M&As In 2019 At Five-Year Low, But Enterprise Tech Bucks The Trend

This article is an overview of DataLabs by Inc42’s upcoming Annual Indian Tech Startup Funding Report, 2019 which offers a detailed analysis of the investment trends, mergers & acquisitions (M&As), startup policies and macroeconomic factors that influenced the Indian startup ecosystem from 2014-2019. Read all articles in this series.

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As the Indian startup opportunity comes out of the 2010-2019 decade, the ecosystem’s growth is palpable and booming as it stabilises into the phase of maturity. This maturity is evident from the fact that with 766 deals worth $12.7 Bn, 2019 did only a little bit better as startup funding amount grew by 15%, even as deals plunged by 8%.

Just as funding deals did not rise, consolidations in the startup space also fell in 2019, despite conglomerates such as Reliance identifying Indian startups as key part of their growth and scale-up strategy.

The historic moment for Indian startup ecosystem in terms of mergers and acquisitions (M&As) came in 2018 when Indian ecommerce posterboy Flipkart was acquired by global retailer Walmart in a $16 Bn deal.

Since then, the world has kept a keen eye on Indian startups, and Walmart’s move has also sharpened the corporate attention on startups, which continue to be a source of talent pool, new innovation and new customers.

Outside of the corporate interest, within startups, consolidations are expected to rise with increased market pressure and competition intensifying across sectors. Indeed, crowded sectors such as lending tech, logistics and enterprise tech have the biggest potential for M&As in the Indian context. But that potential will only be on display in 2020 and beyond. For 2019. Indian startups did not fare too well in terms of mergers and acquisitions.

DataLabs by Inc42 in its Annual Indian Tech Startup Funding Report, 2019 noted that the ecosystem saw 111 M&A deals in the year, recording a 10% Y-o-Y fall. This is the lowest number of mergers and acquisitions deals between 2015 and 2019.

With 2019’s tally, 629 M&A deals have been recorded in India between 2014 and 2019, with 2016 seeing the highest annual count at 149. However, since then mergers and acquisitions deals have continued to fall. This is partly due to market correction after a peak year, but there are other factors, which DataLabs by Inc42 has seen in its analysis.

Why Are Mergers And Acquisitions Deals At 5-Year Low?

One of the major factors is the seed funding crunch, which has hit all major startup hubs in India. Mergers and acquisitions deals are impacted in a big way by seed funding for any sector. For 2019, we recorded 306 seed funding deals worth $252 Mn, seed-stage deal value fell by 44% (compared to 2018).

With fewer seed deals, the potential pool for acquisition is going down every year. Underfunded startups are less likely to prove themselves worthy of M&As. Startups with great ideas will not be able to bring them to market if there isn’t adequate funding, while viable consumer software products or services cannot reach their target audience without the capital to spend to acquire users.

The Annual Indian Tech Startup Funding Report, 2019 also shows that median funding amount has been growing at 38% CAGR from 2015 to 2019 for startups in India. This indicates the growing popularity for late-stage investments over seed funding and growth-stage deals. While late stage startups could drive consolidation in the next few years, at the moment, this does not seem to be the case.

Further, India sees most startup shutdowns at early stage itself due to a dearth of funding, lack of market demand, lack of originality and failure to raise follow-on funding among other reasons. With issues such as angel tax, shutdowns are expected to rise and the impact is seen in the falling seed stage funding in 2019.

Enterprise Tech Proves Hottest Sector For M&A

Enterprise tech sector had a great 2019. With a total funding of $1.15 Bn across 114 deals in 2019, enterprise tech recorded 49% surge in funding amount compared to 2018.

With 20.7% share in the total M&A count, enterprise tech startups recorded 23 deals. The proactive push from the government towards digitalisation of Indian economy, growing digital presence of the business and wider M&A opportunity in the enterprise tech sector are the catalyst fueling the growth.

However, on a Y-o-Y level, there was a 23% decline in mergers and acquisitions activity in enterprise tech startups in 2019, compared to 2018. But in the comparison for the last five years, enterprise tech recorded 138 deals and 21.9% share in total M&A deals for the period.

One of the other major M&A segments was media and entertainment which recorded 16 deals. These two sectors together contributed 35% to the total M&A deals of 2019. This is followed by deeptech, consumer services and ecommerce.

Reliance Dominates Mergers And Acquisitions Landscape

In 2019, Reliance continued to reign as the kingpin of the Indian economy, but it also became a godfather for startups. With its focus on creating a digital ecosystem around Jio, Reliance is gearing up to compete with tech giants around the world with an array of services and products.

In addition to its interest in enterprise tech, fintech and ecommerce sectors, Reliance has also made inroads into edtech, deeptech and consumer services with its acquisitions last year. In 2019, Reliance acquired eight startups, and contributed 6% of the total M&A deals of the Indian startup ecosystem for the year. In the past two years, RIL has entered into nearly 49 mergers and acquisitions, strategic investments and joint venture deals globally.

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