Here's why Corporate India should spend some of the $150bn it has in cash on acquiring home-grown tech startupsVishal Krishna
Over the last five years we have seen some great acquisitions of Indian companies by global businesses in the technology space. ibibo Group acquired online bus ticket platform redBus, Hitachi acquired point-of-sale solutions company Prizm Payments Services, and Oracle acquired enterprise security startup Bitzer Mobile, while Facebook acquired software startup Little Eyes Labs, which makes performance analytical tools, and Google acquired cyber security firm Imperium. The 15 notable acquisitions made by foreign companies till 2015 raise questions as to why Indian companies don’t look at homegrown startups for strategic acquisitions.
This year, Tata Group’s Titan Industries acquired a strategic stake in Caratlane.com—the online jewellery business—to promote its jewellery line to a younger segment of consumers. Sources value the deal to be well over Rs 327 crore. This makes one wonder if the dam has finally broken to let in a deluge of strategic acquisitions by Corporate India in the digital consumption and technology industry. Unfortunately, analysts and industry sources say Corporate India sees more value abroad than within its own country. “The problem is Indian corporate houses want to do everything by themselves,” says Mohandas Pai, MD of Aarin Capital. He adds that this must change and rupee capital must invest in startups that have built strategic tech.
Here are some examples as to why they could have acquired companies in these segments. Data shows that the top 50 India corporate houses (minus the banks) have $150 billion in cash reserves. Reliance itself has more than $25 billion (Rs 1,63,000 crore) in cash.
Fintech: Payments are going digital and mobile is central to financial technology. Most corporate houses in India have consumer businesses in the form of retail and have over five lakh distributors who still make payments through cheques. With the Unified Payment Interface being launched by the India Stack and the National Payments Council there are a slew of startups that have developed capabilities in this area. Any investment in this space will make corporates leap-frog their ecosystem from netbanking to UPI in under four years. However, large houses like Reliance are working on their own payment wallet and ecosystem. The good news is that Future Group has tied up with Paytm to allow online payments for Big Bazaar, the grocery retail chain of the group. But the pertinent question to ask at this juncture is: why are Indian banks not investing on acquiring startups?
B2B technology: There are startups today collating and mapping information on the region-wise sales behaviour of mom and pop retailers. These businesses can benefit consumer goods companies. There are analytics sciences companies that are making sense out of data in manufacturing and consumer behaviour. These companies could have seen investments from telcos and large manufacturing houses. Even logistics is a big business these days, especially last-mile connectivity, none of the Indian brick-and-mortar retailers have taken stake in last-mile delivery businesses.
E-commerce: Taking into account the growth of Snapdeal, ShopClues and Flipkart, Indian corporates should have seized the opportunity to strategically partner with these businesses. With Amazon pumping close to $5 billion in the country, these Indian retailers are in need of money. A reason why Indian corporates stayed away from these businesses is because of their balance sheet, which carries heavy losses. Any acquisition of these companies could have a bearing on the stock price. However, these companies continue to sustain losses in their in house e-commerce ventures. Aditya Birla’s TrendIn and Abof, Tata Group’s Cliq have been funded with all the cash to sustain operations at lower scale. The Future Group acquired a distressed FabFurnish - from Rocket Internet - (for Rs 12 crore minus the debt), which is hiving off investments in the country. It was a good buy for Future Group to streamline their furniture retailing business.
Healthcare/manufacturing technology: Manufacturing businesses have robots today and manufacturing is getting automated. There are Indian startups that manage robotics networks and factories. There are security companies that fight cyber crime. Unfortunately, other than Kovacis — a plant network management company —several core technology companies have no business cases within the country. There are companies like Forus Healthcare breaking boundaries in building products to manage eye care in India at an affordable cost. Maternity care provider CloudNine has been actively scouting for technology startups to work with. Even companies like Infosys have bought at least five startups globally over the last two years.
“This also tells you that none of the Indian startups have achieved any scale. It is also because there is a strong SMB sector in India, which has served large corporates. Also, the fact that the Indian technology industry has been services-led, there is not enough core technology to bet on,” says V Balakrishnan, founder of Exfinity Ventures.
These are some examples of opportunities that have knocked on Corporate India's doors over the last five years. It looks like the next four years will see a slow M&A activity for Indian startups with Corporate India, giving way for the foreign firms to lap them up.