Startup M&A wave may spill over to new year | The Financial Express

Startup M&A wave may spill over to new year

Between 2018 and 2020, the number of M&A deals remained below 164, exceeding the 200-mark in 2021 and 2022. In CY2022, grocery delivery app Blinkit received the highest acquisition price of $568 million paid by Zomato.

Startup M&A wave may spill over to new year
“Investors and founders are already anticipating 2023 to be an even tougher year and may proactively look for deals because the longer you wait, the higher the value erosion will be,” Rikhye added.

With 230 merger and acquisition (M&A) deals in 2022 so far, India’s tech startup segment continues to witness consolidation. With about a month to go, the number of transactions is slightly behind the 242 reported in 2021. But experts believe the funding winter could push many more of the smaller startups to sell out to larger peers. While many of them have revamped their cost structures by opting for retrenchments to improve the cash runway, many startups are bracing for down rounds next year.

Investors active in the startup space indicate that 2023 could see more consolidation as more small to mid-stage startups may find it harder to raise cash on favourable terms. Manu Rikhye, partner, Merak Ventures, said the funding crunch of 2022 will drive more M&A activity next year as both founders and investors may rush to protect existing valuations.

“Investors and founders are already anticipating 2023 to be an even tougher year and may proactively look for deals because the longer you wait, the higher the value erosion will be,” Rikhye added.

Smaller startups, especially in the consumer space, have ended up becoming acquisition targets for larger unicorns like Byju’s, Vedantu, CRED, Zomato and others. Larger corporates such as the Tatas, Jio, Reliance, TransUnion, Asian Paints and Aditya Birla have also cashed in on the distress to snap up weaker players.

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Most of these acquisitions have provided meaningful exits to venture capital (VC) and private equity investors. According to startup tracking platform Tracxn, angel investment firm LetsVenture made around 8 exits in CY2022, VC firm Sequoia Capital made 7, and angel fund Indian Angel Network made another 7 exits. Large corporates, including Jio and Aditya Birla Capital, made 6 and 4 exits, respectively, Tracxn data showed.

Between 2018 and 2020, the number of M&A deals remained below 164, exceeding the 200-mark in 2021 and 2022. In CY2022, grocery delivery app Blinkit received the highest acquisition price of $568 million paid by Zomato.

The second most valued acquisition in the year was that of Bengaluru-based compliance management platform Fintellix by TransUnion for $515 million, while the third most valued acquisition was reportedly made by US-based Thrasio when it paid $507 million to acquire Gurugram-based consumer durable brand Lifelong Online.

An acute funding winter, coupled with multiple global factors including rising inflation, high interest rates and the Russian-Ukraine war, forced Indian tech startups to take cover as they cut down on large spending and trimmed thousands of jobs.

Neha Singh, co-founder and CEO of Tracxn, said despite a stalled year for funding, investor exits improved by a large margin in CY2022 in comparison to the past couple of years, largely due to a spike in M&As and domestic IPOs. “While a majority of the M&As last year were made due to the high availability of cash among large unicorns and tech companies, this year it is different. Some of these M&As in 2022 have been a survival tactic, especially for smaller companies that got acquired due to the ongoing funding crunch,” Singh added.

While ongoing talks between startups for potential M&As have been just as active as ever, some of them haven’t materialised, putting pressure on both investors and founders involved. Earlier this year, PayU terminated its $4.7-billion deal to acquire payments company BillDesk in what was understood to have been one of the largest M&A deals in the fintech space. This has also caused a ripple effect and other smaller acquisition plans are being relooked at, investors in the space said.

“Investors have already adjusted themselves to the new, lower valuation times, but sellers are yet to align with that reality because of which we have seen a lot of deals not materialising and the trend is likely to continue at least till the end of 2022,” an M&A expert at a large private bank said.
An early-stage investor requesting anonymity added that a deal as large as PayU-BillDesk falling through also steals the will of founders to acquire.

“Now, when an IPO opportunity — which is regulated — opens up, it will look like a better exit option than an M&A, which could be fraught with uncertainties,” the investor mentioned above added.

Vikram Chachra, founding partner at 8i Ventures, a fintech investor, believes that in the near future, startups that are in the market to be sold “will make sure to bake in a clause that makes it very costly for a buyer to walk away last minute and won’t be very vocal about it, thereby bettering the chances of a deal going through”.

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First published on: 08-12-2022 at 06:10:00 am
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