Can’t eat paper profits: India’s startup ecosystem has a vital cog missing

Photo credit: Pixabay.

India is routinely touted as the world’s third biggest startup ecosystem, the fastest growing one, the third best funded one, and so on. But there’s a vital cog missing: exits of substance, which cross US$5 million in value.

Taken as a whole, the number of exits and even their aggregate value surged in 2015 and there’s been no let-up this year. The devil is in the details.

Last year, there were 135 M&A (mergers and acquisitions) deals in the tech product space – 130 percent more than in 2014 – and the total value of these deals was US$1.35 billion (70 percent more than in 2014), points out a study by tech industry think tank iSPIRT and strategic advisory firm Signal Hill.

Source: An iSPIRT & SignalHill report.

The momentum has continued in the first three quarters of this year: there have already been 113 M&A deals and the number is likely to cross that of 2015. As for total deal value, it’s likely to surpass last year’s US$1.35 billion substantially because US$1.34 billion got notched up in the first three quarters of 2016.

But a closer examination reveals the missing cog.

The missing link

What’s striking in the chart above is that 94 out of the 113 deals this year were domestic, but they constituted only a little over 20 percent of the total deal value. It’s the inbound deals which tend to be substantial, but there were only 19 of them.

Three-quarters of the deal value since 2014 came from just eight deals.

Two-thirds of the US$1.34 billion M&A value in Q1-Q3 this year came from a single deal: the US$900 million buyout of Div Turakhia’s Media.net by a Chinese consortium, one of the biggest cross-border adtech acquisitions.

Overall, nearly three-quarters of the deal value since 2014 came from just eight deals. So they hide the low volume of substantial exits in the ecosystem as a whole.

Most of the big ones represented industry consolidation:

• CarTrade buying Carwale for US$88 million
• Quikr buying CommonFloor for US$120 million
• Payu buying CitrusPay for US$130 million
• Ola buying TaxiForSure for US$200 million
• Flipkart buying Myntra for US$370 million

Transition period

Sucker deals