SUMMARY
2022 topped the charts recording 240 deals, according to Inc42’s latest Annual Funding Report
While the funding winter played a part, the maturing of the startup ecosystem has a big role to play, particularly startups of the 2015-17 vintage
Enterprisetech displaced ecommerce to be the sector with the highest M&A activity in 2022
If 2021 was a banner year for mergers and acquisitions (M&As) in the Indian startup ecosystem with 210 deals, 2022 turned out to be even better. A total of 240 M&A deals took place in 2022, 10% higher than in 2021, according to Inc42’s ‘Annual Funding Report 2022’.
The year 2022 started with market leaders acquiring complementary businesses to strengthen their product range, for example, Exotel absorbing Ameyo, and Perfios acquiring Karza Technologies. However, as the funding crunch began squeezing startups with unsustainable unit economics, the edtech and fintech sectors saw several M&As with the objective of increasing margins and reducing operating and marketing costs, thereby extending the runway.
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The rise in the M&As in the Indian startup ecosystem can be attributed to macroeconomic headwinds. As Rajul Garg, founder and managing partner at Leo Capital, highlighted, there has been a sea change in the macro funding environment through FY23. Global venture markets declined nearly 50% (from $142 Bn to $74 Bn) from Q1 to Q3 and is expected to fall further in Q4 ending March 31, 2023.
Another factor which led to the rise in M&A deals was high-burn startups with broken unit economics struggling to raise funding amid the funding winter. Growth and late-stage funding deals have been impacted in deal volume and deal value vs 2021.
“2022 saw the highest number of M&A deals in the Indian startup ecosystem as funding dried up post Series A. While the funding winter played a part, the maturing of the startup ecosystem has a big role to play, particularly startups of the 2015-17 vintage,” said Anup Jain, Managing Partner, Orios Venture Partners.
Ecommerce, Enterprisetech Led M&A Activity In 2022
The ecommerce sector saw a high number of M&A deals in 2022, including Zomato’s acquisition of Blinkit for $568 Mn, the acquisition of eight fashion brands by Aditya Birla’s D2C focused entity TMRW and deals in the ecommerce rollup space (led by unicorns Mensa Brands and GlobalBees).
The roll-up “House of Brands” model also saw participation from more established players, with Nykaa and Reliance’s retail arms flexing their muscles in the space.
Enterprisetech, which displaced ecommerce as the sector with the highest M&A deals in 2022, saw most such deals taking place with an eye on expansion, both across the value chain as well as geographically. In fact, 1 out of every 5 startups acquired in 2022 was from either ecommerce or the enterprisetech sector.
“Netcore’s $100 Mn acquisition of Unbxd and Shiprocket’s acquisition of Wizgo are examples of mergers and acquisitions that allowed expansion into and greater control over more parts of the value chain. A rising number of enterprisetech acquisitions also enabled geographic expansion and talent acquisition, with several international companies being acquired by Indian entities,” said Madhu Shalini Iyer, partner at Rocketship.VC.
Edtech, the third largest sector by M&A activity, was also hit hard by the funding winter, with even the biggest players in the sector like BYJU’S and Unacademy resorting to layoffs to cut costs.
Media & Entertainment Sees The Biggest Acquisition Deal Of 2022
The biggest M&A deal in the Indian startup ecosystem took place in the media and entertainment sector, with Times Internet-owned MX Takatak getting merged with home-grown social media unicorn Sharechat in a deal worth $700 Mn.
This was an interesting turn unlike 2020 and 2021 where edtech, fintech, hyperlocal and legacy players such as Reliance dominated the M&A activity in the Indian startup ecosystem.
Also, we observed that the deal size to claim the top spot has also dropped considerably in 2022 compared to the previous year. The top most acquisition deals in 2021 were acquisition of BigBasket ($1.2 Bn), Aakash Education ($1 Bn) and Justdial ($700 Mn).
M&A Trends And Predictions For 2023: Investor Outlook
The trend of digitization continues globally across all major industries, including insurance, banking, media, commerce, and retail. Additionally, new software infrastructure technologies such as AI, blockchain, container architecture, and cybersecurity are reaching a point of widespread adoption.
India’s GDP per capita growth continues and once it reaches a certain level, it should usher in the next wave of investments. That said, it won’t be an exaggeration to say that the next phase of the Indian startup ecosystem will be 10x mature than a decade ago. As Orios’ Anup Jain indicated, 2022 was all about early stage funding, while growth and late stage funding were tepid with respect to 2021. All these factors indicate an ecosystem ready to absorb more consolidations going forward.
Three Key Startup M&A Trends For 2023
Year Of Consolidation: According to Leo Capital’s Garg, the uptick in M&As in 2022 was just a start and 2023 will turn out to be the real year of consolidation. As startups struggle to raise capital, there will be the temptation to merge with better-capitalised players.
Besides, the fintech sector has received a lot of funding in recent times and has also been affected by the change in regulations. Hence, it is likely to see much higher consolidation next year, said Garg.
Value Creation Through M&As: A large number of M&As in 2023 will take place for value creation and gaining market share, according to Nandini Mansinghka, CEO & cofounder of Mumbai Angels Network. Sectors such as financial, healthcare, energy and power, and industrials are those which can see an increase in M&As in 2023, she added.
Survival Of The Fittest: Startups that have raised significant funding are looking at smaller businesses with unique offerings, specialised talent, and innovative technologies for expansion. Considering the tough times ahead in terms of funding, the well-funded players will eye to acquire struggling startups, according to Kunal Upadhyay, cofounder and managing partner of Bharat Innovation Fund.
Many of these M&A will be distress sales in nature and may not result in great financial outcomes for the shareholders of the acquired companies, he added.
As Chinmaya Saxena, Partner – Community Strategy, BEENEXT indicated, there won’t be any deviation from the assumptions under which M&As have happened historically. M&As that offer an expanded market, expanded product capability & strengths, team, and overall strategic go-to-market capabilities to companies that have happened in 2022, will probably continue to happen in 2023.
Download Annual Funding Report 2022“We do expect specifically the valuations around these to be approaching the overall public market valuation-led approaches. Since India and Indonesia are still growing markets with a lot of companies in the early-stage buckets, we predict these are going to be fewer in number and very selective in 2023,” he added.
