Chemistry, not Mathematics, Rules Mergers
As growth funding began slowing for startups in crowded online markets in the second half of 2015, speculation increased that firms unable to run the long distance on their own would be acquired. But consolidation, especially among the portfolio companies of investors, is easier said than done. Mergers and acquisitions have to be driven by founders rather than investors, said Mohit Bhatnagar, a managing director at venture capital firm Sequoia Capital India. In an interview with ET’s Madhav Chanchani, Bhatnagar, who sits on the boards of Zomato and Dailyhunt, spoke about the distressed funding environment and the high rates of cash burn by startups. Edited excerpts:
MOHITBHATNAGAR MD, Sequoia Capital India The smartest entrepreneurs knew last year was an anomaly so they raised capital playing the game, put the money in a safe and threw the key away
How have things changed since the first quarter of 2015? It was breathless the past 18-24 months and it was an anomaly. But things are exactly the way it should be right now. Fundamentals in the Indian internet market remains strong with consumer adoption of smartphones and spending getting better and better.
It is time to stop worrying about what your competitor might do if he has access to lots of capital and does some silly things… (and feel pressured to) do it as well. It is business as usual right now. The best companies get built in downtimes and normal times.
How are companies used to high burn rates and raising more and more money from investors to maintain high growth adapting to this environment? Companies were getting rewarded for high growth with large fundraises (last year). This year, companies are not getting rewarded if they have exponential growth with broken unit economics. The smartest entrepreneurs knew last year was an anomaly so they raised capital playing the game, put the money in a safe and threw the key away.
Burn rate levels in January-February are at half or one-third of their peak levels. The correction of reducing burn, focusing on what’s core to startups and cutting away businesses that are frills or adjacencies has already happened.
How will consolidation play out for startups compared with 2012-2013, when it was mostly investor-led? I am still to see a company where an investor can go to the founder and say ‘let’s merge’. The biggest thing that happens in consolidation is not mathematics between investors but chemistry between founders. Putting two weak companies together only creates a weaker company. The only way (consolidation) can make sense is when two founders say there is not enough capital in the market and come together to be more attractive to customers and investors. The most effective thing investors can do is put founders together and ask them to talk. They could come out hating each other or work together. (Fullversionoftheinterviewon ETtech.com)