Given the scarcity of growth capital currently, M&A volumes could ramp up significantly in 2023, especially in large revenue/market-share based segments where there have been very few deals in the past. There have, however, been several small tuck-ins/bolt-ons and acqui-hires, a trend we expect to continue. As a backdrop, M&A activity in 2022 in India was at an all-time high, with 220+ startups acquired.
Not only are there acquirers from the US, Europe and Asia who are active in India, Indian acquirers are also getting into the game. There are increasingly large M&A transactions from Indian conglomerates and scaled-up technology companies. Examples include Tata acquiring Big Basket and 1Mg; Sharechat acquiring MX Takatak, Reliance acquiring Embibe and Fynd; Zomato acquiring Blinkit; and Byju’s acquiring Great Learning and Aakash.
Notwithstanding this, the circle of founders who have exited businesses in India remains small, likely not more than ~100-150 founders with any type of material liquidity event. Perhaps as a result, we consistently hear from founders who’ve been through M&A in prior cycles about the dearth of good M&A advice for first-time founders going through this process.
And so, to capture common problems and solutions, we spoke with several founders in India over the last few months who have had both big and small exits – over $3 billion aggregate value at exit to a global list of buyers. Their businesses were in a diverse set of sectors, including software/SaaS, commerce/marketplaces, edtech, fintech, gaming and content.
We hope this is useful to both founders and acquirers in 2023 and beyond. Here goes…
Focus on a single problem to drive a significant outcome: A common theme is for the acquired startup to be maniacally focused on doing just one thing really well i.e. the ability to focus on a single problem vs operating multiple products or go-to-market motions. One product is powerful enough to drive a significant outcome, and founders should be sharply focussed. Having many products confuses the positioning and sometimes makes it harder for strategics to locate you on their roadmap – they may therefore find it harder to build the case to acquire you. This of course has to be carefully balanced with the size of the market opportunity a single product company could face.
Different founders exit for different reasons: Some want liquidity for personal reasons. Some are tired of the problem and want to move on to other things. Some want to keep growing their business and see the acquirer as a route to even greater impact. Some, but not as many as we think, take this route when they are staring at an imminent cash-out in a few months to a year. The reasons for exit obviously have a significant impact on the success of the outcome.
Keep your board engaged and involved: Engage your board early on. The best boards are supportive of founders’ decisions while still pushing back on unrealistic or impractical approaches and biases. There are limits (terms or legal or even financial) to what the board could agree to – ensure you understand those limits with the board. It’s not intuitive for many founders to figure out the role of the board in M&A processes. The board will help navigate deal structuring and will want no last-minute surprises. There are almost always twists and turns in an M&A process which the board can provide perspective on. Also as fiduciaries, the board has the task of representing all stakeholders and doing right by them.
Reach out to multiple potential acquirers & generate multiple offers : Finding a buyer is a process full of serendipity and one cannot predict who (and when!) will make an offer for your company. Buyers can be public or private companies and can be operating companies or financial acquirers (e.g. tech buyout funds). Buyers can come from different countries. Sometimes buyers who the founders did not think of will come out of the woodwork – as the old saying goes: companies are bought, not sold.
Make a list of potential acquirers and initiate relationships through warm introductions. The initial approach is often about partnerships and distribution, sometimes about participating in a round of financing. Get help from your investors, advisors and bankers to get the right introductions. You need to generate multiple offers to be able to maximize value and optimize the structure. If you have only one offer, then your ability to maximize value and get the best terms will be severely restricted. There is an art to this, get help from people who’ve been through this before.
Know why you are being pursued: If you don’t know, ask the potential acquirer. Also, strategize as to what you have that is differentiated and/or valuable to the acquirer. We’ve seen reasons such as setting up an engineering team in India to acquiring distribution in a certain geography to gaining market share to denying access to a competitor to adding significant revenue in an accretive manner. Just like mid-market or enterprise sales, do an interest level check with acquirers – are they just looking around or truly on a deterministic path to purchase your company, do they have budget, decision makers/sponsors and forcing functions.
M&A is often a long-term relationships-driven process, get help doing so: Building relationships with strategic partners / potential buyers is always a good idea whether in good times or in challenging times. M&A is a multi-month, if not multi-year, journey and not a point-in-time transaction. Several founders who’ve successfully sold their companies have built these relationships with strategics over months and years. Develop these relationships across corporate development and senior management into the product and tech teams – corp dev relies many times on internal feedback to make the case for acquisitions.
