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2015 India Technology Product M&A Industry Report: M&A and Investment landscape in India

iSPIRT, India’s software products think tank, SignalHill, technology focused M&A advisory boutique firm and Microsoft Ventures, accelerator program for high potential technology startups released the much-awaited 2015 India Technology Product M&A Industry Report. The report highlights key trends in the Indian technology M&A and funding landscape so far as well as predictions for M&A activity in the following year.

To access the report, visit: PMI Report

To watch the Think Next Roundtable: ThinkNext Video

iSPIRT PMI Report

(L-R): Sanat Rao, Partner, iSPiRT M&A Connect; Ravi Narayan, Director of Microsoft Ventures, India; Klaas Oskam, Managing Director, Signal Hill
(L-R): Sanat Rao, Partner, iSPiRT M&A Connect; Ravi Narayan, Director of Microsoft Ventures, India; Klaas Oskam, Managing Director, Signal Hill

M&A

According to the report, technology majors as well as large Indian ‘Unicorns’ are predicted to continue acquiring Indian technology product startups to fill technology gaps as well as talent requirements. Since 2011, there have been 190 M&A transactions involving Indian technology product companies, with a total estimated transaction value of $2.27B. That makes the average deal size in India stand at $11.3mn, far lower than that of mature startup ecosystems such as Israel ($113mn) and the US ($57mn). Furthermore, there’s a substantial difference in value between inbound and domestic transactions. Inbound M&A transactions (M&A by global acquirers) average $21.1M versus domestic deals that average $8.4M. Therefore domestic transactions may account for the lion share (72%) of M&A activity by volume (largely driven by the Indian ‘Unicorns’ including Flipkart, Snapdeal, OlaCabs) but a much smaller share (51%) by value.

M&A

From a sector perspective, there seems to be a clear trend emerging where the majority of M&A transactions and transaction values of B2B software companies is cross-border in nature, while domestic transactions account for the bulk of transaction value and volume for Internet & Consumer and E-Commerce deals.

INVESTMENTS:

From a funding perspective, VC/PE investments in India have hit an all-time high in 2014. Funding in the E-commerce and Consumer Internet markets have grown 38x from 2010-2014. $4.2B was invested in this space 2014 alone, with the two main companies (Flipkart & Snapdeal) accounting for > 50% of the Indian internet investment dollars. Investments in B2B software are also showing an upward trend.

With a fear of missing out, hedge funds & private equity funds are investing in ‘new’ Series B ($10-25mn) and Series C & D ($20-250m) onwards, fueling a frenzy in valuations. Prior to 2014, it would take startups at least 1-2 years to raise series B and C funds. In the last 12 months, this has dropped by half with companies reaching this mark in less than a year.

Investments

OTHER HIGHLIGHTS

The report indicates that a generation of entrepreneurs is coming up in India, looking to build deep-tech companies in the country. Where B2B software companies are aiming at serving the global market, the Internet & E-commerce businesses are focusing on India. These are vision-driven and are focused on creating a market differentiator rather than “selling-out” early. These entrepreneurs are also likely to be angel investors and help other startups succeed, in parallel to running their own firms.

The report also highlights two key challenges that Indian entrepreneurs and startups face: Discovery & Readiness. Most startups are not on the radar of the large global tech companies either for business engagements or investment, which in turn reduces their chances of going through an acquisition. iSPIRT’s M&A Connect Program is solving this problem via targeted connects between US and Indian tech companies with specific technology gaps, and exciting India startups who can fill these gaps.

[Any startups with ongoing M&A discussions, please reach out to [email protected] for advisory support.] 

PREDICTIONS

Finally, the report makes some interesting predictions for M&A and investments in India in 2015.

M&A activity will continue to accelerate. Domestic transactions will dominate E-Commerce and Consumer Internet, with large Indian “Unicorns” will aggressively make strategic acquisitions to enhance market dominance and strengthen strategic growth areas such as: mobile, data & analytics and payments etc. Cross-border M&A will dominate B2B / Enterprise Software transactions.

