The last few months have been ripe with unicorns and big start-ups acquiring smaller rivals or ventures in allied sectors. Ride-hailing app Ola acquired food delivery start-up Foodpanda. Food delivery start-up Swiggy acquired on-demand delivery start-up Scootsy for $7.3 million. Budget hotels marketplace OYO bought out IoT start-up AblePlus and Chennai-based service apartment Novascotia Boutique Homes. While, more recently, online restaurant discovery and delivery platform Zomato acquired TongueStun Food, an aggregator of restaurants and caterers for workplaces for $18 million. These acquisitions speak of the changing dynamics of the start-up ecosystem in the country.

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Experts point out that promising new ventures will gradually find it difficult to sustain and thrive on their own, without being acquired by bigger players.

“There is space (for smaller start-ups), for those who have sustainable business models with right unit economics as a base minimum,” says Pankaj Karna, founder and MD, Maple Capital Advisors. But he explains that in the emerging landscape, where only a few are getting the real big funding required to scale, acquisitions are extremely important for start-ups, “especially those that have raised initial funding from an investor exit and perhaps founder growth avenue perspective.”

According to Sidharth Rao, co-founder and CEO, Dentsu Webchutney, the heightened acquisition activity is the outcome of funding returning to the sector, especially for the big start-up guns. “This year till now, players like Zomato and Swiggy have raised close to $500 million in funding. Add to that the newfound ambition of giants like Ola to play in their turf. The result of this is that consolidation is happening as the big boys need more growth and the smaller ones are looking to exit.”

Experts say smaller start-ups are increasingly looking at the exit option since, over time, it becomes tough to survive and scale up in a highly competitive environment that is driven by big unicorns. If you feel you can’t survive the competition, then it is better to join someone bigger operating in the same field, says Girish Shivani, executive director, YourNest, an early stage fund house.

According to Nandu R Kumar, CEO of management consulting firm Spice Route Business, an exit through an IPO is tough in the Indian ecosystem, which puts acquisitions as an important exit route for start-up founders and investors. “Start-ups which do not have a definite path towards getting profitable may see acquisitions as an attractive option.”

Shivani says any stable market would typically consist of a few big players controlling a bigger share of the market, with numerous smaller companies retaining a smaller chunk. “In such a market, it is tough for smaller companies to grow unless the total market increases, so acquisitions are inevitable. It is a route for bigger ones to acquire the smaller ones and steepen their growth trajectory.”

“Moreover, being a part of a bigger picture or availing synergies, the smaller start-ups would aspire to be strategically acquired by internet giants to ensure future success. For example, Facebook’s acquisition of Oculus, which allows the social network giant to enter into the VR business, with Oculus providing the technical expertise is a win-win situation for both.” Shivani adds that it is clear that investors will be more open towards consolidation as a survival strategy instead of a shutdown due to lack of funding and inability to live up to competition. “In fact, for any start-up looking for VC money, an acquisition by a bigger rival could be a much desirable option.”

Agrees Rao who believes that acquisitions are now a viable alternative for founders and investors in case they believe that the start-up is burning loads of cash or is straying from what the investors bought into initially. “Big acquisitions are happening and larger companies are paying the market price for start-ups.”

Source: DNA Money