Rise of vibrant private market for emerging businesses? Flipkart, Snapdeal,Practo investing in or buying startups
The lack of exit opportunities for investors and founders through acquisitions has been a major topic of concern in the Indian startup ecosystem.
He needn't have worried.
The company's product, already being used by online marketplaces such as Snapdeal, drew a lot of interest from Indian internet companies looking to beef up their mobile applications.
Mendiratta got one term-sheet from a VC fund, and buyout offers from two of India's largest online retailers.
"The (buyout) offer was a better bet than building out the company with a sub-optimal venture capital round that would put us on a long road to survival," said Mendiratta.
He sold his two-year-old startup to Flipkart earlier this year.
The deal, pegged at $5 million (about Rs 30 crore) according to industry sources, gave the investors in Appiterate an exit in less than 12 months, and the founders an opportunity to build something new.
Mendiratta has since started a consumer lending startup, Loancircle, after quitting Flipkart a few months ago.
Well-funded Indian internet companies are increasingly relying on acquisitions to add capabilities that can fuel growth, making for a vibrant private market in the startup ecosystem, significant especially in the absence of public share sales by technology firms.
Deals are being struck to enhance a product, diversifying into new areas or acquire talent, often serving to consolidate fragmented or hyper-competitive segments.
The number of such deals has tripled from 18 in 2013 to 54 this year, with the total value increasing from $509 million to $656 million, according to data from startup research platform Tracxn.
The lack of exit opportunities for investors and founders through acquisitions has been a major topic of concern in the Indian startup ecosystem, unlike in Silicon Valley where companies like Facebook, Google, Cisco, Salesforce and Intel are active acquirers of startups.
Recently, though, companies such as Flipkart, Snapdeal, Ola, PayTM, Housing and Practo that have raised multiple rounds of financing have become active investors and buyers of smaller startups, pointing to early signs of a developing M&A market.
"The only exit option that entrepreneurs and investors earlier had was an IPO, but now with M&A everyone can see returns, which is good for the ecosystem," said Shashank ND, cofounder and CEO of healthcare company Practo. “They don’t have to wait for 8-10 years to realize value.”
Shashank predicts deal-making will increase as Indian startups compete with global rivals in domestic and overseas market, and don’t have five years to build a product themselves.
Practo has closed four acquisitions since April and is scouting for more deals.
Others are equally bullish on deal-making.
"I am more excited about the next 12 months than I was about the previous 12 months," said Nishant Verman, director of corporate development at Flipkart.
Since Verman joined India's most valuable online marketplace in July 2014, he has built a team of eight to focus on acquisitions and strategic investments. Flipkart has closed more than 10 deals since.
Experts say these companies are in some way emulating the Chinese internet triumvirate of Baidu, Alibaba and Tencent—collectively known as BAT—that have poured billions of dollars through investment and acquisitions in the local ecosystem.
While Flipkart and Snapdeal are focusing on a mix of acquisitions and investments, startups like Practo and Housing are focused on purchasing other firms, and Delhivery, Amazon and Ola on investing.
Ecommerce and payments firm Paytm, which recently raised $680 million from China’s Alibaba, plans to deploy as much money as a venture capital firm in startups.
"We are planning to invest $150-200 million in startups over the next 18 months, especially in areas of interest like logistics, in addition to M&A opportunities," said Kiran Vasireddy, senior vice president at Paytm.
Several Indian internet companies now have dedicated teams constantly evaluating deals. Even as these companies explore large M&A deals, such as Snapdeal’s acquisition of Freecharge and Ola’s purchase of TaxiForSure look at building billion-dollar companies.
"These tech companies have started reaching a point where it has become meaningful for them to acquire. And deals below $20 million, which also includes acqui-hires, will be 80% of the volume," said Abhishek Goyal of Tracxn. This is being driven by a growing realisation that everybody is not going to or even look at building billion-dollar companies.
"In the Valley, there are several smaller opportunities in the $20 million to $50 million range and these make for good acquisitions, unlike in India where there used to be a 'Zero or Hero' mindset," said Tarun Davda, director at Matrix Partners, who see this changing.
With the slowing in fund raising, a lot more Indian entrepreneurs are likely to begin exploring M&A as an option.
This could bode well also for investors, providing them a healthy exit pipeline. Several venture capital funds are set to complete their 10-year investment lifecycle in the next 2-3 years.
"Globally, M&A dollar values are between 3-4 times of IPO plus private placement, especially in mature markets like the US and Israel. In India, it is less than 1x," said Nitin Bhatia, managing director at investment bank Signal Hill.
"This situation clearly has to change. The tech IPO market is practically non-existent, and hence, tech M&A market is bound to scale up."
All deals may not work out as planned. While some acquisitions like Ver Se Innovation’s purchase of Newshunt in 2012 gave the company a platform to transform the business and build a new product, deals like Fashionandyou’s acquisition of Urbantouch set the company back because of a cultural mismatch.
"Entrepreneurs who now start up are willing to work more together. But founders of acquired companies have to be given control," said Shashank.
"In Practo, we have no bureaucracy and have a culture of ‘startup inside a startup’."