‘Covid a wake up call for startups; consolidation likely ahead to boost profits, increase market share’

The outbreak of the Covid-19 pandemic on an unprecedented global scale has devastatingly affected startups across diverse sectors in India. The adverse impact is being felt by the Indian startup landscape in the form of disrupted supply chains, depleted cash flows and steep fall in revenues. As promoters of startup ventures attempt tiding over the current crisis to achieve business scale by leveraging operational synergies, an uptick is foreseen in M&A activity across the Indian startup landscape.

According to data sourced from Venture Intelligence, 11 M&A transactions with a cumulative deal value of $311 million have been concluded in 2020 in the country as compared to 15 M&A transactions concluded in 2019 with a cumulative deal value pegged at $116 million. There has been a boom in aggregate deal-making activity, particularly in the domestic edtech and e-health startup segments.

In a significant acquisition, Indian edtech and online tutoring platform Byju’s bought WhiteHat Jr for $300 million. Bangalore-based Unacademy has acquired postgraduate medical entrance exam preparation platform PrepLadder for $50 million. These acquisitions have helped the companies diversify their portfolios to a greater extent and expand their outreach in emerging business segments. Also, as raising working capital and maintaining operational momentum becomes an arduous process in an uncertain business environment for struggling startups, their downbeat valuations are becoming attractive for acquiring companies.

The health-tech segment has also been witnessing significant deal traction. Reliance Retail Ventures Limited (RRVL), the wholly-owned subsidiary of Reliance Industries Limited has acquired a majority stake in Chennai-based Vitalic Health Pvt Ltd and its subsidiaries (known collectively as Netmeds) for an all-cash deal of around Rs 620 crore to establish a strong presence in the online healthcare segment.

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Even before the onset of the Covid-19 pandemic, the Indian startup landscape was flush with cash as investors like Chinese internet giant Alibaba and its affiliate Ant Financial and other big-ticket investors such as Tencent Holdings and Fosun RZ Capital held substantial stakes in Indian startups.

A large number of startups, particularly unicorns in the country are also backed by Chinese VC funding. However, the Chinese funding pipeline for Indian startups is anticipated to dry up with the Indian government amending its foreign direct investment policy. The amendment mandates companies from neighbouring countries sharing a border with India to seek prior permission from the government for any deal-making activity. This move has been initiated by the Department of Promotion of Industry and Internal Trade (DPIIT) of the Indian government to prevent the supposedly hostile takeover of distressed companies in the country by Chinese investors at throwaway prices in the wake of the Covid-19 pandemic. As a reciprocal gesture aimed specifically to counter the Indian FDI amendment initiative, China has threatened retaliatory action against companies based and operating in China but originating from a country that acts against the interests of its investors.

While demonetization laid the groundwork for the mass acceptance of digital transactions, the onset of the Covid-19 pandemic with social distancing norms and compliance protocols has accelerated the pace of transitioning towards a robust contactless economy. KPMG has estimated the value of the Indian digital payment market to be pegged at Rs 4,323 crore by 2023-24.

As banks and insurance companies seek to digitize their operational processes, they are likely to buy significant stakes in the country’s fintech startup ventures with a view to offering a bouquet of customer-centric, location-agnostic and technologically smart financial and banking solutions to their clients. The fintech startup space in the country is likely to witness a rise in deal-making activity over the near to medium term. The outbreak of the Covid-19 pandemic has been a wake-up call for the Indian startup landscape. We are likely to foresee a surge in the consolidation of operations as startup players aim to maximize profits, increase market share and meet shareholder expectations.

Mahesh Singhi is the Founder & MD of Singhi Advisors. Views expressed are the author’s own.