05 January 2017 07:30:55 IST

As VC funds fall, M&As keep start-ups buzzing

Shift in focus to B2B signals maturing ecosystem; mortality rate set to fall

Investors may have pumped smaller amounts into start-ups in 2016, but M&As within the sector ensured that the fledgling companies continued on the path to growth.

Mergers and acquisitions activity grew 23 per cent, with the sector witnessing over 80 M&As. Start-ups have begun to acquire peers in niche areas for inorganic growth, signalling consolidation. This is despite venture capital firms making smaller investments at $1.4 billion in 2016, down from $2 billion the year before.

Also, fewer start-ups visited campuses for hiring as the slowdown hit businesses badly. The start-up ecosystem made strides in newer areas such as business-to-business, deviating from the ‘me-too’ kind of business-to-consumer start-ups.

Maturing industry

Industry watchers say the ecosystem is maturing with people having domain knowledge and understanding of how businesses work coming in. This augurs well for the ecosystem that’s beset with a huge mortality rate.

What’s the significance of the growth in B2B start-ups? It means a decrease in the mortality rate. According to a Nasscom report, the mortality rate in B2B start-ups is 12-16 per cent against 20-25 per cent in the B2C segment. “B2B start-ups are more likely to survive than the others,” the report said.

While the overall investments into the sector are down 20 per cent at $3.8-4 billion, the number of start-ups that got funding went up about 8 per cent to 650.

Padmaja Ruparel, President of Indian Angel Network (IAN), the biggest angel investor network in the country, conceded that it was a difficult year.

But the network made over 30 investments worth ₹340 crore. “As many as 12 of the start-ups in our portfolio went for the next round of funding,” she said.

Srikanth Velamakanni, Co-Chairman of Nasscom’s Business Process Management Council, felt that the irrational exuberance of 2015 — where start-ups were flooded with money — will not be repeated any time soon. “Start-ups that address the challenges that India faces will have great scope,” he pointed out.

Nasscom 10,000 Startups, the Nasscom’s initiative to focus on building the start-up ecosystem, said there was a qualitative change in the nature of start-ups. Though e-commerce start-ups continue to attract a major chunk of investments, those in niche areas like health tech, fintech (financial technologies) and edutech are getting attention.

“The ecosystem is maturing as people with domain expertise and experience enter the sector. Their understanding of business would help them survive as compared to those set up by freshers,” said Ashok Madravally, Director, Nasscom 10,000 Startups Programme, referring to the report ‘Indian Start-up Ecosystem Maturing’. B2B start-ups constituted 36-40 per cent of the 4,750 tech start-ups in 2016.