Mergers & Acquisitions: A Beacon Of Hope For Startups This Funding Winter M&As are the only way out for some startups today and the good thing is there is enough buyer interest across the spectrum, say VCs and mentors

Since the beginning of April 2023, we have been seeing many acquisitions across startup sectors. Pepcoding, Prognosis Labs, CarLelo, KOOK, Tellephant and many other startups have been acquired in the last two months. Ecosystem stakeholders believe that due to the global economic slowdown and the resulting funding winter, mergers and acquisitions (M&As) are inevitable and are probably the only way out for many. Many large startups are also increasing their M&A drive budgets to cash in on the current scenario and drive growth.

The shift to profitability

The current market conditions indicate a favorable environment for M&A transactions, as long as companies have well-planned strategies and the necessary financial resources to pursue transformative deals, say experts. "The focus has also shifted to profitability and sustainability, and M&As provide a strategic means of business consolidation and expansion. Additionally, with the compression in fundraising, distress M&As may become more frequent," said Kavit Sutariya, general partner, CapFort Ventures.

Moreover, many startups which were in the early stage, wherein they would have soon found their product market fit, proven unit economics and eventually become profitable in 3-4 years, are now in a fix. "They have been stopped short in their tracks as growth capital has dried up, especially true for startups that were planning to raise Series A+ rounds in 2022/2023. They find themselves in a precarious position as they try to control burn, and rush to reach profitability while quickly running out of their cash runway. M&As are often the only way out for these startups," said Shauraya Bhutani, Partner, Breathe Capital.

But the blessing in disguise here is the huge buyer interest across the spectrum. Today, larger counterparts are making smart acquisition moves on their smaller peers from a product expansion, talent acquisition or even a new market entry point of view. "Buyer interest from cash-rich, more prominent startups with leading positions in their sector, which have a monopolistic hold on growth capital as VCs, still with a significant dry powder to deploy, take a flight to quality," added Bhutani.

There is also a heightened interest from traditional players and family-owned conglomerates. Large companies are able to cash in on the situation, get better pricing and finally add a digital layer to their business without having to start from scratch. Acquisitions of startups help these companies stay ahead of industry trends and the time also seems to be right today, to get a better bargain.

India has time and again also proven to be an attractive investment destination as the world's fastest-growing major economy. "We foresee sustained cross-border acquisition interest in key sectors such as fintech and financial services, digital services, media and entertainment and new retail," said Bhutani.

"Companies looking to expand their geographic presence or enter new markets may opt for M&A as a faster and more efficient means of achieving their objectives. Acquiring an established local player can provide instant market access, distribution networks, and local expertise," added Somdutta Singh, founder and CEO, Assiduus Global.

In addition to the above reasons, experts we spoke to also mentioned how VCs are today encouraging portfolio companies to merge to drive cost savings and avoid write-offs.

Sectors favorable for M&As

Technology and software have always witnessed frequent M&A due to innovation and disruption. Healthcare and pharmaceuticals is another sector sees considerable M&As. Fintech, Consumer Goods and Retail have also been known for acquisitions. However, given the current scenario, there could be other emerging sectors as well. "M&A activity can extend to other sectors, and emerging sectors like renewable energy and e-commerce can also become M&A hotspots, subject to market trends and economic conditions," said Singh.

Irrespective of sectors, Indian companies with healthy cashflows are looking at M&As as an inorganic means of growth, both domestically and overseas.

Overall, it looks like 2023 can be a year of M&A. It looks like a consolidation market, which is usually a year of mergers and acquisitions. "We will see a lot of consolidation in the startup and PE-funded companies. A lot of startups will close down this year, and many will go for slump sales as the funding will only keep on drying in the coming year," said Milan Sharma, founder and CEO, 35Northventures.