As funding drains, small businesses become fair game for unicorns

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Bombay/Bengal: The unprecedented funding boom that domestic startups experienced last year is now being followed by a rush to acquire smaller players as the funding market softens.

Consolidation is also at stake as many of these startups are unable to build up a war chest to fight larger, better capitalized rivals.

Dozens of unicorns – private companies valued at $1 billion or more – and soon unicorns have acquired companies or are in the process of buying out companies.

This is aimed at gaining market share, adding revenue streams and accessing technology, geography or talent, according to at least half a dozen industry experts, investment bankers, managers funds and founders.

Beauty and personal care company The Good Glamm Group, fintech startups Cred and Razorpay, edtech gamer Scaler and online used car sales platform Spinny, among others, made acquisitions, while others like ride-hailing company Ola, business-to-business commerce startup OfBusiness, and fantasy gaming platform Dream11 are in the process of acquiring businesses.

Some of the notable acquisitions of recent times have been the Chalo-Vogo mobility sector deal and a bunch of buyouts done by The Good Glamm Group.

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The bigger ones, like the Zomato-Blinkit (formerly Grofers) deal, are still ongoing and have yet to be officially announced.

These deals were also triggered by a broader correction in the funding market due to which acquired businesses were unable to raise additional cash or were hit hard by the Covid-19 pandemic.

Cred’s acquisition of online investment platform Smallcase and Razorpay’s ongoing talks for a potential acquisition of Ezetap play to the theme of consolidation for the entire industry.

Traders involved in the deals said the market was still witnessing consolidation after a funding boom, where bigger players were looking for M&A targets amid tight liquidity.

“An interesting trend is that companies with tech valuations are looking to acquire offline models with strong cash flows. Conversely, offline companies are also looking to grow their online distribution but generally cannot match valuation expectations. sellers, with a few exceptions,” said Pankaj Naik, executive director and co-head, digital and technology at Avendus Capital, a Mumbai-based investment bank.

According to data from industry tracker Tracxn, acquisition activity peaked at 123 deals in the first quarter of 2022, compared to 70 deals in the first quarter of 2021. These include target companies founded after 2010.

Quarterly M&A activity_Chart_ETTECHETtech

Interestingly, with several startups raising capital at record valuations, the pressure is on for companies to justify their new valuations, as they plan for future funding rounds.

“I think valuation multiples have skyrocketed for many companies in the last year, and startups are looking to catch up through acquisitions. If you’re going to increase your next round, you need to show growth. , and startups are now resorting to inorganic growth through mergers to flesh out their propositions,” said an investment banker who has helped bigger startups acquire growing companies.

About 60% of the focus continues to be on acquisitions rather than fundraising, the banker added.


Easy targets

As a funding winter sets in globally, smaller players struggling to raise finance and scale meaningfully are becoming easy acquisition targets for well-funded startups looking to fuel their growth ambitions. grow inorganically.

Best M&A transactions this year_Chart_ETTECH (1)ETtech

“The post-merger world can be tough. Many early and growth-stage acquisitions can tend to derail the business, with the results not being so exciting,” said Ashish Kashyap, founder and chief executive of wealth management firm IndMoney. “I think companies need to be in the right economic times to be able to digest and integrate an acquisition or their assets.”

Kashyap previously founded online travel portal GoIbibo and also led the 2013 acquisition of redBus by the GoIbibo Group, in one of the largest acquisitions in travel technology at that time.

“I believe assets or startups are available at cheaper prices in this market cycle…we’ll see more and more consolidation happening over the next 12 months for the broader ecosystem,” said Vamsi Krishna, co-founder and CEO of edtech startup Vedantu.

The pandemic-induced digitization push has helped some businesses grow faster, while others have struggled to emerge from the trough the business has experienced due to lockdowns and changing consumer behavior .

One example is Chalo’s acquisition of Vogo, which has been battered by the pandemic.

Last week, Chalo announced the deal saying Vogo would add to its bus technology services by offering first and last mile rides at major bus stops and other public locations.

Stock exchanges

Since most companies use their shares to acquire smaller ones, investors in target companies are also happy with the overall outcome as they get a small stake in a high-growth company.

Main sectors for M&A activity___Graphic_ETTECHETtech

“It’s not that a stock swap is better on balance sheets, since you still have to create value for investors. But obviously the benefit of a stock swap deal is that the company you bring also has its ‘skin in the game’ and puts the two entities on a common path,” said IndMoney’s Kashyap.

While this year’s acquisitions have largely focused on further expansion, many acquisitions have also focused on acquiring technical teams.

“The other open secret is that engineering talent has been very hard to hire, and add-on acquisitions have been a great way to scale technical teams,” said Vaibhav Agarwal, partner at Lightspeed Venture Partners.

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