that we have observed in the past six months had some strategic benefit for them, either in the form of expanding their services/reach or complimenting their existing product portfolio with the right fit”, says Rishabh Lawania, co-founder of Xeler8, a start-up research platform.
In April, Kishore Biyani-led Future Group acquired FabFurnish — the first acquisition of an internet store by the group—apparently to expand their services online. Similarly, Sequoia-backed Craftsvilla’s three acquisitions of gourmet online food e-tailer PlaceOfOrigin (February), Mumbai-based logistics start-up Sendd (February) and women’s clothes rental platform F2SO4 (April) “helped them to strategise their expansion to ethnic gourmet food, efficient delivery mechanism and post-purchase demand, respectively”, adds Lawania. Also, recently, fashion e-commerce aggregator Voonik acqui-hired Zohraa, a marketplace for designers and boutiques; Styl, a salon and spa booking app; and Picksilk, an online silk store—all of which helped them to launch their new product Volara, a portal for premium boutiques and designers. In early February, Amazon-backed home services provider Housejoy grabbed two smaller entities—fitness technology start-up Orobind and laundry service provider Mywash. This was a case of a global marketplace gobbling up niche operators.
Analysts say the M&A trend will continue. “We strongly believe that the momentum will continue to rise. This quarter has already seen around 40 deals till now and we expect an addition of five to seven deals anytime soon. Guessing any big-ticket deal is a bit dicey but the silence of the e-commerce segment signifies a bigger deal soon,” offers Lawania of Xeler8.