Acqui-Hires will continue to be a critical focus for US and India acquirers. Areas of interest include iOS &Android engineers and Machine Learning/Data Science experts, whose demand is rapidly growing.

Finally, from an investment perspective, E-Commerce and Consumer Internet sectors will continue to be hot into 2015. Internet of Things [IOT] will also receive significant interest from VCs.

Seems like the market is hot and there’s a lot of activity predicted for 2015. Exciting times ahead… Stay tuned!

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#TheWayForward for M&A in India

2013 was a hot year for Global Technology M&A:   204 announced Tech M&A deals took place at an overall valuation of ~$100B, of which 70% were pure software companies. Thanks to a strong stock market, 51 Tech IPOs took place in 2013.

The story for the India software product industry has been different. Despite huge innovation and rising entrepreneurship, most Indian product companies have lacked meaningful exits.

ThinkNext CorpDev PanelLast Friday, I hosted the M&A Panel at Microsoft Think Next in Bangalore, with a very interesting setup: 2 VCs, 2 entrepreneurs and 2 Corp Development folks from MNCs.   The theme of the discussion was “The way forward for M&A for the Software products out of India”.    Our star panel consisted of Ashish Gupta (Helion Ventures), Bharti Jacob (Seedfund), Ken Foo (Autodesk), Prashant Gupta (Microsoft), Sanjay Shah (Invensys Skelta) & Phani Sama (Redbus).   We had a marquee audience of VCs from IDG, Lightspeed, Qualcomm, Inventus etc. who contributed their insights and really made the discussion lively!

Here is a glimpse of the insights generated during the panel:

– “Discovery” continues to be problem #1 for India software product companies.  Most Indian startups don’t show up on the radar of the big US acquirers. Autodesk first discovered Qontext (their marquee acquisition in 2012) through analyst reports in the US, and didn’t know they were an India company until later in the process.
– Corp development folks are mostly agnostic to the location of the company.  As Ken Foo from Autodesk put it, “we don’t start our day thinking:   today I will acquire an Israeli company … or an Indian company”.  They are looking for a specific product or technology fit & location is secondary.
– One interesting insight was the Investment bankers didn’t really seem to play a role during the discovery process, and all of the participants (buy side, VCs and entrepreneurs) felt that startups shouldn’t expect a banker to help with strategic engagements.  iBanks do play an important role in helping negotiate the deal and running the process to a positive conclusion.
– Acqui-hires (acquisitions with the sole intent of acquiring engineering talent) are extremely hot right now, due to the shortage of big data, analytics & android/iOS engineers.  Obviously, VC investors are less excited about acquihires & view them as a “last option”.  As Ashish put it, a VC will entertain an acquihire deal only when he believes that scaling the company is no longer possible, and the company is in danger of running out of cash.  On the other hand, Corp development folks at the MNCs view acquihires as a ‘badge of pedigree’ for the founders!
– Entrepreneur readiness continues to be a challenge during the M&A process.   Indian entrepreneurs traditionally are techies and don’t spend time building a clear differentiation story or preparing themselves for organizational and financial diligence.  iSPIRT does offer an “M&A hotline” to entrepreneurs where we formally provide advice in the event of an inbound M&A interest.
– A new generation of MNCs: Traditionally, MNC companies have established captive R&D centers in India (eg: Intel, Cisco) and then looked at M&A to enter the India market or identify new technologies.   However, the panelists beleived that M&A activity in software products will be driven by a new generation of MNC companies, such as Facebook, Salesforce, Autodesk etc. who have limited or no presence in India, and are looking to use M&A as a means to acquire global talent and/or establish a presence in India
– Future M&A:  Based on the “Virtual Mandates” that iSPIRT has received, we believe that future technology M&A is likely to happen in the areas of Machine Learning & Analytics, SaaS disruptions like HR and Recruiting, Cloud Infrastructure & Mobility.   Companies that have aggregated large groups of customers & partners within India (small medium businesses, classifieds, consumers for finance etc.) are also interesting for acquirers.

I enjoyed the frank conversation & clear thinking from the panelists, and left with a  huge amount of learning and ideas that I will use to guide iSPIRT’s M&A connect program.

