Seed-Stage M&As Will Bear Biggest Brunt Of Covid-Led Slowdown

The merger and acquisition activities across Indian startups has witnessed a downward trend over the last three years. Indian startups have been preparing for growth and looking to reach the maturity stage, and this has come at the expense of strategic moves or acquiring talent from other startups. But the unprecedented Covid-19 pandemic has led to a situation where startups are struggling for existence, and this could fuel the next wave of consolidation in the Indian market.

Startups will face difficulties in closing funding rounds, and getting organic growth due to low consumer spending. Plus, the lockdown and quarantines have called into question the scalability of many products, and startups are still pivoting to adjust to the impact. We may witness a higher incidence of early-stage exits in the Indian startup ecosystem in the coming months. However, mergers among startups operating in the same vertical will help bring down unnecessary cost and give both startups leverage in the market.

Already, enterprise and consumer service sectors are leading in M&A activities in India. Covid-19 and the lockdowns will also impact other sectors like consumer services, e-commerce, fintech and deeptech and lead startups into the M&A space.

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Why M&As Will Rise In The Post-Coronavirus World

The number of seed-stage funded startups reduced by 19.5% to reach 306 in 2019, compared to 380 seed-stage startups that were funded in 2018. New startups are struggling to convince investors about the business model and strategy, and the problem is compounded for first-time entrepreneurs.

The lack of experience in handling crisis situations is a big handicap for startups with fresh founders. And this will negatively impact a number of early-stage startups. 

Growth-stage startups are trying to minimise cost and maximise cash conservation during the global pandemic situation. Growth stage players like Fabhotels and Instamojo have already laid off several employees and even unicorns such as OYO have been forced to cut salaries for employees.

Commenting on the effect of M&A on the funding stage, Siddarth Pai, founding partner of 3one4 Capital, added, “M&As have always been opportunistic and Covid-19 has had unintended consequences in hastening it. The largest buyers will be unicorns who will look to consolidate their spaces in order to capitalise on an uptick in investments once Covid-19 passes.”

From observing the past few year trends in the Indian startup ecosystem, we can say that it’s becoming harder to getting seed funding, but M&A activities are more prominent in growth-stage startups. 

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Indian unicorn startups, funded by global players like Alibaba, Tencent, Ant Financials, SoftBank, STRIVE and Didi Chuxing, are in the lead position when it comes to leading M&As. Chinese VC firms will find it very difficult to raise funds after the Covid-19 situation and the new FDI regulations in India. 

This situation may lead to more financial crisis situations for Indian startups. If the USA, Japan and South Korean firms start investing in Indian startups and manufacturing units move from China to India, then the situation will improve, but at this moment, there’s no guarantee about.

The uncertainty over the future will increase the chance of underperforming VC investments in the Indian market in certain sectors. Additionally, VC firms will try to maintain cash flow for future technology by saving more during an uncertain situation.

What’s In Store For 2020?

2020 has so far begun on a slow note with a few minor acquisition deals. Some of these talks are still the only speculation with no confirmations from companies.

• Online grocery delivery app BigBasket completed the acquisition of Bengaluru-based milk delivery app DailyNinja. BigBasket is also eyeing on Milkbasket to dominate the milk delivery market space.
• FusionCharts, a data visualisation company acquired by US-based Idera.
• Foodtech unicorn, Zomato is speculated to be in talks with Grofers for acquisition valued at $750 Mn.
• Bengaluru based startup social media platform Sharechat is looking to acquire startups in AI and ML field to further strengthen its vernacular content platform.

After the Covid-19 outbreak, every possible industry has shifted to digital means of operations as well as service delivery, whether it be free online education, digital media and entertainment or regular grocery shopping. Working from home is expected to be the new normal for many months in parts of the country such as Delhi and Mumbai. 

Digitally transformed organisations will be able to recover faster than traditional organizations. The startups will fight to extend runway this year and the “survival of the fittest” test will include a wave of consolidation as well. 

Like 3one4’s Siddarth Pai added, “Companies who raised money in late 2018 till 2019 will be best-placed to drive M&A as of now. M&A in the seed stage is largely driven by companies looking to acquihire strong teams or accelerate the creation of a new revenue line. This activity will take some more time to stabilise as startups are hesitant to make such explorations now. Stock will drive a large amount of the M&A activity as liquidity is still tight in the startup ecosystem.”

Moreover, new innovations and redefining business strategy will help Indian startups players to look beyond M&A deals for survival, according to VCs.