The grand exit

Last year saw 265 exits collectively valued at $33 billion, with the Flipkart acquisition by Walmart at $16 billion being the biggest

Exits are the phenomenon that completes the circle for the start-up-venture capital-private equity ecosystem to move forward

Alongside the rise of unicorns is increase in the number of exits of investors in Indian start-ups. A report by Bain and Company and Indian Private Equity and Venture Capital Association (IVCA) states that 2018 was one of the best years for exits. Last year saw 265 exits collectively valued at $33 billion, with the Flipkart acquisition by Walmart at $16 billion being the biggest. Experts feel with the maturing of the start-up ecosystem in India, exits signify a strong momentum in the industry.

“Exits are the lifeblood of the start-up ecosystem. A lot of investment (in terms of people and money), product innovation, customer value is created in a start-up, and if the company isn't headed to be a standalone player it is often best to consolidate it with a larger company and get a meaningful outcome, financially and otherwise,” says Sanjay Swamy, managing partner, Prime Venture Partners,

According to Rajat Tandon, president, IVCA, exits are crucial for a number of reasons. “Venture capital (VC) and private equity (PE) investors tend to raise funds from limited partners, or LPs. These LPs are usually institutional or are high networth investors, eyeing returns from alternative asset class by investing in a PE or VC fund. The LP-PE/VC contract has several contractual and timebound terms for returns. This implies that exits are the phenomenon that completes the circle for the start-up-VC-PE ecosystem to move forward.”

Exits can happen either through an initial public offering (IPO) or by way of a buyout. Recently, Uber went public, pricing its IPO at $45 per share. While Lyft, which also went public in 2019, had priced its IPO at $72 per share. However in India, IPOs have been non-existent for start-ups, says serial entrepreneur Bala Parthasarathy, CEO and co-founder, MoneyTap.

“There is enough domestic capital that wants to participate in the tech start-up environment but cannot do so at scale. I might believe in Ola or OYO and want to own shares in them. But the listing rules are complex and not conducive for tech start-ups. Today, acquisitions seem to be the only viable exit strategy for start-ups,” says Parthasarathy. 

According to experts, the recent acquisition of artificial intelligence (AI) start-up Haptik by Reliance Jio for Rs 700 crore and that of Reverie Technologies for Rs 190 crore are interesting examples. "They provided solid returns to the founders and the investors of the start-ups, and at the same time a platform such as Jio can provide the entrepreneurs a realistic chance of seeing their start-up dream of impacting a large chunk of the population become a reality,” says Swamy. 

Experts feel the ecosystem needs a mix of both blockbuster exits like in the case of Flipkart, or smaller ones like the buyout of Bangalore based TongueStun Food by Zomato last year, for $18 million. "Silicon Valley is not just built on multi-billion dollar acquisitions, but more on the $30-70 million acquisitions that happen on a weekly basis in large companies such as Google, Amazon, Facebook and Apple,” Swamy says.

However, acquisitions in the start-up space come with their own challenges, as there is no proper domestic ecosystem for mergers and acquisitions. Swamy says this starts with the culture of not making it easy for entrepreneurs to do business with larger companies. "It is crucial for the large corporates to plan a few programmes on how to do business with start-ups as most exits happen after two companies have worked closely together, and the larger company sees the strategic benefit of owning the smaller player." Thus, large companies should focus on partnering with start-ups.

Another key challenge is the foreign buyouts of start-ups. "Foreign exchange clearances have to be obtained and global players are often reluctant to even bother. This needs to be simplified,” says Parthasarathy. "Furthermore, to boost the exit environment, start-ups have to work on their fundamentals and have a healthy and fast-growing business." "Start-ups should keep their books clean, preferably audited by a reputed auditor as transparency is the key. Also, having a robust set of investment bankers with global connects will spur more deals,” adds Parthasarathy.