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With Funds Drying up, Indian Startups Go on a Consolidation Spree!

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Funding Crunch

Finally the irrationality that had been driving the startup funding trends last year is showing some signs of sensibility now. VC’s have observed by now the negative implications of startups literally throwing money to gain market share. The irony is that the very sustainability of these startups is under threat now because of their ‘mindless’ indulgences in the past.

As a result, a new note of caution has crept into the minds of investors and series B and C round of funding is down by 25%-30%since last year. A major shake down is already taking place in the market, where a flurry of news on new mergers and acquisitions of startups have already begun to make headlines now. In this FY ending March 2016, mergers and acquisitions in the startup space had almost doubled, with the numbers reaching 146 transactions as compared to just 69 in 2014-2015, according to Venture Intelligence, data trackers.

One can clearly see a consolidation in the market where there were too many ‘me too’ ventures, unrealistic business models and a fiercely competitive environment. A pattern is emerging where better funded and larger startups are seeking strategic purchases to leverage themselves into the fast track and to shore up their capabilities to emerge stronger. A number of reasons are influencing this new dynamics propelled by a drought in funding and the maturing of many ventures into the next level.

1. Acquisition to take out the competition

With younger start ups finding it more and more difficult to find the sky high valuations their predecessors enjoyed,finding a buyer seems to be the only route to survival.It is better for them to continue in some measure than be completely wiped out. The country’s biggest internet companies were waiting for just such an opportunity to snap up some of these young start ups. In the long run only a couple of companies in each category will be around post this acquisition spree.

“2016 will be an excellent time for buyouts”, predicts Jain, cofounder of CarDekho, that has raised $75million so far and acquired many portals in the same segment. “The big players will get bigger and the small start ups will either die out or get merged into larger players,”adds Jain.

Take for instance the case of Ola and TaxiForSure merger, wherein the two entities were direct competitors in their field. With funding drying up for the on-demand-taxi-service segment post some controversies, TaxiForSure could not keep up with the discount war between Ola and Uber. As a result, Ola, that had deeper pockets, acquired TaxiForSure, making it India’s alternative to Uber. An even bigger merger born of necessity is that of Flipkart and Myntra teaming up to take on Amazon.

The latest in the series of such announcements was the merger of MakeMyTrip and Ibibo, two of the largest online travel platforms in India (in October 2016). Together, MakeMyTrip and Ibibo account for 50% of online hotel bookings (28% and 21%each respectively) in India and the merger will further help strengthen their position in the competitive market.

2. Acquisition to acquire technology and market access

Increasingly, after acquiring market share, larger startups are now focussing on acquiring technology and newer market areas which would take far longer and new skillsets to achieve, if they do it themselves.

Practo, is currently one of the best funded digital health apps in the world. In order to expand into a more comprehensive healthcare platform, the startup went on an acquisition spree. Additions of Fitho, Genii, and Insta Health, followed by the biggie Quikwell, to its portfolio recently will allow it to connect to hospitals, pharmacists, and fitness centres apart from doctors and clinics.

Similarly, Twitter acquired ZipDial, a mobile marketing business startup. Here customers could make missed calls to brands which would respond and engage with the callers. Twitter finds this platform a great tool to grow its user base and engagement in emerging markets.

3. Acquisition to speed up scalability

An acquisition also helps in escalating the product pace in the market. Facebook’s acquisition of Little Eye Labs, a company which builds performance analysis and monitoring tools for mobile app developers, is one such example. It is meant to give a step up to Facebook’s mobile access ambitions. Snapdeal’s acquisition of Freecharge is a big step in helping the company to introduce a more efficient payment capability which was essential to compete in the current e-commerce market scenario.

Most importantly, it is a positive sign for the coming years since it indicates that it is not necessarily large businesses that are buying out startups. It is mainly other companies in the startup space that are looking to consolidate their space in the market that are identifying opportunities in deriving greater synergies by merging with or acquiring other start-ups.

Conclusion

Startups that have been around for over five years are coming of age now. They are more confident and ambitious, have grown by leaps and bounds in terms of size, funding and experience. These startups stand to gain tremendously if they synergize their resources and efforts with other startups to deliver even greater value.

This year, Ola acquired Taxi for Sure for $200 million and Snapdeal acquired Freecharge for a whopping $400 million. It is a sure sign that this consolidation does not sound the death knell for the Indian startup industry. Such well priced buyouts will further boost investor’s faith in the Indian startup story. With startups on a consolidation spree, a new and improved entrepreneur and investor ecosystem is set to evolve, which will eventually help take the startup growth story to the next trajectory.

[This article has been contributed  Sanjay Bansal, Founder and Managing Partner at Aurum Equity Partners LLP]

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