Acquisitions as an engine for exits

Most of us are well aware of Facebook’s purchase of WhatsApp or Instagram; Google’s purchase of Nest; Microsoft’s purchase of Github. By comparison, since Indian companies have been focused on services rather than products, very few acquisitions have taken place. 

Vivek Srinivasan Mar 08th 2019 A-A+
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When Myntra got acquired by Flipkart, I was one of those people who said, “The VCs are just engaging in buying and selling to themselves.” Reality is a little more complicated.

For any investor, there are multiple forms of exits that are possible. IPO is one of them; strategic investments, acquisitions and share buy-backs are others. I had made a poor assumption that success is only when the company reaches an IPO.

In the US, according to the IVCA, over 90 percent of exits since 2011 have been in the form of acquisitions or buy-outs. USA sees about 5,500 investments each year. If less than half of these reach some kind of exit - less than 250 make it to IPO. 

Come to think of it, it is only natural. 250 IPOs is more than one a day! (Leaving out weekends)

... Most founders in India are unwilling to sell, especially when their startups are doing well and moving up quickly. Their willingness rises when the company is embattled, at which point few suitors are ready. Much like Myntra’s sales to Flipkart, if Snapdeal and Flipkart worked together rather than against one another, would Amazon have had it as easy as they did?
Vivek Srinivasan
Co-Founder and Tech Evangelist, Startups Club

Nevertheless, the other 2750 need exits as well. If there are no exits coming around, the investors would no longer have the interest or the appetite to make venture investments.

A tale of 2 eco-systems

We compared numbers to understand what was happening in India vis-à-vis the USA. This would also offer us some insights into the areas where more focus would be required in the long run.

Across the entire economy, US sees about 14,000 acquisitions each year. India sees about 250 such deals in a year. The chasm is wide. 

“Indian startups have uniquely stayed in India. It is only in the last couple of years that startups are beginning to stray beyond our borders. This in turn also has meant that some of the cash rich companies in the west have not even heard of these startups. This restricts the opportunities that come towards them.”

India is already clocking 700-800 investments each year and this number can be expected to rise in the coming years with the increasing penetration of internet and digitization of the economy. 

Most obviously, acquisition activity needs to increase considerably in order to make all of these investments viable. 

The next question was - Who drives these acquisitions in the US?

Tech companies understand tech and therefore are more willing to buy other tech companies. 

Most of us are well aware of the headline making acquisitions that take place, such as; Facebook’s purchase of WhatsApp or Instagram; Google’s purchase of Nest; Microsoft’s purchase of Github. While these are much talked about and well publicized. There are hundreds of other acquisitions that take place each year that nobody speaks about.

In September 2018, Google turned 20. In this time, the company has made well over 200 acquisitions; 218 to be exact as of Dec 2018. Microsoft has similarly made over 217 acquisitions and only 25 of these were made before 1996. Facebook, which will turn 15 this year has already acquired 69 startups and I am sure you would have heard about some of them. Apple has made 99 acquisitions; Intel 91 and HP 127. 

Close to 60 percent of acquisitions made by the companies mentioned above are of businesses (startups) that are in the first seven years of their journey.

By comparison, since Indian companies have been focused on services rather than products, very few acquisitions have taken place. Infosys, which is close to being a 40-year-old company has made 10 acquisitions. Even product companies like MakeMyTrip, which is close to 20 years old, has made only 4 acquisitions. Snapdeal by contrast has made 13 acquisition, while Flipkart and Paytm have made 11 acquisitions each. 

Where does the difference lie?

Service Focus - India has traditionally being the IT services capital of the world and our businesses have not really focused a lot on building products. This has meant that there have been very few Indian corporate buyers. The numbers speak for themselves. These are not cash strapped companies.

Unwillingness to sell at growth stage – Most founders in India are unwilling to sell, especially when their startups are doing well and moving up quickly. Their willingness rises when the company is embattled, at which point few suitors are ready. Much like Myntra’s sales to Flipkart, if Snapdeal and Flipkart worked together rather than against one another, would Amazon have had it as easy as they did?

Poor corporate valuation – In the US, corporates tend to look at multipliers that they will be able to garner by putting their sales force behind the product. Instagram is a great example – Their product for advertisers was not even ready when they were acquired by Facebook for USD 1 Billion. Facebook knew what they could do when their ad product was combined with Instagram. Indian companies do not evaluate a startup in such a fashion.

Global markets, global opportunities – Indian startups have uniquely stayed in India. It is only in the last couple of years that startups are beginning to stray beyond our borders. This in turn also has meant that some of the cash rich companies in the west have not even heard of these startups. This restricts the opportunities that come towards them.

Vivek Srinivasan is the Co- Founder and Tech Evangelist, Startups Club

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