As we step into 2024, the journey towards restoring investor confidence in Indian startups appears to be an arduous one. Additionally, a relentless and prolonged funding winter has all but halted the momentum of mergers and acquisitions (M&A), casting a shadow over the landscape.
The situation is such that the number of M&As in the Indian startup ecosystem almost halved to 123 in 2023 from 240 deals in 2022.
While it may seem like the consolidation train ran slowly in 2023, historical data suggests a correction may be in the offing, paving the way for a more dynamic and transformative year ahead. For instance, the number of M&A deals that took place this year is comparable to the years between 2015 and 2019.
Despite the onset of the funding winter, the Indian startup ecosystem witnessed some of the biggest M&A deals in the last couple of years. While MX Takatak’s merger with ShareChat was the biggest deal of 2022 at an estimated $700 Mn, 2023’s biggest deal was OLX’s Sobek Auto being acquired by CarTrade for an estimated $67 Mn.
The risk aversion observed last year was evident in the fact that the top 10 deals averaged around $26.2 Mn in size, a significant drop from the $237.5 Mn average deal size among the top 10 deals in 2022.
What’s a bit less surprising is that many of these deals were distress sales. Allen’s acquisition of Doubtnut or TenderCuts being acquired by Good To Go, or indeed the GoMechanic acquisition by Servizzy after the startup’s corporate governance debacle were all startups at the end of their wits, with a consolidation deal their only hope of survival.
In terms of sector-wise deal trends, enterprise tech led the consolidation charge last year, recording 33 deals. Ecommerce and fintech completed the podium with 25 and 21 deals, respectively. Given that these three were the top three best-funded sectors during the year gone by, the trend is hardly surprising.
Meanwhile, the likes of logistics, media & entertainment and consumer services also had their moment in the sun, having lodged one deal each among the 10 largest M&A deals of 2023.
The Plummeting Interest In Consolidation
The trend we presented above is reflected in the M&A data. For instance, funding between 2016 and 2019 ticked along at almost the same pace, hence resulting in a mild decline in line with more startups hitting maturity and opting for organic growth.
However, the consolidation activity plummeted in 2020 – the worst economic collapse since the 2008 Great Financial Crisis (GFR).
Towards the end of 2020, startup funding in the country started gaining momentum. The nine months between July 2021 and March 2022 recorded the most intense funding activity the Indian startup ecosystem had ever seen. In just three quarters, homegrown startups raised an eyewatering $44 Bn, a figure higher than what was raised in the calendar year 2021.
This rapid influx of funding gave us back-to-back years of 200+ mergers and acquisitions in the Indian startup ecosystem. For context, nearly three times as many deals happened in 2022 as in 2020. Since the influx of cash slowed towards the end of 2022, the deal count dropped significantly in 2023.
What Does The Future Hold?
Given the abysmal funding performance of 2023, the Indian startup ecosystem could witness another year of slow deal activity in 2024. However, with the US Federal Reserve and several major central banks looking to cut interest rates over 2024, mergers and acquisitions might again rise towards the end of 2024 and going into 2025.
However, there is another factor at play here – the falling startup valuations in India. Companies with a dearth of cash are exploring down rounds. While India’s economy remains robust in the face of global uncertainty, there is far too much foreign stake in India’s startup ecosystem for it to remain completely shielded from global macroeconomic shocks.
Falling interest rates and startup valuations might just be enough to sustain a certain degree of deal activity, despite the lack of funding Indian startups are facing right now.
In August 2022, we predicted that India’s startup ecosystem would see its M&A count since 2015 reach 1,400 by the end of 2023. As of December 25, 2023, that count stood at 1,286, well short of our estimate. As global uncertainty continues to drive volatility across both public and private markets, another year of slow consolidation could be ahead of us.
[Edited by Shishir Parasher]
The post Startup M&As Hit 8-Year Low As Cash Crunch, Funding Winter Continues To Rattle Indian Startup Ecosystem appeared first on Inc42 Media.
