Unicorns on prowl

For a while now, the startup space has been buzzing with buyouts. The year began with a bang, with edtech major BYJU's buying out US-based playful learning solutions provider Osmo for $120 million.

Unicorns have time and again strategised and planned clever acquisitions of their smaller rivals or ventures in allied segments, to grow, expand and enter new territories. But as the market evolves, a series of big-ticket buyouts, especially in the overseas markets is needed to give a major thrust to the ecosystem as a whole, feel experts.

“The overseas markets provide significant value scale-up for unicorns. They get greater visibility as far as the big investors go, and therefore, are in a better league to access more capital and gain dominance in their spaces,” says Pankaj Karna, founder and managing director, Maple Capital Advisors.

Last year saw eight ventures turning into Unicorn, taking the total count of $1 billion firms in India to 20. Many of these grabbed the limelight not only for raising $200 million to $1 billion in funding rounds led by high-profile investors like Tencent, SoftBank, Naspers, etc, but also for spearheading buyouts. 

Swiggy acquired niche delivery firms like Scootsy and SuprDaily, OYO bought out wedding management firm Weddingz, service apartment Novascotia Boutique Homes and internet of things (IoT) platform AblePlus; and Zomato acquired drone delivery startup TechEagle Innovations and TongueStun Food, an aggregator of caterers and restaurants.

“But all of these buyouts were of small niche businesses operating within India and were valued at a few million dollars. A ticket-size upwards of $80 – 200 million is now needed. That too, in markets like China, the Middle East, South East Asia and maybe even the developed world,” said an expert.

Ashish Sharma, CEO, InnoVen Capital, says, “Global expansion is especially imperative in the case of business-to-business (B2B) enterprises, particularly those in enterprise tech, artificial intelligence, or robotics. Enterprises have to think global as soon as they achieve a product-market fit and that is how companies like Freshworks and Mu Sigma have built valuable franchises.”

Experts feel Unicorns such as software-as-a-service (SaaS) provider Freshworks, insurance platform PolicyBazaar, digital payments platform Paytm, budget hotel marketplace OYO and ride-hailing platform Ola are best placed to buy big abroad. While Freshworks is said to evaluate expansion plans in the US and European Union, PolicyBazaar, Paytm, OYO and Ola have aggressively expanded into markets like the UAE, Japan, Canada, China, Australia, New Zealand and the UK.

“The next step post an international foray is a big-ticket acquisition in that territory to consolidate their presence,” said the expert.

According to Nandu R Kumar, CEO, Spice Route Business, attaining fast growth and tackling competition are the two key factors that motivate Unicorns to acquire. “The triple-digit hyper-growth projections by many of them necessitate inorganic growth, especially when it comes to expanding into a new territory.”

China, Middle East and South East Asia are easy bets for Indian Unicorns to acquire and attain economies of scale, since these markets are highly optimistic on startups, strong on capital and carry demographics similar to India, feel experts.

Kumar notes that identifying a target which can be a cultural fit to the acquirer is a major challenge in the developed markets. “However, the presence of excellent competition law in the developed markets is a boon, as this ensures a seamless and predictable approval process. The BYJU's-Osmo transaction is an excellent example of seeking synergies. Osmo complements BYJU's in terms of providing technology and a new user segment. In addition to that, Osmo brings in a customer base of 1 million and also skilled human resources. This can accelerate the morphing of a Unicorn into a global brand.''

Karna believes that the volume and value mix is different in the developed markets. “Often, superior infrastructure and per capita customer value stand out as compared to the developing markets where volumes acquire prominence.”

An acquisition in the US or EU will principally be part of a Unicorn's global expansion strategy, says Kumar, “While an acquisition in a developing market could be for killing competition or acquisition of talent or intellectual property.”

INTERNATIONAL WATERS

• Experts say Unicorns such as Freshworks, insurance platform PolicyBazaar, digital payments platform Paytm, budget hotel marketplace OYO and ride-hailing platform Ola are best placed to buy big abroad