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Fund Squeeze in Internet companies may trigger wave of mergers and acquisitions
September, 07th 2015

As the funding cycle for Indian Internet companies starts to slide off its peak, investors and entrepreneurs anticipate a wave of mergers and acquisitions, particularly in the crowded and highly competitive hyperlocal delivery and online classifieds segments.

Startups in these sectors have emerged as must-haves for venture capital firms.

However, securing follow-on financing could become tougher as investors turn selective about which companies to bet on. Experts say this is a fallout of back-to-back capital infusions, overheated valuations and a thrust on growth over profitability, which investors fear could come back to haunt them.

Fund Squeeze in Internet companies may trigger wave of mergers and acquisitionsA round of consolidation could bring focus back on building a business and improving unit economics, or the key components of a consumer Internet business, according to venture capital investors ET spoke with.

"The funding climate is drying out. In all these sectors (food-tech, home services, logistics) there is a lot of overcrowding happening without any real differentiation, so players which are not at a high scale and not differentiated enough will either shut down or consolidate in the next few months," said a Bengalurubased VC investor, requesting anonymity since his firm holds investments in these segments.

Total funding for VC-backed tech companies in 2015 reached $5.4 billion by the middle of August, as compared to $4.7 billion invested in entire 2014, according to startup analytics firm Tracxn.

A flood of early-stage investments until recently into hyper-local startups — which include food and grocery delivery firms, internet-first restaurants, handyman and other local services, and logistics — was somewhat reminiscent of the investor rush into eretailers in 2011. That sector saw a wave of consolidation in 2012 and 2013, when more than a dozen companies including Letsbuy, Indiaplaza, Sher Singh, Urbantouch, Hushbabies, and Inkfruit were either acquired or shuttered.

"Food-tech is an operationally intensive business and different players are strong in different markets. So if you consolidate, value is created.

So consolidation is likely to happen there first," the unnamed VC investor said. Prominent among food-tech companies are Zomato, TinyOwl, Swiggy and Foodpanda, which focus on delivering food from restaurants.

The founder of an internetfirst restaurant and hyper-local logistics entrepreneur said on condition of anonymity that smaller rivals had approached them seeking to be acquired.

"There was concentrated company creation happening in certain segments during the first half of the year, and investors were inclined to close deals much faster," said Avnish Bajaj, managing director at Matrix Partners India. Also, "the progression from seed to series-A (the first round of institutional investment) had started shrinking to 6-8 weeks, but it is now going back to normal time frame of around six months". Bajaj said later-stage funding rounds are becoming tougher to close because of concerns over valuation, and there will be an increasing "flight to quality."

Overall, the number of series-A investments increased to more than 85 between January and August from 50 in all of 2014, according to Tracxn. Earlier-stage seed deals increased to 141 from 112, indicating that a large number of companies will be looking to raise series-A and series-B funding. That could prove difficult.

"Depending on whether these companies are able to raise their series-B rounds within a certain time period or not, they will either break out as clear leaders or may have to pivot, consolidate into another player or down the shutters," said Aashish Bhinde, executive director at investment bank Avendus Capital.


But M&A deals may not be easy to execute now. While much of the consolidation in 2012 and 2013 was driven by venture capital investors among their portfolio companies, it could be tougher this time as the number of investors participating in the hyperlocal story is more diverse. Sandeep Murthy, partner at Lightbox Ventures, said consolidation among peers is challenging and he expects to see more complimentary acquisitions and acqui-hires being stitched. "Two wounded animals coming together does not make a healthy animal. Also in a marketplace model, if a company has a funding advantage they might find it easier to acquire customers than part with equity for an acquisition," said Murthy.

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