Acquisitions and Exits
“The startups in India saw a 108 per cent growth in total funding from USD two billion in 2017 to USD 4.2 billion this year.” — National Association of Software and Services Companies — Economic Times
Startups have picked up unprecedented growth in the last decade. While some of them certainly make it big: PayTm, Flipkart & Ola, to name a few; there are tales of early acquisitions and failures that make the rounds too, on media channels.
Why do startups shut down in an early phase of their journey despite boasting of great ideas?
- Market failure — What most founders fail to foresee is the market need of their product in future. More often than not, a similar/better product/alternative exists which makes the newer one vulnerable.
Are your offerings compelling enough for people to buy them?
Market size — Are there enough people to buy the product?
Market Timing — Is this the right time to launch the product?
Do people need it now or will they need it in future?
These are the kind of questions that must be put forward and analysed.
GoZoomo was one of these startups for which the market was not ready, at least at the time of its launch or near future, which shut down within a couple of years of its inception. GoZoom (primarily Zoomo) was a mobile-based peer-to-peer platform for used car transactions that helps the patrons to buy verified, pre-inspected cars directly from owners without paying any brokerage.
Although GoZoomo’s ideas were on point because there was no other platform that ran on similar ideas, but perhaps the market was not ready for this change. This led to an early exit for them and a word for all others.
“The right thing to do is to treat the capital respectfully and deploy it where there is a better chance to create huge value,” GoZoomo CEO and co-founder Arnav Kumar told Tech in Asia.
2. Business Model failure — If Customer Acquisition Cost exceeds their Lifetime Value.
CAC — Customer Acquisition Cost; the average amount spent to acquire each customer. This cost includes the marketing, sales, promotional, productional and all other expenses combined.
LTV — Lifetime Value; gross margin related to a customer.
Let’s take an example of Hyperlocal grocery delivery startup PepperTap which was one of the biggest startup failures of 2016 even after raising US$50M funding -Techinasia.
PepperTap, which launched itself as an on-demand grocery major, failed to back its outright growth with strong technology leading to app crashes and consequently bad UX. This led to a disruption in their operation and they had to initially stop business in a few cities and eventually PepperTap shut down when none of the other resorts worked in their favour.
“We operated on a negative margin per delivery, and in such a scenario, the path to profitability looked very distant — at least two to three years,” PepperTap founder and CEO Navneet Singh told Tech in Asia.
You can read more about Peppertab’s journey at Yourstory.
3. Running out of cash — Despite heavy fundings, the young enterprises either fail to utilise the resources in the right capacity or overuse them and stay stranded!
“The total number of startup funding deals, especially in the late stages, witnessed a massive growth of around 250 per cent from USD 847 million in 2017 to USD 3 billion 2018!” , Source ET
Stayzilla, which started off as one of India’s largest homestay network, had raised US$33.5 million. But soon after, Stayzilla ran losses of US$14 million against a revenue of US$2 million in the financial year ending March 2016.
The cash burn became unsustainable when investors turned more cautious and funding dried up- Techinasia; Thereby enforcing Stayzilla to cease operations with immediate effects.
Studies have shown running out cash constitutes of a whopping 29% of all the reasons that result in startup failures. Utilising funds/resources in the right capacity is as essential as raising them.
As much as the sources try to give accurate details of the shutdown, there are several reasons, and not just the ones mentioned, due to which these startups discontinue to function, some other reasons include networking failures; legal challenges; poor management.
Acquisitions
While a lot of startups fail to sustain in the longer run, the others, despite flourishing, get acquired by bigger enterprises in the market as an attempt to increase the value of the organisation.
Joe Caprara, COO, Boxton, in of his Quora Q&A, discusses various factors which lead to acquisitions.
The popular acquisition of Myntra by Flipkart seemed like a strategic move. Flipkart had been escalating at a tremendous pace in the e-commerce industry, but it was high time it would have wanted to grow new wings and expand itself to cater to latest trends. Therefore the decision came in to buy the fashion giant Myntra in 2014 and take over the online fashion industry.
Also, with Amazon hitting the Indian markets, it was important for Flipkart to gear up and take this step. Flipkart later went on to buy Jabong as well to leave no stones unturned when it came to e-commerce, especially the fashion sector in the sub-continent.
Recently, world’s largest retailer, Walmart acquired Flipkart in a US$16B mega deal. This is primarily because Walmart wanted to venture into India and Asian markets and India is one of the biggest growing markets in the world. Subsequently it is also an opportunity for Flipkart to showcase itself in other parts of the globe post this acquisition.
On the other side, taxi aggregator Ola bought Foodpanda in a recent contract in order to compete with Uber’s Uber Eats venture in the on-demand food delivery sector. It was a transactional acquisition as Ola did not want to lag far behind Uber on any grounds and it was ready to bear the cost for it too. Off late, we have encountered multiple offers and discounts running on both the food delivery apps just to keep up with the perfect competition in the economy!
With all those facts and speculations, it would only be fair enough to conclude that although India has become a hub for startups and internet companies that are being launched every day at a tremendous pace, there are varied tales of successes, failures and acquisitions; and despite the roller coaster ride and all those disruptions in the startup industry, it is a treat to see so many individuals breaking the monotony, fighting the odds to take up new challenges and take innovation & technology to greater heights.
“The key growth drivers were enterprise software, fintech, healthtech marketplace and edtech. Data analytics, artificial intelligence and IoT startups have been witnessing fastest adoption across industry verticals.” — ET
