2022 In Review: Startup M&As Surge Amidst Funding Crunch & Downturn

The year 2021 was a path-breaking one for the Indian startup ecosystem as it scaled new heights and crossed multiple milestones. In the process, the Indian startup ecosystem also narrowed the gap with its counterparts in the US and China.

The Covid-19 pandemic turned out to be a blessing in disguise for the country’s tech startups as the fear of contracting the virus and the restrictions imposed to curb the spread of the infection paved the way for the growth of innovative startups in 2021. 

While traditional businesses suffered because of their inability to evolve and adapt to newer technologies, Indian startups raised record funding. The Indian startup ecosystem raised a whopping $42 Bn across 1,584 deals in 2021. Besides, India also produced 42 unicorns in the year, the highest ever. 

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However, the situation changed drastically in 2022. If 2021 was all about new records for the Indian startup ecosystem, 2022 was about layoffs, shutdowns, pay cuts, and funding crunch. The ongoing Russia-Ukraine war, consequent geopolitical tensions, and rising global inflation hit both the public and private sectors during the year. 

As global investors, who pumped billions of dollars into Indian startups in 2021, tightened their purse strings to tide over the tough economic situation, lack of funds forced startups to either shut down or be acquired by bigger players. Consequently, the year 2022 recorded the highest number of startup mergers and acquisitions. 

As per an Inc42 data analysis, there were 229 merger and acquisition deals in the Indian startup ecosystem till November this year, 9% higher than 210 such deals in the entire 2021. The number of mergers and acquisitions in 2022 were 179% higher than 82 such deals in the year 2020.

According to an Inc42 survey based on responses from the most active venture capital and debt firms in India, the startup M&A wave in 2022 is largely driven by late-stage startups looking to consolidate their market share or expand into new verticals. While 23% believed that it was the pressure of investor exits that forced companies into M&As.

Enterprisetech Sector Saw Highest Startup M&As

The enterprisetech sector saw the highest number of acquisitions in the Indian startup ecosystem in 2022. The sector reported 51 mergers and acquisitions during the year, constituting over 22% of the total such deals in 2022. 

The enterprisetech sector was closely followed by the ecommerce sector which reported 49 mergers and acquisitions. Interestingly, the ecommerce sector also reported the highest number of mergers last year as a large number of Thrasio-style startups emerged in the country. 

Meanwhile, the edtech and fintech sectors reported 31 and 22 acquisitions, respectively, in 2022. Healthtech and deeptech sectors reported 9 mergers and acquisitions each.

 

Biggest Acquisitions Of 2022

The merger of Times Internet-backed short-video platform MX Taka TakTak with ShareChat’s short-video platform Moj was the biggest acquisition of 2022. The deal was pegged at over $600 Mn. The combined platform was expected to have 100 Mn creators, 300 Mn monthly active users and nearly 250 Bn video views. 

Meanwhile, after months of talks, listed foodtech startup Zomato acquired Tiger Global-backed quick-commerce startup Blinkit for a whopping $568 Mn, making it the second biggest acquisition of the year. 

Peyush Bansal-led Lenskart’s acquisition of Japan’s eyewear brand Owndays for $400 Mn was at number three on the list.

 

In terms of cities, the Delhi-NCR region topped the chart with the startups based in the region recording the highest number of acquisitions. The region reported 55 mergers and acquisitions. Bengaluru, the startup capital of India, was at the second position with 47 deals, followed by Mumbai with 34 deals. 

2023 To See More Startup M&As

Plagued by the global economic slowdown, the year largely revolved around downturn, fears of a looming recession, layoffs, valuation cuts, shelved IPO plans, and funding winter. By all means, 2022 can be called a historic year in terms of downfall, defeat and Indian startups’ coming of age.

While November saw a significant increase in funding compared to the previous two months, the total funding raised by the Indian startup ecosystem until November was almost half of what was raised in 2021. According to Inc42 data, Indian startups raised a total of $24.4 Bn until November this year, compared to the $44 Bn raised in 2021.

Top investors such as Sequoia Capital, Y Combinator, Redpoint Ventures, and BEENEXT have already cautioned their portfolio companies to cut costs to increase their cash runway as the funding winter is expected to last 12-18 more months. Consequently, startups can now be seen readjusting their priorities by extending their runways, pivoting products as per the market’s requirements and strengthening business fundamentals. 

The rising demand for tech capabilities by large and traditional businesses, as well as growth and late-stage startups, is expected to grow. And as companies look to automate their operations as they move towards cash conservation and launch new services or expanding businesses, the acquisition of smaller players is likely to grow further. “Many unicorns will continue to become serial acquirers, causing a wave of consolidation among new-age businesses,” Shanthi Vijetha, partner at Grant Thornton Bharat, said.

The world’s largest investment banks have also predicted that global economic growth will slow further in 2023. This hints that 2023 will be a year when many distressed startups with less cash are likely to exit through mergers and acquisitions. When it comes to sectors, there are signs that deal activity may increase in the ecommerce, enterprisetech or SaaS, and fintech sectors.

The factors driving these mergers and acquisitions in these sectors are diverse and unique. On the ecommerce front, the rise of the house of brands model is behind a flurry of D2C brand acquisitions by Aditya Birla Group’s TMRW, GlobalBees, Mensa Brands and others. Meanwhile, behemoths such as Tata Digital, Reliance Retail and BSE-listed Nykaa are also acquiring brands as a whole or launching competing private labels through acquisitions.

Besides house of brands, larger ecommerce companies such as Lenskart have shown the appetite to expand their international plays through acquisitions. This is very likely to continue for startups that have the advantage of being a large player in a vertical. 

The ‘house of brands’ pattern is likely to come into play on the consumer side as well. Swiggy’s Dineout acquisition and Zomato’s Blinkit deal are clues as to where this sector might head towards. Reliance has one leg in with its Dunzo investment. 

The pandemic led to many smaller delivery startups and quick commerce players which are likely to be snapped up by Swiggy, Zomato, BigBasket, Zepto, Dunzo and other ecommerce players backed by venture capital. 

As far as SaaS M&As are concerned, an uptick is expected as large companies look to add more tech capabilities to their legacy systems or overhault their existing offerings. Existing SaaS companies will also look to plug gaps within their revenue chain by adding new features or products through acquisitions. Shiprocket’s Wigzo deal or WhatFix’s Leap.is acquisitions are examples of this trend. 

However, the story changes for the fintech sector, where M&As and consolidation will be to enter profit-making verticals. In their push for sustainability, fintech startups are adding multiple revenue sources that can extract the most revenue from a particular customer whether it is a consumer or a merchant or business. 

CRED’s recent acquisition of CreditVidya is a clear example of diversification of revenue streams, especially because regulatory concerns mean that focussing on a single line of business could disrupt operations.  

But as seen in the case of Paytm, a large user base and a super app approach is also not sustainable. So fintech startups in niche segments that can be scaled up will definitely see some consolidation in the next 12-18 months. 

Finally, edtech — the worst-impacted sector in 2022’s funding winter — will also likely see some startup M&As as businesses with a solid core revenue source will look to diversify and pick up struggling startups for either their operations or talent or to launch lines of business that could bring in profitability. 

While 2022 has seen a record number of startup M&As, given the widespread impact of the slowdown in the past 12-14 months, we are likely to see this figure toppled by the end of 2023 if investor caution continues to hold back capital infusion.

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