Funding, product-market fit, growth hacks, being agile, scaling—entrepreneurs obsess about all these and more when they start up. Exits are far from their thoughts, till they suddenly find themselves in a situation where they’re scrambling to get their books in order for an acquisition. It’s best to have an open mind, even if one can’t predict how a startup will fare.
Big deals like Walmart’s $16 billion acquisition of Flipkart in 2018 are as rare as the Comet Halley. Last year’s biggest acquisition was of Yatra by Ebix for $338 million. Most deals are much smaller. Data tracker Tracxn puts the median value of startup acquisitions last year at $20 million, taking into account only the ones where the acquisition price was disclosed.
Exits often happen at an early stage for small, undisclosed sums. CB Insights research shows nearly half of all exits last year were of startups that hadn’t gone beyond seed or series A funding.
Reasons to exit vary. For some, it’s an opportunity to take the money on the table for founders, employees and investors, while placing the innovation in an environment where it can go mainstream and grow bigger. For others, it may just be a better outcome than the startup shutting down or becoming a zombie. Some are acqui-hires, where a startup is acquired for its tech talent rather than a product or service.
“If you’re not able to build a business as a standalone profitable organization or attract the kind of capital needed for a venture funded business, there’s no shame in exploring opportunities in mergers and acquisitions," says Rohan Malhotra, partner at Good Capital. “Often a missing piece that a small company provides is just what a large company has been looking for and is often beneficial for all the shareholders across the transaction."
MAKING MONEY FLOW
Exits are important for the startup ecosystem because investors get returns and VC money can flow back to support new entrepreneurs. The Flipkart deal did a lot in that respect, but mid-sized deals are just as vital as outliers.
Many of these represent strategic business acquisition or consolidation. For example, last month Bengaluru-based digital payments startup Instamojo acquired Gurugram’s SaaS startup GetMeAShop, which helps kirana stores get online. One of the significant inbound deals last year was Cisco’s acquisition of Bengaluru-based customer analytics startup CloudCherry, which had raised $16 million in seed and series A funding.
Reliance Industries has taken the lead in corporate acquisitions of startups. Fashion etailer Fynd, website creator Nowfloats, hyperlocal restaurant delivery service Grab, fluid dynamics software maker Sankhyasutra Labs and drone maker Asteria were among its acquisitions last year. Also, an edtech startup it had acquired earlier, Embibe, merged with personalized digital learning app Funtoot. Reliance Jio also acquired Haptik for its AI virtual assistants.
Apart from mergers and acquisitions, early stage investors also get exits from follow-on funding rounds when larger VCs come in. “Investors need liquidity which often comes from secondary transactions," says Neha Singh, co-founder of Tracxn.
SoftBank’s mega investments in India, starting in 2014, moved the needle the most, preceded by US’ Tiger Global. But the WeWork implosion has put SoftBank on the back foot as it had to write off $4.6 billion from its investment in the office space company. This has put a spanner in the works of late stage deals in recent times, although Indian startups raised a record $14.5 billion last year, according to Tracxn. That’s more than three times the $4.3 billion invested in the slowdown year of 2016, which followed the exuberance of the previous two years.
THE LOCAL CYCLE
“Like investments, exits have also improved along with the quality of entrepreneurs," says Manish Singhal, founding partner at Pi Ventures. He cites last week’s example of customer engagement platform Freshworks acquiring AnswerIQ, which offers AI-assisted self-service. “The most interesting piece that has moved in the last couple of years is that Indian startups are buying Indian startups," he says.
The local cycle of investment and exit would reduce dependence on external factors going forward. “What excites me is that people in India are starting to appreciate technology developed in India. That’s why local acquisitions are happening," he says.
Singhal doesn’t worry about a large number of acquisitions being small pops rather than high value deals. “As an angel investor, if I get a small exit, I will put the money in some more companies. Anything that circulates money in a rather constipated investment scene in India is good for the ecosystem."
Malavika Velayanikal is a consulting editor with Mint. She tweets @vmalu.