Acquisitions Happen for Several Reasons
Acquisitions of startups have been quite a common occurring in the past year here in India. According to these serial entrepreneurs and investors these are some of the top reasons for an acquisition to take place.
Photo Credit : mobilemarketingwatch.com,
“October 2014 to September 2015 there has been no real funding happening. Investor sentiment turned notably pessimistic. Startups at seed level and pre-series A needed funding but couldn’t find or found it hard to find funding so the only option was to put themselves up for acquisition.”
It’s a normal course to take in business
‘’Not every startup will assume the same type of winning position and this sometimes results in acquisition of smaller companies by bigger companies, as a venture capitalist you see this happen often.”, said Navin Honagudi, Investment Director at VC firm Kae Capital. Kae Capital funded startup Myntra which was acquired by the bigger war-chested Flipkart in 2014. Added to that Navin says the investors are looking for exits in a faster time frame now, which could also be a reason for the expedited rate of acquisitions made.
It’s consolidation of position
Manoj Agarwal is a co-founder of Giftxoxo which acquired Actizone and acqui-hired BookMyInterest and Yipeedo for its founders and customer databases. He feels the negativity or the scarlet letter pinned to acquired and acqui-hired startups is a bit too much. “I have tremendous respect for the founders of our acquired and acqui-hired startups. For example with BookMyInterest it only made sense to consolidate our position as Giftxoxo and BookMyInterest were serving the same market, so we join forces, become stronger while expanding the business and market for experiential gift giving.”
Pranay Gupta, popularly known as co-founder of 91springboards feels there are two reasons why acquisitions happen. ‘’A. Most of the tech product companies in India didn't have deep enough balance sheets to afford acquisitions. Now, the startups are raising big money and many have the balance sheet allowing them to afford acquisitions. B. Companies are understanding that if they just have the "build" attitude, it does affect their pace of growth and innovation. They are now embracing "buy" too.’’
We see this trend all around us. In November 2015, Craftsvilla raised 34 million dollars in Series C from Sequoia India and Lightspeed Venture Partners in addition to Apoletto, Global Founders Capital and Nexus Venture Partners. By February 2016, they announced using these funds to acquire startups PlaceOfOrigin and Kae Capital backed Sendd. Similarly, Yatra just acquired mGaadi in June 2016; news of acquisitions have become commonplace.
It’s to avoid down rounds due to initial over valuations
“October 2014 to September 2015 there has been no real funding happening. Investor sentiment turned notably pessimistic. Startups at seed level and pre-series A needed funding but couldn’t find or found it hard to find funding so the only option was to put themselves up for acquisition. It was the alternative to going for down rounds”, explains Ajeet Khurana, angel investor and former CEO of SINE, Bombay IIT’s business incubator.
Pratik Seal, former Chief Marketing Officer for Housing.com believes what led to this trend of acquisitions and shutdowns is the initial overvaluation of some of the startups. ‘’You have no idea how many people ask me if I know anyone interested in acquiring or buying into their startups”, says Pratik. “Some startups were funded at very big values, which gave them immense room to offer discounts. Discounts never built customer loyalty especially not among Indian customers who will gun it for the lowest price. It is an absolute must to build brand equity.”
“Nokia was sold off because it wasn’t making money, but it still has brand equity. When it came time for the next round of fund raising some startups didn’t have any crucial assets like a large loyal customer base or record of profits to leverage. If it doesn’t even have the basic assets a typical startup looking to get acquired should have [like customers base, employees, IP, products], the next best thing one can do is try to get acquired or worse shut down.’’
Investors feel it’s time for an exit
For most VCs selling to an acquirer that was always their end game. Blume Ventures has many such exits. They earn their principal plus interest and move on to other investment opportunities.
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