India tech M&A: Power plays

When Ben Mathias looks at recent M&A moves among India's VC-backed technology start-ups - July saw classifieds site Quikr buy online hiring platform Hiree and Flipkart-backed fashion retailer Myntra acquire its competitor Jabong - the managing director and head of India operations at Vertex Ventures sees a development that was inevitable.

"To a certain extent the consumer segment got overfunded two or three years ago, and as a result too many companies were created in the same category. That's correcting itself right now," he says. "Companies were given too much capital and asked to deliver unrealistic levels of growth."

Mathias' assessment is shared by other investors, who see the consolidation of the country's tech start-ups as a logical outcome of an earlier flood of interest. However, this does not apply to every situation. Industry players note the importance of business plans targeted to the Indian market and the wide difference between the country's consumer internet and enterprise technology spaces. Understanding both of these issues will be crucial to navigating India's rapidly changing technology landscape.

When you don't discount, you can actually run a profitable business from day one – Ben Mathias

Acquire or merge?

Consolidation moves in India's consumer technology space tend to be described in one of two ways: straightforward acquisitions or mergers of equals. The degree to which these descriptions are accurate in each case is a matter of debate, but it is more than a matter of PR spin. For example, when Myntra was bought by Flipkart in 2014, Myntra's founders stayed on and play a prominent role in the combined company.

In other cases, such as the 2014 acquisition of taxi-booking service TaxiForSure by Ola, there is an obvious strategic value for the acquirer. "That was basically bulking up to better fight Uber," says Ritesh Banglani, who departed Helion Venture Partners last year to co-found Stellaris Venture Partners. "The number one and number two Indian companies got together to have an 80% market share advantage relative to Uber."

The TaxiForSure buyout, in which two Indian companies took on a major foreign rival, offers one model for how India's tech consolidation wars could play out. It bears comparison to markets in which each consumer tech category coalesced around one or two players.

Not all agree that it will end up with one domestic and one foreign rival in each category, however. Industry professionals point out that plenty of global players have entered India with the intent to dominate less experienced local competition, only to be tripped up by problems created by that overconfidence.

Businesses that require talented execution on the ground have found it particularly hard; Banglani, of Stellaris, points out that Amazon only began making headway when it gave its local team greater control over the business.

"The number one complaint of Indian country managers of global tech companies is that they don't have control over the product," he says. "In many cases the Indian country manager is not able to even change the placement of one text box on the home page. Because they don't have control, they don't have the ability to localize the product to the Indian market."

While India's overcrowded consumer internet space follows a rationalization path, the enterprise side is expected to go in a different direction. Companies in this segment have attracted less funding and less buyout interest; on the other hand, they have also shown considerable resilience compared to the more well-publicized consumer start-ups.

One reason for this divergence is the differing nature of competition in the two markets. Consumer tech companies have historically fought fiercely for every customer, leading to subsidy-driven battles that burn through cash. "Because so many companies got funded in the same space, they were all forced to discount each other in order to get ahead, because the market didn't really need 10 companies providing home services, for example," says Vertex's Mathias. "In the enterprise space you don't need to do that, and when you don't discount, you can actually run a profitable business from day one."

He points to Firstcry, a child-focused online retailer in Vertex's portfolio, as an example of the competition in online retail. When Vertex first invested in 2014, there were 12 similar players in India; now almost all have been absorbed into Firstcry and Helion-backed Babyoye.

Among enterprise start-ups, duplication tends to be less of an issue. Freshdesk, a developer of online customer support software that has raised nearly $100 million from investors, has just two major competitors, Zendesk and Salesforce.com.

Defensive model

Freshdesk, whose customer roster includes Sony Pictures, Hugo Boss and Honda, illustrates another contrast between India's enterprise and consumer markets. Whereas consumer internet and e-commerce ventures primarily focus on the domestic market, enterprise companies target the global market. This provides them with a much larger potential customer base.

Investors identify a few factors that have historically held Indian enterprise-focused companies back from competing on a global scale, including difficulty penetrating global markets and the lack of high-quality enterprise product managers in India. However, increasingly sophisticated sales models and the spread of start-up experience among local managers are expected to help solve both these issues, in turn helping the companies scale up effectively and creating growth in M&A opportunities.

While the enterprise and consumer segments follow their own paths, investors say consolidation can only be good for the tech sector overall. Not only can the best ideas and talent of former rivals be combined, but increasingly seasoned investors can commit to companies that have learned important lessons in the digital market.

"Previously we saw large hedge funds come in and take wild bets on good to great teams with bad business models," says Vishal Pereira, managing director at CreedCap Asia Advisors. "This year we have seen investors be a lot more diligent; they spend more time on commercial and business diligence before offering a term sheet. So, for the next 18-24 months, we will see strong business models being funded."

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• Topics
• South Asia
• Technology
• Buyouts
• Trade sale
• TMT
• M&A
• India
• Vertex Management (II)
• Helion Ventures