Feeling The Squeeze

Consolidation is the name of the game as private equity and venture capitalists turn cautious

For startups and e-commerce companies in India, the ground beneath them has clearly shifted over the past two years. The frenzy around startups and funding which peaked in 2015 has clearly cooled off with valuations now heading towards saner levels. Vidhya Shankar, partner at Grant Thornton India LLP, feels the slowdown in funding is a blessing in disguise. “There’s a lot of dry powder in the market. People are taking a lot more time before taking a call. That sense of FoMO that used to exist two years back has certainly come down,” he says.

According to a Grant Thornton deal tracker report the first half of 2017 saw 248 startup PE funding deals worth $1,187 million down 36% from $1,858 million in the first half of 2015. PE investments in e-commerce increased marginally from $769 million to $799 million, but it is nowhere close to what they would require to sustain the growth momentum.

The love affair investors had with Indian e-commerce is clearly turning cold with some of the biggest names in the business struggling for survival. So, it is only natural that the sector is now turning to strategic investors and mergers & acquisitions (M&As) to stay in business. According to the Grant Thornton report, M&A deals in the e-commerce sector went up from $232 million in first half of 2016 to a whopping $2,890 million in the first half of 2017, thanks to the $1,400 million deal between Tencent Holding, eBay Inc, Microsoft Corporation and Flipkart; the $200 million deal between Flipkart and eBay India; the $177 million deal between and One97 Communications-run Paytm. While it was the largest fundraising for Flipkart thus far, its valuation took a significant knock. In the recent round, Flipkart was valued at $11.6 billion, almost 23% lower compared to the last time it raised money in 2015 when it was valued at $15.2 billion.

The report predicts that the second half of 2017 would see an increase in M&A activities. With funds drying up it makes more sense for the smaller startups to join hands with the bigger ones for survival. Rajesh Raju, managing director at Kalaari Capital, feels M&As are natural progression for the industry. “Although M&A was not considered a good option until recently, we are only going to see more of it. The M&A market in India should get deeper for the capital to be recycled,” says Raju, who doesn’t expect any dramatic changes in the funding scenario in the second half.  

However, Mukul Singhal, managing director at Pravega Ventures, feels consolidation for survival doesn’t really solve the problem. He notes, “Let’s say some startup has not been able to raise capital and is getting merged into an entity with no cash involved. I wouldn’t call it a real M&A because there’s no shareholder value created in that process. For Indian ventures to move ahead, companies should get sold for $100 million or above, for cash. I think it’s very early days for that but it has to happen.” While that might be the ideal situation for startups and investors, companies fighting for survival are ready to take any lifeline that comes their way and right now it looks like more consolidation is on the way.