It’s a negotiation: We found that founders have several back-and-forth conversations with acquirers before agreeing to a transaction, usually beginning the conversation with a “no” to the potential acquirer. Don’t be afraid to do this. It is natural and expected. Nobody expects their first offer to be accepted. Seek advice.
Experience of the acquisition process depends on the acquirer’s geography: This was new learning for us, as we spoke to founders. There is a significant amount of cultural nuance when it comes to running the process. There is no one right way but it is worth knowing what could happen. We’ve listed a few generalisations here that founders mentioned to us, at the risk of being politically incorrect…
US companies are professional and run a rigorous and watertight process, to tight timelines, especially if they are publicly traded. They can be very stubborn on terms, as sometimes their hands can be tied by regulations in their home market. This means that while the documentation is painful, timelines are generally met & signed terms are respected. European companies seem to combine a fairly rigorous process with some EQ, flexibility and a human touch. Indian companies run a trust-based process involving founder-to-founder relationships and informal conversations. However, several startups sold to Indian companies have experienced change in terms, delayed paperwork and slow decision-making.
Manage internal team dynamics: While you/your cofounders and/or other senior team members (e.g. CFO) are talking to potential acquirers, you have to manage the internal narrative. This is not easy. Rumors spread easily internally and in the media. Often, acquirers want to talk to the larger team, even before a term sheet. Some founders take a very transparent approach here from the get-go, some keep it to a very small set of people. Startup acquisitions are about talent retention, ensure key talent is in the know. A lot of M&A conversations don’t result in actual transactions – you have to then rebuild the conviction to keep building with your team and investors.
Money is not the only vector in decision-making: While money and valuation is an important factor, it is not the only criteria for choosing a buyer. Founders care a lot about influence in the larger entity and the cultural fit of the current employees. They want to be treated with respect and want to have CXO-level influence at the acquirer. Because of this, founders often choose to get acquired by people they’ve known for a long time, sometimes not taking the highest price offer if the fit is not right. One common concern that emerges is the need to protect the mid-level team.
Terms and taxes matter: Get proper advice from legal experts and commercial experts. The tax regime when it comes to acquisitions is particularly difficult to navigate in India and can trip you up unexpectedly, actual cash flows will also depend on your personal tax jurisdiction, whether India, Dubai, Singapore, Europe or the US, sometimes even based on the state you reside in. There are many different ways to structure transactions. Commercial terms can also make a difference – understand what is consideration given to stockholders (including founder stock) versus what is given as retention/earn-out packages for founders and employees. Be particularly aware of liquidation preferences and openly map out in advance with your investors what will happen if total consideration is less than liquidation preferences in your company.
Integrating your company takes active effort and time: Merging two companies is merging the product and culture. Employees have to go through a stark cultural change dealing with less autonomy, more process and more structure. Product integration is one of the trickiest challenges, and much work needs to go in for synergies to start working. Take the first 90 days to navigate the new org, help with dotted line reporting and understand the OKR/priorities. Negotiate a break after the closing for the founders and team. Most founders spend 12-24 months just integrating the product. The standard advice is to assign the best leadership talent to drive this integration and to have a strong integration team on the acquirer side with a detailed integration plan in place before the acquisition closing.
What next?
While selling your business is a tough process, it does not seem to dampen entrepreneurial energy at all. Most folks we know/have spoken to want to start up again after their first venture. Once a founder, always a founder! At some point post-acquisition (sometimes a few months, sometimes a few years), founders mentally check out and will move to start up again whether after earnouts or, in some cases, prior to all earnouts being paid out. Many times, there is a solid inclination to build again in the same space as the previous company, given they have fallen in love with the problem/sector, have sharp insights and understand pockets of high-quality talent pools that give them a day 0 advantage!
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We hope these learnings were useful to you. Best wishes on your journey and do look us up in case you want to chat about your current or your next venture!
Authors : Dev Khare, Rikkin Majani, Anuj Bhargava
Contributors : Rishi Kulkarni, Vijay Rayapati, Arpita Kapoor, Shruti Kapoor, Shashank Kumar, and many others who chose to remain anonymous.
