Category Archives: startup

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.

Fishermen dont get featured in Time Magazine

I get to meet and hangout with many product entrepreneurs in India across a wide variety of spectrum (wannabe, early stage all the way up to category leader). I have been one and have crossed a few early stages myself, based on my experience I see 3 type of founders

The Surfer, Voyager & Fisherman

The Surfer

Surfer

Surfer is someone who is riding a tide, has unique skills, most often flamboyant but certainly a great story teller. Some may call him lucky for the tide is responsible for his greatness and he may have been only there at the right place and time.

He however believes that he can read the wind & the wave and that he has his board in so much control that can swerve smoothly against the biggest tide.

Investors could be referred to as bystanders on the beach making bets on surf board, tide or surfer himself to win.

Press makes a celebrity of him for it becomes a sport worth paying attention to for the adrenaline kick that it can produce.

They however have the same fate that movie industry mete to its heros & heroines, i.e post their short lived hotness they are relegated to the archives of history.

Many yesteryear consumer internet and e-commerce stalwarts are good examples of this. We are yet to find our Rockstar/Shehenshah/Thalaiva heroes that are timeless in this category.

Voyager

Voyager  Voyager is like the columbus, an italian in spain, a master storyteller as well. He is going for the glory and riches but also believes and leverages his experience of past expedition by a previous voyager.

He sets sail to find India but discovers America. He also finds other backers to to chase the dream.

After the Surfers, Voyager becomes a great story to write about so they get their share of press as well.

Good examples are engineers, product managers from other successful big product companies like Yahoo, Veritas, Symantec, Google, Microsoft (MNCs) & Zoho, Tally (Indian Companies) etc.

Fisherman

FishermanHe is someone who also faces the vagaries of the sea but goes to catch fish. His work is not sexy and it may stink but feeds him and so many others. He may choose to fish where nobody is fishing or have to compete and jostle with other fishermen going after the same fish. His journey is a long one.

Story of a fisherman comes only when stories of other two types have been repeated to boredom. Many call this as the bootstrapped entrepreneur.

They are different but have few things in common. Each involves skills but given the odds has self doubt. Some play the game for 3-4 years, other spend decades.

Yet the

  • Surfer does not create the tide
  • Voyager can only envision his prized destination in a rear view mirror.
  • Fisher man does not create the fish.

Many first time entrepreneurs are confused on what persona they would like to choose or what choices are even available to them. As the startup ecosystem ebbs through greed and fear the god that founder look up to changes, in times of boom the surfer is the god, in times of gloom fisherman is the god. Also when one type is treated god the other type is berated.

Wish there was more understanding amongst them and about them to reduce the pain they go through. For contribution they do to society through society they all deserve salute.

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

Market Maps – Thinking market instead of an idea

Starting point of a startup is an idea and it goes through a journey of product releases and pivots to reach its product market fit and further scale. Source of this idea is a brainstorming session or hot flavor of the season (foodTech, fintech etc) or even comes from past work experience of the founder, in rare some cases it is rooted in an unsolved customer pain point.

For Indian software product startups regardless of the origin of the idea when looked at through the lens of market segments a pattern seems to emerge that is too hard to ignore.

Market Map

A 2 X 3 matrix

Market map

Parsing the market  map

  1. Before 2009  India consumer  was not a major open digital market. There were few online ticketing sites, many attempts in the e-commerce space that  did not fan out big,  telecom VAS a closed market which also existed only because of regulation gap around strong consumer privacy laws .  However in 2009 something happened along with the birth of Flipkart where consumers changed behavior, i.e started believing that they could trust making transactions online and swiped their cards. It would be hard to attribute a causal reason of whether it was ‘Cash on Delivery’, critical mass of people on internet or myriad of other reasons. It is suffice to say that market behavior changed since then. Today there are countless new ideas being tried out because this market has opened up.
  2. India SMB market on the other hand is yet to witness its Flipkart moment.  I have been a close observer on two industry (read multiple organizations collaborating efforts) attempts to wrench open this and closely involved in my last role in leading multiple experiment in creating this market. While I am very bullish about this market but the fact of the matter is that this market is yet to open up. Just like how consumers shifted mindset about transacting online, small business need to change their buying ‘tailored shirt’ mindset to buying ‘branded shirt’ mindset for this market to explode.  Open API based GST system in India may cause to be a major reason of change here.
  3. If India consumer has already exploded and India SMB is around the corner, it would not be completely wrong to say that India Enterprise is yet to germinate. There are handful few startups that have been able to sell to Indian CIO however those are exceptions than the rule.
  4. In the global consumer market there is hardly any precedence of a startup from India building a global force i.e. equivalent to a Facebook or Snapchat. Not that this may not happen, it is just that it is not happened so far because it is very hard to understand global culture nuance when based in India alone and when there are gaps in the kind of risk capital that is available to try out radical business models. There are handful instances where this is being attempted such as Zomato, Hike but the jury is still out.
  5. Indian startups are rocking the global SMB market, strategic inflection point that has made this possible is small business are searching for solution to their problems online. When solution is possible to be delivered online through Saas, the purchase consideration is based on the experience of solution (try and buy) and not based on the trusting the salesman who delivers the CD.  Given this dynamic it does not matter if the solution was built in Alabama or Alwarpet in Chennai. Comparative cost advantage of doing desk based selling from India makes it possible for price points unimaginable in other parts of the world and which in turn opens many low end markets that have been earlier priced out.  Companies that are trend setter here are Zoho, Freshdesk, Wingify, KissFlow, Kayako, ChargeBee, Hotelogix and many others.
  6. There is also good precedence of traction for the global Enterprise with more than handful examples. The pattern here has been to prove product with pilot customers in India and scale it faster with global markets. This involves migration of feet on street sales team globally, iflex has been the Zoho equivalent grand daddy to set the precedence here but recent examples are Druva, Eka and newer folks like Innovaccer, Unbxd are following suit.

There are startup ideas that are tech components and may sell into a value chain into one of these market and not directly, for example a developer toolchain. The effect of traction in the market has same implication for them.

The above map is not going to be static map and is bound to change. Certainly past is not an indicator of future however history of technology has taught that path dependency plays a huge role in shaping of markets. Thus realization of this map has allowed few startups have change their gear in reaching product – market fit or scale.  Also this map helps understand that playbook for winning a market is a different than a playbook for creating a market.

 

 

To quote Marc Andreessen

When a great team meets a lousy market, market wins.
When a lousy team meets a great market, market wins.
When a great team meets a great market, something special happens.

What are the market maps that you are seeing ?