Chem­istry, not Math­e­mat­ics, Rules Merg­ers

The Economic Times - - Disruption: -

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)

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