Bangalore: India has the worst record in terms of mergers and acquisitions (M&A) of early stage software product start-ups, limiting a key option for investors to sell their stakes in these companies.
India has a far worse ratio of M&A exits and private equity and venture capital (VC) investments into early-stage product firms as compared to other mature start-up ecosystems such as Israel and the US, according to data compiled by think tank iSpirt and investment bank Signal Hill Capital Group Llc.
iSpirt, or the Indian Software Product Industry Round Table, was formed last year by 30 software firms and individuals to promote India’s fledgling software products industry.
Despite India having far more early stage firms than a thriving start-up ecosystem such as Israel, Indian software product start-ups are finding it difficult to gain visibility among the world’s top technology firms.
India has 2,123 software products start-ups, as compared to 651 such start-ups in Israel, according to AngelList, which tracks the progress of start-ups globally.
India’s ratio of exits in software products start-ups stands at 1.1 times the amount of investments, while Israel’s ratio stands at seven times, according to the Signal Hill-iSpirt study. In the US, the ratio of exits to investments is at over five times. India’s ratio also includes a boost from acquisition in the IT services sector.
Experts say iSpirt’s product industry monitor report is the first attempt in several years to meaningfully track investments and exits in India’s software products sector, and is part of a broader attempt to improve valuations and increase visibility for early-stage homegrown products firms.
“To build momentum we need a string of positive outcomes—substantial VC investments, M&As and IPOs (initial public offerings)—that will give the industry much-needed validation and a boost of confidence," iSpirt said in a statement on Tuesday.
India’s software products sector has the potential to clock $100 billion in revenue by 2025, fuelled mainly by domestic demand for homegrown software products, the study says.
The industry is currently dwarfed in size by the country’s information technology (IT) services sector, which counts the likes of global multinational giants such as Citigroup Inc. and General Electric Co. as top customers.
Of the $108 billion that the Indian IT industry generates every year, software products contribute roughly about $2 billion, according to lobby group National Association of Software and Services Companies, or Nasscom.
iSpirt was formed a year ago by homegrown product firms such as Tally Solutions Pvt. Ltd and InMobi, amid a growing sentiment that the interests of the country’s software products ecosystem was not being adequately represented by larger lobby groups such as Nasscom.
Ravi Gururaj, chairman, Nasscom Products Council, said M&As shouldn’t be the main measure of India’s software products industry.
“I think M&A should be only one of many measures by which we benchmark our industry’s progress. In my opinion it’s vastly more important to focus on improving quality of our software products and ensuring higher levels of real innovation and differentiation are being embedded into our products," said Gururaj.
“Benchmarking using M&A is the equivalent of measuring a cricket team’s performance merely on the number of sixes hit which we know is an incomplete and inadequate measure at best. Focusing too closely on M&A is premature at this stage," he said.
In October, iSpirt signed a partnership with US-based boutique investment bank Signal Hill Capital to kickstart acquisitions of Indian software product start-ups by large Silicon Valley-based technology firms such as Google Inc.
Last month, social media giant Facebook Inc. bought Indian products start-up Little Eye Labs for an undisclosed sum. On Tuesday, iSpirt said M&A activity will increase and at least 10 such acquisitions of software products will take place this year.