BYJU’S, PharmEasy & The Burden Of Startup Acquisitions 

How quickly things change in the tech and startup ecosystem! Less than 18 months ago, we explored how startups were turning into acquirers of legacy businesses and larger companies. But now these mega acquisitions are proving to be a big burden on loss-making startups.

While 2021’s acquisition spree was fuelled by free-flowing VC capital and the disruption seen by some legacy players during the pandemic, startups are now realising that they have bitten off more than they can chew.

For instance, the WhiteHat Jr deal and Aakash acquisition for BYJU’S have proven to be two different kinds of problems for the edtech major, while healthtech startup PharmEasy is in a similar position with its Thyrocare acquisition. And even BharatPe’s JV to acquire a banking licence for its Unity SFB has caused some existential changes in the fintech company.

Amid the ongoing slowdown as businesses look to cut costs and become profitable, some of these acquisitions are proving to be cash cows to support loss-making verticals and in some cases have also complicated future fundraising.

That’s what we are delving into today, but after these stories from our newsroom.

• OYO’s Rejig: The hospitality unicorn has undertaken a major reshuffle of its top management, assigning additional roles to founder Ritesh Agarwal’s core team. Our exclusive story
• Hiring Mantras For Cockroaches: Our deepdive into the cockroach startup trend continues with a look at how startup hiring strategies need to evolve amid the funding crunch
• Short Video Wasteland: Trell, ShareChat, Josh, Roposo and other Indian short video apps are sliding and bleeding users after the ban on TikTok in 2020 fuelled their boom. So what happened to these once-flying social media platforms?

Startups Sing The Acquisition Blues

Ask any startup founder, and they would tell you that one of the trickiest things about mergers and acquisitions is that the transition and integration is often more challenging than signing the deal itself.

Finding VC money to lead acquisitions is one thing, but this does not actually help founders in integrating acquired businesses into their loss-making operations.

It’s a challenge that has also been seen in the case of relatively smaller deals such as Unacademy’s PrepLadder or Mastree acquisitions, and previously in the $400 Mn deal for Freecharge by Snapdeal in 2015, which did not bring the desired results for the marketplace as it continues to remain in the shadows of other giants in the space.

When VC Money Drove Big Deals

The growing appetite for corporate acquisitions can be largely attributed to the fact that startups are finding it much easier to raise capital in the post-pandemic market than legacy businesses.

This gave startups a big advantage during a time when legacy companies had been hit hard by the pandemic’s lockdowns and restrictions on businesses. The power to dictate terms shifted from corporates to startups which not only had the capital but also the technology, which became a competitive edge over legacy companies.

“Venture and private equity capital is always looking for management that is committed to only one company or a new-age startup, but it also needs to be tech-enabled,” according to the founding partner of a Bengaluru-based growth fund.

Best Laid Plans Undone

After raising mega rounds from VCs, startups went for acquisitions of players to unlock new revenue streams and get ready for the post-pandemic market.

For PharmEasy, the Thyrocare deal was about having the retail diagnostics network to serve millions of customers at a time when the diagnostics market had gone through major challenges. What was particularly of note is that Thyrocare was a profitable and listed company that gave PharmEasy a lot more credibility in the healthcare space.

BYJU’S looked to become ready for hybrid learning and the return of offline coaching with the Aakash deal. And previously, the company had entered the coding segment with WhiteHat Jr to add to its curriculum and test prep-focussed offerings.

The pandemic had dented Aakash’s growth plans as revenues dropped from INR 1,200 Cr in FY20 to INR 1,000 Cr in FY21. Its profits in FY20 was INR 164.68 Cr, but fell to INR 43.6 Cr in FY21, just before the nearly $1 Bn BYJU’S deal was signed.

But even the best laid plans can come undone. Especially, as these startups discovered that their loss-making core operations may not be able to support the capital needs of the profitable acquisitions.

