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Information technology (IT) majors, as well as large Indian ‘unicorns’, are likely to continue acquiring start-ups to fill technology gaps and talent requirements, according to a report in this regard by iSpirt, a software products sector think tank, technology-focused M&A advisory boutique Signal Hill and Microsoft Ventures.
In technology parlance, ‘Unicorns’ are start-ups valued at $1 billion or more, based on fundraising. Mergers and acquisitions (M&A) in the segment have totalled $2.3 billion (Rs 14,600 crore) from January 2011 till date.
The report said venture capital (VC) and private equity (PE) investments in the e-commerce and consumer internet markets had grown 38 times in the 2010-2014 period, with $4.2 billion invested in this space in 2014 alone.
With the fear of missing out, hedge funds and PE funds are investing in ‘new’ Series B ($10-25 million) and Series C & D ($20-250 million) funding, fuelling a frenzy in valuations.
Prior to 2014, it would take start-ups at least a year or two to raise series B and C funds. In the past 12 months, this has dropped by half, with companies reaching this mark in less than a year.
The M&A Product Monitor report also showed that from 2011, there had been 190 M&A transactions involving Indian software product companies, with a total estimated transaction value of $2.27 billion. Domestic transactions accounted for the lion's share (72 per cent) of the M&A activity by volume.
However, in value terms, 53 ‘inbound’ M&A transactions happened during this period, which accounted for about 50 per cent of the total estimated transaction value due to a higher average deal size ($21.1 million versus $8.4 million).
The average deal size during the period was $11.3 million, lower than that of mature start-up systems such as in Israel ($113 million) and the US ($57 million), the report added.
“On the technology product M&A side, there is a clear trend emerging where in B2B (business to business) software, the majority of transactions and transaction values are cross-border in nature. However, in the consumer internet and e-commerce space, domestic transactions account for the bulk, both in value and volume. With the emergence of Indian internet and e-commerce unicorns, we foresee this trend to continue,” said Klaas Oskam, managing director, Signal Hill.
“On the VC/PE investment side, we expect continued strong momentum across already favoured sectors such as internet & consumer, e-commerce and B2B software, as well as sunrise sectors such as IoT (internet of things).”
The report indicates a generation of entrepreneurs is coming up in India, looking to build deep-tech companies in the country.
Where B2B software companies are aiming at the global market, internet and e-commerce businesses are focusing on India. These are vision-driven and focused on creating a market differentiator, rather than “selling out” early.
These entrepreneurs are also likely to be angel investors and help other start-ups succeed, in parallel to running their own companies, the report added.
“The M&A space, despite growing at 56 per cent year-nyear (2013-14), had been relying on anecdotal information to make business decisions,” said Ravi Narayan, Director of Microsoft Ventures India.
“(This) Think Next Roundtable Report has now become the handbook for investors and corporates and regularly provides them with data and insights into M&A space. We are hoping this clarity will enable businesses, entrepreneurs and investors alike to invest in taking Indian entrepreneurship to the next level.”