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Back to the Future: Software Moves as Catalysts for Driving Change

Several events in the software world during 2012 will have a notable impact on the industry for years to come, according to SandHill’s industry observers. Some are striking enough that our panelists think they deserve an award.

What software event that happened in 2012 will have the most impact over the next two to three years?

Lincoln Murphy, founder and managing director, Sixteen Ventures:  From a purely commercial standpoint — software innovation aside — there was one event that should have the attention of everyone from freemium startups to the biggest, entrenched enterprise software vendors: Microsoft’s acquisition of Yammer. Microsoft bought Yammer, a four-year-old company, for $1.2 billion not just to expand their market or for their “Cloud DNA,” but because Yammer was, quite simply, beating them in the market. This should make legacy enterprise software and ISV incumbents open their eyes to the reality of cloud startups in their market.

As an industry, enterprise software companies should have learned from Salesforce.com sneaking up on CRM vendors — including Microsoft — and taking market share. But it was brushed off as an anomaly. In 2012, 2013, and beyond, cloud-native companies disrupting and displacing entrenched, on-premises software vendors is no longer an anomaly; it’s rapidly becoming the norm.

Yammer, a cloud-native company, was winning deals against Microsoft SharePoint; and Microsoft didn’t see it as (or perhaps admit it was) a threat until it was so late that the option of buying Yammer was only available at a premium. If you’re the incumbent on-premises software company being threatened by cloud-native vendors and FUD doesn’t work anymore, what’s your move?

Kevin Cox, vice president corporate marketing, Actian Corporation: The thin client or mobile device or smartphone established itself as the most consumer-desired platform for software consumption and a dramatic extension of cloud as the new most desired platform of software. This will play out over the next three years as a disruptive reshuffling of middleware, applications and service provider markets.

Guy Smith, chief consultant, Silicon Strategies Marketing: The utter domination of Android for smartphones is a shift that cannot be discounted. Android came from nowhere to market dominance in less than two years, which changed everything. There appears to be no slowing its growth save for market saturation. If Apple releases anything like Apple Maps again, their halo sales will drop and Android will own it all.

Read the complete story at Sandhill.com

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Sanjay Parthasarathy’s Mantra for Product Entrepreneurs: “If You Can’t Think Big, You Can’t Really Scale”

Even top-notch corporate executives get bored with their work and that’s what happened to Sanjay Parthasarathy. Maybe in such cases the corporation is no longer seductive enough to feed the creativity or a stray thought emerges to create something on one’s own instead of creating newbies at corporations. Sanjay spent a little more than two decades at Microsoft, at the forefront of many new initiatives including the Startup Accelerator Program, which he headed, before he exited to become a startup entrepreneur and investor. The geeky executive headed home after a long stint in the US, to Chennai and started Indix, which is into data analytics and products that impact people’s lives. It would be of relevance to indicate that Sanjay directed Bill Gates’s first visit to India in 1997 and that led to a spurt in Microsoft’s India activities and also had high and positive impact on the software industry in India. Besides being an entrepreneur at Indix, he also plays angel investor and mentors startups in the US and in India. In conversation with YourStory, Sanjay spelt out his philosophy and his point of view.

You were in the US for 23 years; you graduated from MIT, worked at Microsoft for 19 years, what triggered you to come back to India?

I think I was a little bored, and the opportunity here was quite ripe, so it is really a combination of these two things.

If you have to look back at your corporate journey heading various divisions at Microsoft, what were some of your biggest take-aways?

Probably, creating things from scratch. I was with the Internet Explorer, then with .Net, and I helped set up the startup business accelerator. So, I always started things from scratch at Microsoft, so that was the biggest learning to do the startup kind of thing.

Starting stuff in bigger organizations vs. starting up as nobody, what are the differences?

Philosophically, they are the same things. You still have to argue for money, though the funding comes from the company in one case, you still have to put your idea out in the market, you still have to recruit a team, as they don’t give all of that to you, you have to take it. In a way, you have to do the same things.

Read the complete Interview by Raghu Mohan for YourStory.in