Overweight Acquisitions Drag Down Unicorns

PharmEasy’s own challenges in eliminating its losses have dented Thyrocare’s trajectory as well. The diagnostics company reported profits of INR 34 Cr in H1 FY23, as opposed to INR 109 Cr in H1 FY22, before the PharmEasy deal.

To make matters worse, these lower profits are being used to pay the interest on loans that PharmEasy parent API Holdings had taken to buy the company. With Thyrocare’s profits also down, PharmEasy will have a tough time showing why investors should invest in the company at a higher valuation.

PharmEasy had IPO ambitions where it hoped to raise INR 6,250 Cr to pay off the debt for the Thyrocare deal. The healthtech unicorn has now put off the public listings plan, and its growth as a result rests purely on VC funding.

Now Thyrocare is faced with competition that has built up tech capabilities in the past two years and Pharmeasy’s deal which seemed like a coup for the startup at one time feels like a burden.

BYJU’S is in a similar position with Aakash. The edtech decacorn faced problems in clearing dues to Aakash investors which it finally cleared in September last year. A month later it raised INR 300 Cr as an unsecured loan from Aakash to fuel its ‘principal business activities.’ Aakash seems to have become a collateral for BYJU’S in raising new funds to support loss-making businesses such as WhiteHat Jr, which was acquired for $300 Mn.

With a total loss of INR 1,118.25 Cr in FY21, according to BYJU’S unqualified financial report, WhiteHat Jr contributed 26.73% to the total loss of INR INR 4,588 Cr

Now amid the prevailing funding winter and macroeconomic difficulties, BYJU’S is reportedly examining the option of shutting down WhiteHat Jr to cut expenses. The company has denied this, but the fact is the coding platform is an under-performer in the group.

Will Startup Acquisitions Survive?

It’s not just financials that get complicated with acquisitions, but also sometimes the culture of the company itself.

In the competitive fintech segment, B2B payments unicorn BharatPe wanted a slice of the elusive banking pie with the PMC Bank licence acquisition. And now the company is hiring more and more former banking professionals as it moves away from its tech-first promise.

“BharatPe does not need experience but developers and innovators. This is why we were able to launch so many products in so little time. But now, the pace at which BharatPe was able to launch so many products is bound to change, and the key reason behind this is the latest reshuffle at the board and in the management team,” a former CXO at the company told Inc42. The source added that BharatPe’s product and organisational culture has changed a lot in the last year, especially after Ashneer Grover’s acrimonious exit.

Credit ratings agency ICRA observed that Unity SFB will continue to report loss over the medium term, given the high operating expenses typical in the early stages, costs on account of the merger with PMC Bank, and incremental credit costs if required.

The question now is whether these acquisitions, which once looked like masterstrokes, are nothing but signs of the misplaced confidence that startups had on their growth prospects.

The very same ambition and a bullish outlook, largely fuelled by VC money, potentially resulted in mass layoffs and several reshuffles across unicorns. After letting go of people, will startups have to let go of their acquisitions to find the path to profitability?

Sunday Roundup: Startup Funding, Tech Stocks & More

? Slow February: As we come to the end of February, we saw a noticeable dip in fundraising for startup, compared to the previous three weeks. This week, the startup ecosystem collectively raised $215 Mn across 17 rounds, led by the deals for FreshtoHome and Mintoak.

? Amazon X ONDC: In a major development, Amazon has said it will integrate its SmartCommerce and logistics services with the Open Network for Digital Commerce, as it looks to tap India’s small businesses

? SEBI’s Curveball: The stock markets regulator has proposed that a newly listed entity disclose its first financial results within 15 days from their listing date. How will this impact new IPOs?

?️ Swiggy Adds Dineout: Expanding its dining-out service to all users, Swiggy has integrated the Dineout offering into its app, extending the service to 24 cities.

We’ll be back next Sunday with another roundup of the top stories from the Indian startup ecosystem and our key insights on the developments. Till then follow us on Instagram, Twitter and LinkedIn to get the latest news as it happens

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