With VC cash, start-ups gobbling up start-ups

Within days of its third round of venture funding, Bangalore-based education services company TutorVista closed an acquisition in the supplemental education space.

Meena Ganesh, CEO of Manipal K-12 Education, a joint venture between TutorVista and the Manipal Group, said that the deal would give the start-up the required scale and augment its capabilities as well.

“Acquisitions help in a variety of ways ranging from scaling up operations to strengthening of offerings. We recently raised $19 million from investors which helped us go ahead with this acquisition,” Ganesh said.

TutorVista is just one of the several VC-funded start-ups that are looking to use venture funds to grow inorganically taking advantage of the current low valuations. 

IMImobile, the Hyderabad-based provider of converged mobile and online technology platforms and managed services to cellular service companies, is another start-up that acquired another start-up. In July it bought Mobytec to add back-up and sharing service to its portfolio of offerings.

Likewise iYogi, a Gurgaon based direct to consumer technical support provider, funded by VC firm Canaan Partners, recently acquired US-based Clean Machine Inc, a personal computer security and performance management service provider, for an undisclosed amount.

According to Arun Natarajan, founder of Venture Intelligence which tracks VC and M&A activity, acquisitions in India have historically been the forte of bigger private equity backed or listed companies.

In that sense the increasing appetite for VC-backed start-ups in India to look for acquisitions is new. VC firms say that the in more mature markets like the US start-ups have been making acquisitions over the years.

“The VC scene is nascent and many start-ups are still too small to make acquisitions. However, some start-ups that have now reached a reasonable scale and are well funded through VC funds are looking to grow faster,” he said. Natarajan said that the average size of these deals would be in the range of $2-3 million.

Bejul Somaia, managing director at Lightspeed Venture Partners, said that start-ups are looking at acquisitions for a number of reasons.

“Start-ups are looking for a strategic fit whether it is to fill in a technical functionality, accelerate growth or even buy out a competitor. There is a lot of innovation happening in the industry and acquisitions can give you an edge,” he said.

Start-ups may evaluate acquisition opportunities based on their specific objectives — whether it is to enhance technical capability, accelerate revenue growth, strengthen the team or even take out a competitor, he said.

According to Alok Mittal, managing director of Canaan Partners, boardroom discussions on acquisitions have become more frequent.

These start-ups are also looking at mark their footprints in overseas markets as well.
“It’s an opportunity to augment the capabilities of our portfolio companies and also broaden our presence. Discussions for acquisitions are fairly active these days as it’s not possible to do them in boom times,” Mittal said.

VC firms say that as start-ups scale up their businesses, more acquisitions will be on the anvil. They say that many industries, including travel, software and IT, food and beverages, have opportunities for consolidation.