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M&A Roundtable: Indian startups are breaking through

M&A activity in the Indian startup ecosystem has, for a long time, remained fairly nascent. Relatively small exits, averaging $10-15M, are commonplace in India. But things are changing, and with India being the third largest startup ecosystem in the world, Silicon Valley giants are beginning to pay more heed to the entrepreneurs and IP emerging from India.

On January 23, 2015, the iSPIRT M&A Connect Program hosted a Corp. Dev. and M&A Roundtable in Palo Alto. Attendees included corporate development, M&A and senior business unit folks from several key companies including Google, Yahoo, Twitter, Cisco, Intel, Box, LinkedIn, Intuit, etc. the event was coordinated by Sanat Rao (Partner, iSPIRT) and Roxna Irani (Associate, iSPIRT).

Neeraj Arora (VP, Corporate Development – Whatsapp) was the keynote speaker, talking about his experience with the Facebook acquisition, key learnings and challenges he faced while closing the $22B deal with the tech giant. He repeatedly highlighted the importance of trust that the Facebook team built out with the Whatsapp team over the course of multiple years before the acquisition that eventually led to an extremely seamless process. He also emphasized the element of trust that a startup must establish with a potential acquirer, because nothing is more appealing to an acquirer than a startup’s commitment to their specific relationship. (So there’s monogamy in M&A too!)

M&AConnectAfter an interactive session with Neeraj, we had a candid discussion with the Corporate Development attendees about their experiences acquiring Indian startups. The Yahoo and Twitter corp dev folks shared the key learnings from their recent M&As in India. Here are some takeaways for us in the Indian software product industry and for the next acquirers of Indian startups:

  • Visible benefits when the target is a US entity. Given legal complexities, the difference in time and effort to close a deal with a US acquirer can vary substantially based on the legal domicile of the company. Recurring piece of advice of new startups is to register as a Delaware C-Corp.
  • Acquisitions in India take time. Beyond geographic complexities, there are a couple of other reasons responsible. For one, communication can sometimes be ‘lost-in-translation’, so legal agreements with an Indian and a US counsel, with different laws and legal terminology, can often demand more fine-tuning than normal. Other times, key stakeholders may require more engagement and disclosure that demands resources. Whatever the reason, the general idea is to expect, and actively manage, longer cycles.
  • Acquirer confidence in the core leadership of a startup is crucial. Acquirers often expect a strong management team to hire equally strong employees, so they see high quality leadership as a validation of high quality team and product. This is especially true in the case of Indian startups.
  • Acquirers are looking for guidance on how to traverse the Indian ecosystem. India is a new market for a lot of overseas acquirers. A recurring request was for a “playbook” that would highlight the process and differences of doing an acquisition in India. This would include items as simple as list of top colleges in India to give acquirers context of pedigree, to employee attitude towards compensation (cash vs. equity breakdown), to examples of standardized termsheet terms and details.

M&A onnect - Roxna Irani
The iSPIRT M&A RoundTable started 2015 with a bang. The year will be a pivotal one for tech startups in India and the iSPIRT M&A Connect Program is excited to accelerate the pace of change. With all the “Virtual Mandates” received from the Silicon Valley companies, we will make carefully targeted introductions to the Business Exchange Associates. And with a higher quality of interactions, we hope to make much a larger impact to corporates and startups alike..

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.