Consolidation remains key to India VC – AVCJ Forum

"We don't know when new markets are being developed whether it's a winner-takes-all market, or whether we will end up with a duopoly or several companies," Aaron Miller, a managing director and co-head of venture capital at Commonfund Capital, told the AVCJ India Forum. "There's a desire to take the flag to the mountaintop, but the question is how many people can go to that mountaintop and do it in a profitable manner."

However the process plays out, participants in India's VC landscape agree that most of the country's start-ups will end up being absorbed by competitors, with at most a few left to dominate their respective industries. This prospect is a potential win for all stakeholders in the ecosystem, but such acquisitions could backfire if the buyers are unprepared to handle their new assets.

"If you are acquiring a company you need to be able to take over the management and integrate it fully into your business," said Ben Mathias, a managing partner for Temasek Holdings-sponsored Vertex Ventures. "It's pointless to acquire a company and then expect that management team to continue and be fully motivated, because over time the management team will leave, and the business will erode, and you'll end up spending a lot of money for nothing."

Start-ups must also be wary of pursuing acquisitions just to demonstrate growth, without considering whether the target will complement its own strengths. Mathias recalled several cases in which a start-up raised a large funding round and bought rivals due to pressure from investors to put the money to work, only to discover their new acquisitions could not be easily integrated. This eventually dragged at the buyer's bottom line.

Acquisitions are best pursued as one part of a larger strategy to achieve scale, as with online fashion retailer Myntra. Though consolidation has been part of Myntra's story – the company was acquired by domestic e-commerce giant Flipkart in 2014 and bought Rocket Internet-backed rival Jabong last year – the company has also focused on building its identity as a fashion brand with its own clothing line.

"The focus had been on topline growth, but they have moved away from just having internet and mobile as the differentiation, to creating a brand and selling it, with the internet as the most cost-effective mechanism," said Karthik Prabhakar, a director of IDG Ventures India, an early backer of Myntra. "So as an early-stage investor, the focus is still can this business scale very rapidly in the first two or three years and create a meaningful niche for themselves, and can you build it toward profitability."

The AVCJ India Forum is taking place on December 5-6. For more information, go to www.avcjindia.com.

• Tweet  
• Facebook  
• LinkedIn  
• Google plus  
• Save this article  
• Send to  

• Topics
• South Asia
• GPs
• Early-stage
• Trade sale
• India
• Vertex Management (II)
• IDG Ventures
• Commonfund
• Venture
• AVCJ Events