As funding trickles, small companies become fair game for unicorns

Consolidation is also in play as many of these startups are unable to shore up a war chest to fight bigger and more well-capitalised rivals.

Dozens of unicorns – privately held firms with valuations of $1 billion or more – and soonicorns have either acquired companies or are in the process of buying out firms.

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

Beauty and personal care firm The Good Glamm Group, fintech startups Cred and Razorpay, edtech player Scaler, and online used car selling platform Spinny, among others, have been acquisitive, while others such as ride-hailing firm Ola, business-to-business commerce startup OfBusiness, and fantasy gaming platform Dream11 are in the process of acquiring companies.

Some of the noteworthy acquisitions of late have been the mobility sector deal of Chalo-Vogo and a bunch of buyouts made by The Good Glamm Group.

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Bigger ones, like the Zomato-Blinkit (formerly Grofers) deal, are still in the works and have yet to be announced formally.

These deals have also been triggered by a broader correction in the funding market because of which the companies that are getting acquired were not able 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 are playing on the consolidation theme for the overall industry.

Dealmakers involved in these transactions said the market always witnesses consolidation after a funding boom, where bigger players hunt for M&A targets amid a liquidity crunch.

“An interesting trend is that companies with tech valuations are looking to acquire offline models with solid cash flow. Inversely, offline companies are also looking to build their online distribution but usually cannot match the valuation expectations of sellers, barring a few exceptions,” said Pankaj Naik, executive director and co-head, digital and technology at Avendus Capital, a Mumbai-based investment banking firm.

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 that were founded after 2010.

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

“I think the valuation multiples have zoomed for many companies last year, and startups are looking to play catch-up through acquisitions. If you have to raise your next round, you have to show growth, and startups are now resorting to inorganic growth through mergers to bulk up their propositions,” said an investment banker who has been assisting larger startups to acquire businesses on growth.

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


Easy targets

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

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

Kashyap previously founded online travel portal GoIbibo and also led the acquisition of redBus in 2013 by the GoIbibo group, in one of the biggest acquisitions in the travel-tech space during that time.

“I do believe that assets or startups are available at cheaper prices in this market cycle…we will see more and more consolidation happening in the next 12 months for the larger ecosystem,” said Vamsi Krishna, cofounder and CEO of edtech startup Vedantu.

The pandemic-induced push for digitisation helped some companies grow at a faster clip, while others struggled to emerge from the trough the business experienced due to the lockdowns and changing consumer behaviour.

A case in point being Chalo’s acquisition of Vogo, which was 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 places.

Share-swaps

Given that most companies are using their stock to acquire smaller ones, investors of the target companies are also happy with the overall outcome because they get a small stake in a high growth company.

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

While the focus of acquisitions this year have largely been towards new expansion, many acquisitions also focused on acqui-hiring for tech teams.

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