Coronavirus pandemic| Squeezed for funds, small startups brace for fire sale

Distressed mergers and acquisitions in startup space likely to rise due to the outbreak.

M. Sriram

April 29, 2020 / 04:43 PM IST

The coronavirus outbreak may force smaller startups in highly competitive spaces such as social commerce, micro delivery and lending to sell out to bigger players as the pandemic brings economic activity to a standstill, founders and investors have told Moneycontrol.

Squeezed for funds, these smaller players, valued between $5 million and $50 million, are struggling to survive as consumers conserve cash in times of economic uncertainty.

“This is a longer term trend that will manifest faster because of the funding squeeze. Many of these companies should never have been funded because they entered the market when it was already over-funded and a loss-making game for even the market leader,” said a partner at a domestic venture capital firm, requesting anonymity.

Mergers and acquisitions (M&A) would have been the only logical end for some of these companies anyway, but at least in a bull market they would have been acquired at a decent valuation. “This is now a fire-sale scenario,” the partner said.

Some of the founders would consider themselves lucky if they get acquired. “You don't want to shut down the business you have built with your blood and sweat over the years,” said a founder of a content startup, requesting anonymity.

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“In high-burn consumer tech businesses like marketplaces, social commerce and vertical ecommerce, if you aren’t the leader or a close second, selling out is a distinct possibility,” said Shweta Bhatia, partner at Eight Roads Ventures, the venture capital arm of financial services giant Fidelity.

“The Covid backdrop will certainly accelerate the logical consolidation talks, especially in sectors with negative unit economics,” she added. COVID-19 is the respiratory illness caused by the coronavirus.

Well-funded market leaders, however, are looking at this as an opportunity to snap up smaller firms that could add to their expertise or help launch a new vertical.

"If you raised a large round just before Covid hit, and your business doesn’t have an existential crisis in the short term, this is a fantastic time to go on an acquisition and hiring spree,” said an investment banker advising on acquisitions, requesting anonymity.

Even for bigger startups, lack of profitability and an IPO made M&A a mainstream option in recent years.

While Flipkart’s $22-billion sale to Walmart is still a rarity in the Indian market, smaller acquisitions between $100-500 million in cash and stock deals could be on the cards if the business does not start in the next few weeks.

Some other acquisitions in India include Flipkart buying Myntra, Snapdeal’s acquisition of Freecharge and Ola snapping up Taxiforsure and Foodpanda.

Food delivery firm Swiggy buying milk delivery firm Suprdaily and BigBasket acquiring Dailyninja are some examples of big players buying smaller companies.

“There is a big opportunity for leaders to consolidate their position in their categories through inorganic and organic means at attractive terms,” Bhatia of Eight Roads said.