Venture capital in India: Are exits heating up? Or is it just an illusion?

Posted on by KNBT

95% of venture capital-backed exits in 2018 (till date) were through acquisitions, up from 78% in the same period in 2017. Photo: Mints

95% of venture capital-backed exits in 2018 (till date) were through acquisitions, up from 78% in the same period in 2017. Photo: Mints

The wheels are turning, albeit slowly. 2017 was a great year for VC-backed exits in India. There were 82 exits valued at $2.7 billion. It is common knowledge that most of this value came from three big transactions—$800 million part exit from Flipkart, $500 million exit from Ola and $250 million from Paytm. The inference—take away SoftBank and Tiger Global, and Indian VCs have no material exits to show.

Fast forward six months to mid-2018, and the scorecard shows a 10-fold increase in the exit value only through acquisitions.

While the big Walmart-Flipkart acquisition once again skews this value, venture capita (VC)-backed exits’ data reveals interesting insights into how the ecosystem is taking shape.

The great Indian start-up ecosystem

A common mechanism for investors to exit is through acquisitions. Ninety-five percent of exits in 2018 (till date) were through acquisitions, up from 78% in the same period in 2017. Peel the onion for a closer look and optimism sets in. About 40% of the acquisitions were made by VC-backed Indian start-ups. This is a clear sign of the maturing start-up ecosystem. These acquirers have the resources, are run by savvy founders who see value in growing inorganically and are supported by investors who have seen acquisitions work well. Some homegrown unicorns also have dedicated Mergers and acquisitions (M&A) teams. Many successful VC-backed start-ups are motivating a whole generation of entrepreneurs. For instance, there are more than 200 start-ups founded by ex-employees of Flipkart, notable ones being PhonePe, Runnr and CureFit.

Not all acquisitions are the same

There is still not enough reason to celebrate. Most acquisitions, unless as high profile as that of Flipkart’s, don’t generate multiples that VCs can be proud of. Consider the acquisition ecosystem in the US— top 15 global acquirers are all US companies with nine of them from Silicon Valley. Sixteen percent of acquired start-ups return 1-3x, 8% return 3-10x and ~5% return 10-100x, selling into other start-ups, multinational and domestic corporations. India, contrarily, is largely a buyer’s market—acquisition valuations are usually not competitive and acquisitions are often orchestrated to provide companies with a soft landing versus being written off.

Let’s look at two examples—Infibeam acquired SaaS company Unicommerce for $17.8 million after around six years of operations and raised $10 million of funds. Reliance Industries Ltd acquired online test preparation portal Embibe for $15.3 million, six years after being in operations and raised approximately $11 million funds. In both cases, the return multiples aren’t grand by VC standards. There are several other acquisitions where values are lower and investors barely recover their money.

The story of the not-so-hot sectors

Only three of the 53 acquisitions in 2018 (till date) are in healthcare and life sciences sector up from one (same period in 2017). In education, there were two acquisitions each in 2018 (till date) and 2017 (same period).

In these sectors, traditional local companies, family offices and global corporates form the M&A ecosystem. Traditional companies acquire start-ups to keep up with the pace of innovation but are slow with decision-making and pay poorly for acquisitions. Large corporates acquire start-ups for market entry, product portfolio expansion or talent acquisition. Except when the acquisition is for market entry where corporates are likely to look at “regional leaders”, Indian start-ups are competing with start-ups globally to be acquisitions of choice. The well-funded Indian start-up ecosystem is in its infancy in these sectors. For instance, Practo is one of very few healthcare start-ups actively acquiring companies to grow (five till date). Equivalent in education is Byju’s with four acquisitions till date.

Till there are a good number of homegrown unicorn equivalents in these sectors, acquisitions will be hard to come by.

Takeaway for the ecosystem

While VCs are catalysing innovation, they are also revisiting their theses and structures. In parallel, the macro ecosystem is also maturing. Collectively all this will cause ripple effects motivating incumbents and newly-minted unicorns to get the exits-engine cranking. It is clearly the beginning. While it has taken about 10 years for big exits to start appearing, the real question is whether the next five years will actually see a 10-fold increase in billion dollar exits.

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