Mergers and acquisitions are likely to see significant uptick in India’s startup world over the next 3-6 months, as companies and investors gear up for a year starved of capital and revenue due to the Covid-19 pandemic.
Much of the buyouts will take place in India’s consumer internet, retail and financial services sectors, according to bankers, investors and founders.
A significant number of these are expected to be stock-led deals, distress sales and acquihires, they told ET.
Bankers said deal talks that were in the offing three months back are now being accelerated.
Consolidation is high on the wish list of venture capital investors as they look to ruthlessly trim portfolios at a time when even their own ability to raise money from Limited Partners has hit a roadblock.
“The Covid-19 pandemic is an unprecedented event. But it will be a catalyst for both VCs and entrepreneurs to think a little more openly and creatively,” said Karan Sharma, co-head – digital and technology, at Avendus Capital.
“Some of these conversations, which could have happened two or three years down the line, could now potentially get accelerated and catalysed by the Covid-19 pandemic,” he added.
With investors clamping down on bridge capital rounds and urging portfolio companies to tighten their belts in order to extend their capital runways for at least 18 months, the volume of M&A transactions will go up, dealmakers said.
Entrepreneurs, particularly those running high cash-burn, consumer-facing businesses, are already being urged to look for potential opportunities to merge.
“There are twin forces at play right now. One is several companies will have (almost) zero revenue for the April-June quarter, while they still have costs that need to be covered. On the other side, fund raising will get delayed and take longer to complete. Therefore, you will see people say it makes more sense to combine – survive and grow, rather than compete for the same consumers and capital pools,” Gaurav Mehta, India Head of TMT-focused merchant bank, The Raine Group, pointed out.
The consensus is that financial services, particularly those in the lending space, are prime targets for takeovers.
“Banks may feel like upping their tech stack and acquiring some assets from fintech, or even non-fintech de-funded NBFCs, because those are available right now at a discount,” said Anand Lunia, managing partner at early-stage VC firm India Quotient, which has invested in fintech lenders including Lendingkart and LoanTap.
“I think this is also a good opportunity for fintech companies, particularly lending companies, to merge with listed banks, small or large ones,” he pointed out.
Investors estimate that a whopping 55% of startups across the ecosystem do not have a cash runway of more than 11 months.
Over the last two years, consolidation in the Indian startup ecosystem was on the upswing, driven by the increased liquidity in the space.
Calendar years 2018 and 2019 saw 259 deals being struck at a cumulative transaction value of about $4.9 billion, according to data collated by industry tracker Tracxn.
In the current year-to-date, 27 deals valued at about $215 million have been recorded, according to Tracxn.
“Every time there is a market dislocation you will see consolidation. So, I think this is going to happen quite a bit…in a lot of places orchestrated by the investors, because the funding market dislocation is going to continue for some period of time…” Ashish Sharma, managing director at Temasek-backed venture debt firm InnoVen Capital, said.
The Covid-19 pandemic has ravaged countries across the globe, leading to lockdowns and crippling the global economy.
According to World Health Organisation data, more than 2.5 million have tested positive and an estimated 180,000 people have dies across the world. The focus, therefore, has shifted to value protection.
“Usually, VCs, entrepreneurs and boards focus largely on value creation. But now, they’re forced to shift focus first on value protection. Survive and see through this environment, and then look at what the potential value creation can be,” Karan Sharma of Avendus said.