Why Corporates Must Step Up Their Startup Acquisitions Game Corporate treasurers should give careful consideration to startup acquisition as an asset class for its potential for high returns, say experts

In evolved startup ecosystems such as the US and China, we see many leading corporations such as Microsoft, Google, Amazon, Meta, Apple and others acquiring startups time and again. However, in India, the appetite for startup acquisitions among corporates has been slightly lesser and experts feel that it is time corporates stepped up.

Talking about how exit momentum has greatly stalled in India, and how the mergers and acquisitions climate is weak, Madhu Shalini Iyer, managing partner, Rocketship.vc said, "Not many people talk about a black sheep in the ecosystem, that is, corporates acquiring startups. In the US, corporates are a huge acquirers. There's a lot of M&A activity that happens with corporates acquiring companies. There's not that much appetite in India for corporates to acquire startups. I feel that should change. And founders should drive that change. Because it's really a very stark difference in India and rest of the world."

Why the laidback attitude

Over the years, global companies like Microsoft, Google, Amazon etc. have been actively acquiring startups to gain a competitive edge. In India as well while there has been a surge in recent years of startup acquisitions by domestic corporates, on a comparative basis the appetite for startup acquisitions has been comparatively lower. This can be attributed to various factors. Vinay Bansal, Partner, Physis Capital shares below:

Vintage of the Startup ecosystem: Developed nations like the USA have a startup & tech entrepreneurship culture since the mid-20th century while India's startup ecosystem is about a decade and a half old, and hence a time lag in the widespread understanding and adoption of startups as viable business opportunities.

Risk-Averse Approach: More Indian corporates seem to have maintained a risk-averse approach. Many of them prefer to invest in established companies rather than taking chances on startups that may or may not succeed.

Lack of Synergy: In some cases, Indian corporations may not see sufficient synergy between their existing operations and the startups they consider acquiring. Merging two entities successfully requires careful planning and alignment of objectives, which can be challenging to achieve.

Funding Ecosystem: The availability of venture capital and angel investors in India has been on the rise. Startups often secure funding independently, reducing their reliance on corporate acquisitions. This thriving funding ecosystem enables startups to remain independent and grow without being acquired.

Cultural Differences: Cultural differences between startups and established corporates can also play a role. Startups often value flexibility, innovation, and speed, while traditional corporations may have more structured and hierarchical cultures, making integration a potential challenge.

"However, there is a noticeable shift in recent years. Indian companies are beginning to show increasing interest in acquiring startups as they recognize the potential for innovation and growth. Examples include Reliance group's acquisition of Netmeds, Tata group's acquisition of BigBasket, Zomato's acquisition of UberEats etc. This signifies a promising sign of Indian corporates adapting to the evolving startup landscape," he said.

Analysts feel that in the US, such acquisitions have helped drive massive growth for corporations. Some examples include Amazon, GE, Johnson and Johnson, Qualcomm, Comcast, Unilever and Google. "While some of these acquisitions turned out to become multibillion dollar ventures, others ended up being written off. These acquisitions were made to either acquire a patent or a proprietary software, which otherwise would have implications on GTM for the corporations considering the lead time of having to build this from the ground up internally," said Lakshmi Narayanan, Managing Partner, Patel Family Office.

In India, overall M&A activity has grown at a CAGR of 24% from 69 deals in 2019 to 163 deals in 2022. This is attributable to two major themes playing out in the market. One, is the growth in the strategic M&A. Second, large startups are increasingly making strategic moves by acquiring smaller counterparts.

Another key reason is outsourced innovation. "The market is poised to move from the question of 'build vs buy' to 'build vs buy vs outsource'. Outsourced Innovation, by means of an example, is when a corporate, outsources the development of a new product/process to an external party. This helps by providing the corporate access to a specialized team, different outlook, quicker turnaround as in-house innovation could be subject to multilevel approvals and a cost-effective solution than having to build ground-up or acquire," added Narayanan.

Benefits for startups, corporates and the ecosystem

Indian corporates stand at a crucial juncture where they need to reassess their M&A strategies and adopt a more proactive stance, particularly considering the growing trend of startup growth and global startup acquisitions, opine experts.

"For Indian companies, the imperative lies in adapting to the evolving business landscape. These acquisitions can also significantly shorten the time required to enter new markets or introduce innovative products or services, a crucial advantage in today's fast-paced business environment. Corporate treasurers should give careful consideration to this asset class for its potential for high returns," said Bansal.

One of the ways forward could be to capitalize on the Corporate Venture Capital (CVC) route, where the corporates could invest in startups through their CVC arm and potentially buy them out to enhance synergies and tap into new products/services and markets. But overall, an uptick in startup acquisitions by corporates is needed to bolster the ecosystem.

Corporate acquisitions can play a pivotal role in propelling ecosystem growth as well. For instance, since these corporates make strategic investments/acquisitions with a view either to use this as a bolt-on to their existing offering or as a means to enter a new market/segment, it is beneficial to the startup ecosystem as against investments/acquisitions that have of late been made purely from a financial standpoint by VC/PE players with a view of maximizing ROI, said Narayanan.

Corporates bring a vast resources, industry knowledge, and expertise to startups, empowering them to scale operations, pioneer cutting-edge technologies, and broaden market reach. "This collaborative synergy amplifies the collective capacity for innovation.

Furthermore, acquisitions validate startups and their innovative solutions, instilling investor confidence and drawing additional funding and partnerships. As corporates engage in more acquisitions, it signals to investors the potential for high returns on their investments in the startup landscape. This increased investor interest translates into greater funding opportunities for startups at all stages of development," said Bansal.

Overall, experts feel that the frequency of corporate acquisitions signals a maturing startup ecosystem, indicating that startups are evolving into attractive targets for larger players. They say that the infusion of resources, validation, market expansion, talent integration, increased investments, and ecosystem maturity are pivotal elements propelling the sustained vibrancy and success of India's startup ecosystem.