Category Archives: M&A

Inadequate liquidity for Indian Startups

Recently was having a conversation with a Private Equity friend and was trying to explain the challenge that has captured my imagination and full attention, ie exits for software product startups in India. He felt that the data about the exit structural deficit that I was trying to point out felt too bearish to be true. My counter argument was that my intent is not to sound bearish but instead be a realist, after all acknowledgement of a problem is first step to solving one.  Post that conversation I thought should put this data out publicly so that through crowdsourcing can at the very least improve my understanding if it is off by wide margins.

India VC vs Exits 


India Software Products VC  (in $m)

2012 2013 2014 2015 2016*
$801.00 $1,021.00 $4,883.00 $6,526.00 $2,419.00 $15,650.00
147 123 173 330 223 996

India Software Product M&A  (in $m)

2012 2013 2014 2015 2016*
$205.00 $308.00 $799.00 $1,350.00 $1,339.00 $4,001.00
43 39 59 137 113 391

Source iSPIRT M&A Report https://www.slideshare.net/ProductNation/india-technology-product-ma-industry-monitor-an-ispirt-signalhill-report?ref=http://startupbridgeindia.com/

Israel Software Product VC  (in $m)

2012 2013 2014 2015 2016*
$1,878.00 $2,404.00 $3,422.00 $4,307.00 $4,775.00 $16,786.00
567 667 684 706 659 3283

Israel Software Product M&A (in $m)

2012 2013 2014 2015 2016*
$8,149.00 $3,704.00 $4,493.00 $6,462.00 $6,782.00 $29,590.00
74 81 109 98 86 448

Source IVC Report, http://www.ivc-online.com/Portals/0/RC/Survey/IVC_Q4-16%20Capital%20Raising_Survey-Final.pdf

Above data indicates that Israel was able to generate 1.8X of the money that went in while in India in the same period only 0.2X. The right comparison is exits from 2012-2016 with VC investments from 2005-2009, iSPIRT report does that comparison but results are even less encouraging.

Exits follow a power law, however in India it seems like a power law’s power law.

Not only is the volume of exit is challenge but also the structure, any ecosystem exits follow a typical power law. For every $1 bn exit, there are ten $100m deal, for every $100m there are hundred $10m deals.

Top 7 deals in India account for ~$2.5b of the $4b in exit. About 250 of 391 deals total a deal volume of $97m which means the size of an acqui hire i.e in long tail is about 0.5m, which is inadequate even for an angel investor. Lack of many $10-100m deal means there is a missing middle of the long tail.

Source iSPIRT M&A Report https://www.slideshare.net/ProductNation/india-technology-product-ma-industry-monitor-an-ispirt-signalhill-report?ref=http://startupbridgeindia.com/

 

 

Startups are bought never sold

Like many others I have used this aphorism in every M&A Connect conversation in last 8 months.  It sounds intelligent, pithy making some one saying that look very smart however I was stumped when my 7 year old nephew asked me what does it mean ? I was at loss of words trying to explain it to him. In an attempt to simplify the explanation that can pass his comprehension test this is how I started describing it.

 

M&A is the story of when fear meets greed on a treasure hunt voyage.

 

Imagine that you have a small boat (startup) sailing on an unruly sea (uncertain conditions) with the mission of reaching a dream island where you have been told is buried treasures a bounty of immense riches.

To reach there many things would be needed.

You will need a map (aka business plan); have to identify a tail wind that will propel you forward; hire or inspire men to join as your crew ; convince another set of people on the shores (venture capitalist) to finance your voyage. To these folks you will tell a narrative of how your boat with a powerful engine (product), detailed map and unique navigation skills (strategy) will help you find the treasure.

In the same sea you will find big Titanic ships heading to their own treasure island. In this world there also people who are crystal ball gazers (Gartner, Influencers such as Robert Scoble) who make prediction about changing tailwinds & tell folklore about new dream islands.

When the Titanic gets a whiff of this new folklore (ex IOT is the next big thing), they then either create a radar ping in new direction or change the course of their entire ship towards that island.

And then it becomes a race of many towards this new island, boats of all sizes i.e small boats and Titanic are now competing in the race. This race is a dance that oscillates between fear and greed in strengths and weakness of a David and a Goliath.

The Titanic is always cognizant that it has many direction to handle and its huge size allows it only a certain pace. Also doing anything inconsistent of its past will get it rattled by other kind of men on shores (public investors).

Small boats on other hand do not have enough fuel and have to depend on the men on the shore (venture capitalists) to give them money for fuel constantly to take forward their quest.

Sometimes small boats realize that they can’t become big Titanic themselves, typically happens after 4 years.

At which stage they tell the Titanic that getting new engine from this small boat will help the Titanic reach the new island faster and set stage for joining forces.

Things to note though

Only when Titanic shifts in direction startup is after that the Titanic would be interested in a conversation. 

If the small boat is not in geographical proximity of the Titanic and yet trying to get to the same island but from opposite corner of the world, the startup will not be in the radar. This problem particularly plagues Indian startups.   

 

Thus when startups are thinking of M&A, i.e getting bought


They need to have a clear understanding of the dream island, (that the whole world is now after) , the tailwinds that they are leveraging to get there, the possible titanic (s), how to get on their radar and generate fear & greed.

Why Indian startup founders should think about M&A and not be shy about it ?

Think about endgame, chess grandmasters do so to win.

Studies point out that chess grandmasters visualize the chess board state few steps away to a ‘winning game’ and make moves based on memory pattern that can lead to that board state and thus help them win the game.

Many startups however operate in a game where the rules are dynamic and change unexpectedly. An unanticipated flood of competition could sweep in, or the ground gets shaken underneath because of a regulation or policy change.  Due to such unpredictability most of the founder’s move is extremely tactical, the focus is in on surviving and not getting killed as opposed to planning to grow like rabbits.

Data from 20 years of startups in US suggest mean time to exit is 4th and 6th year.

Mean exit time

Mean exit time for startups

This is simply because If investors don’t do that then they can’t return the capital to their own investors (i.e limited partners) within the 10 year fund cycle.  

Same data also reveals that after 1997 there has been more exit through M&A than IPO both in terms of count and value which means that it is more likely for a startup to have an exit via M&A rather than an IPO as the most likely route

VC vs M&A vs IPO

VC vs M&A vs IPO

In India with no IPO route, M&A is the most likely endgame

On  decade long VC scale, Indian ecosystem is quite young and thus historical data is not available to compare however similar forces broady apply.  

Also while scale can become large but technology market growth rates in India are not as fast the US. Add to this the fact there is no IPO market in India for the technology companies. Some efforts are underway to open it such as the new ITP platform by SEBI but nothing has kicked in practice. That makes M&A option all the more important to consider for an Indian startup founder.

From limited data that is available about the Indian ecosystem we can that $14.5 billion of VC money has been invested in last 4 years and $2.5b of exits have happened in the same period spread over 300 deals. This ratio are still very skewed when compared to other ecosystem.  

screen-shot-2016-11-17-at-11-17-23-pm

India M&A / VC Ratio – Low

All of this build the strong case for why an Indian startup founder should think about exits via M&A

A reason they don’t think about it is because they don’t know much about exits or the playbook involved in doing that. Second likely reason could be that advisors actively discourage founders from thinking about exits by labeling them opportunistic and not being a visionary founder.

Paradoxically the right time to think about exits is exactly when an exit is not needed.

Founders should think about exit before they are forced to think about it

PS: Exit has a broader significance, applies to open source and even countries. Here is a talk by Balaji Srinivasan that illustrates the importance of exit as key lever of an healthy ecosystem