The numbers point to a Tsunami of mergers and acquisitions. In the first seven months of 2016, 123 M&A deals were closed in India worth more than half a billion dollars. M&A activity was the highest in July when 36 such deals were cracked, shows data from Xeler8, a deal sourcing and start-up research platform. Flipkart's acquisition of Jabong may be the latest big-ticket purchase, but this heavy shopping bag also includes Quikr devouring CommonFloor in January, Snapdeal acquiring a stake in Gojavas in March, Future Group buying FabFurnish in April, Titan Industries acquiring CaratLane in May, and ShopClues picking up Momoe in July.
Look at another set of numbers and it is easy to join the dots. There is a drought - in the world of funding.
A presentation prepared by product industry think tank iSpirt states that only $2.1 billion was raised by Indian start-ups in the first half of 2016 compared to $3.5 billion in the corresponding period last year. Barring Snapdeal and ShopClues, none of the country's other unicorns (Flipkart, Paytm, Ola, Quikr, Zomato, InMobi and MuSigma) or those with valuations of over a billion dollars raised any significant money in 2016 thus far. Easy money has dried up. By December last year, when the foodtech sector imploded, it was clear that 2016 would be the year for a reality check. Indeed, it is more of a bloodbath.
The top 10 per cent of the companies who were the biggest beneficiaries of irrational valuations in 2015 or earlier, are seeing a correction. Angel rounds continue to happen but raising Series A, B, and C are tougher. Seed and angel rounds are based on future promise but the following rounds are mostly about showing investors the numbers, the fundamentals, the market share, the money. The funding tap has tightened because many start-ups have little to demonstrate on these parameters. Investors now look for firms with better unit economics, "islands of profitability" and prefer sectors where there is "sanity".
The funding crunch is precisely the driving force behind the Tsunami of acquisitions. No one wants to admit but when you run out of money, a larger home for the team you may have built is a saving grace. It works for investors, too. When a distressed start-up gets acquired, the VC's track record remains intact.
So, what can we expect for the rest of the year? There will be more defensive buys - Flipkart's aggression in the Jabong deal may have to do with denying Amazon and Snapdeal market share in fashion, a high margin category. Two, most of the M&A deals, going ahead, will likely be stock deals. Start-ups would want to save cash for operations in this climate. Third, one should be prepared for a longer bear run. No giants of e-commerce have fallen yet. Even if one does, it could trigger a Lehman moment for the Indian start-up ecosystem.