Software product firms catch investors’ eye
Average M&A deal size involving an Indian software product firm is only $11.1 million as compared to $147.3 million and $99.6 million in the US and Israel
Bangalore: Indian software product companies are beginning to attract funding from acquirers, and venture capital and private equity firms, a trend that could improve the software product ecosystem in India, according to the India Technology Product M&A Industry Monitor report put out by iSpirt, a grouping of around 30 technology companies that seeks to make India a technology products hub, and investment bank Signal Hill.
The study, however, points out that the average M&A deal size in India is very small and that many venture capitalists and private equity firms that invested in product firms have been unable to find a so-called exit—essentially a sale of their stake either to another investor or during an IPO.
The classification used by iSpirt and Signal Hill breaks up software products into B2B or Business to Business software, mobility products, and Internet and consumer/e-commerce. In the four years considered by the two, 2010-2013, the last predictably accounts for much of the activity in both M&As and venture capital and private equity investment, although there is increasing incidence of investments in B2B software firms as well as local technology product firms.
India has seen 476 deals involving private equity and venture capital firms in this period, involving an investment of $3.04 billion (around Rs.18,300 crore). However, it has seen only 141 M&As involving an investment of $1.26 billion. The reasons: Indian product start-ups often “do not show up on the radar of acquirers”; the market for software product IPOs in India is “nascent”; local entrepreneurs are not ready; and there are few, if any local acquirers.
The average size of the M&A transaction involving an Indian software product firm is only $11.1 million, said the report, as compared to $147.3 million and $99.6 million in the US and Israel.
“The deal value of India is small because many of these acquisitions are small Indian companies acquiring other small India-specific product companies, while Israel and US, are known to build large global products that are acquired for bigger sums,” said Sanat Rao, who leads iSPIRT’s M&A Connect Program, an initiative which attempts to increase global visibility for early-stage home-grown products firms.
“The main factors that hinder acquisition of Indian companies by foreign acquirers are that there is not much visibility of Indian companies abroad, there is very little scope for partnerships with big firms abroad, Indian entrepreneurs are seldom ready for such big moves, and products are not built for international markets,” added Rao.
Some of the key inbound deals include Salesforce acquiring DimDim for $31 million in January 2011, Disney UTV buying indiagames.com for $80-90 million in October 2011 and Facebook acquiring Little Eye Labs for approximately $11 million in Jan 2014.
Though most experts use exits and acquisitions to measure the maturity of an ecosystem, some believe that they shouldn’t become the main focus of India’s growing industry.
“We must expose our start-ups to the world, but not get fixated on M&As, because when founders start building something substantial, M&As happen automatically,” said Ravi Gururaj, chairman, Nasscom Products Council. “The attitude should be more about companies that can be bought, not sold.”
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