If you ask an entrepreneur of any successful private technology company in India about their plans for the company, the answer almost always is: "IPO". Clearly, being the chief executive of a public company has its cachet and helps establish the social standing of an entrepreneur. So, this may explain why Indian technology entrepreneurs don't explore opportunities for their companies to be acquired by larger Indian or multinational companies. The lack of an active acquirer base in India also means that mergers and acquisitions are not the preferred exit route for these entrepreneurs.
However, the business model of most venture capital companies in the U.S. depends on outsized returns typically generated by portfolio companies either going public or getting acquired at high valuations. While the split between the number of acquisitions versus the number of initial public offerings varies on an annual basis, data clearly shows that mergers and acquisitions remain a significant percentage of the total exits for venture-capital-backed companies in the U.S.
While high-profile acquisitions such as Google Inc.'s $1.6 billion purchase of YouTube or Microsoft's $8.5 billion buy of Skype are highly profitable for the venture capitalists involved, a slew of smaller acquisitions in the $50 million to $400 million range enable venture-capital companies generate positive returns. It's like hitting singles and doubles in a baseball game instead of every player trying to hit a home run.
The venture capital model is still nascent in India, but M&As will have to play a significant role in making the model successful here, especially since public share sales alone may not be able to support exits for all venture-capital backed companies.
However, the business model of most venture capital companies in the U.S. depends on outsized returns typically generated by portfolio companies either going public or getting acquired at high valuations. While the split between the number of acquisitions versus the number of initial public offerings varies on an annual basis, data clearly shows that mergers and acquisitions remain a significant percentage of the total exits for venture-capital-backed companies in the U.S.
While high-profile acquisitions such as Google Inc.'s $1.6 billion purchase of YouTube or Microsoft's $8.5 billion buy of Skype are highly profitable for the venture capitalists involved, a slew of smaller acquisitions in the $50 million to $400 million range enable venture-capital companies generate positive returns. It's like hitting singles and doubles in a baseball game instead of every player trying to hit a home run.
The venture capital model is still nascent in India, but M&As will have to play a significant role in making the model successful here, especially since public share sales alone may not be able to support exits for all venture-capital backed companies.
This gap between an entrepreneur's expectations and the reality that an IPO is not a feasible for all companies will hurt both entrepreneurs and venture capitalists in India in the form of missed opportunities. Entrepreneurs need to be educated about M&A options, a base of acquirers needs to be built up, and significant mergers and acquisitions need to happen to keep the technology ecosystem vibrant in India.
Here is a quick take on mergers and acquisitions that India's entrepreneurs need to think about:
Being acquired is not a bad thing
An entrepreneur's job, in a way, is to maximize shareholder value with minimal risk. If an entrepreneur is able to generate positive returns for everyone, it is a good thing. Personal goals, especially emotional goals, should not be the criteria for making exit decisions.
Life exists after an acquisition
Many entrepreneurs are nervous about their career prospects after an acquisition. The reality is that a deal on the right terms frees an entrepreneur to explore other opportunities.
Position your company for an acquisition
I am not suggesting that you put up your company for sale. Rather, build a mindset among your employees, management, and the board that the company has to be ready to be acquired at any point for the right terms. A significant positive byproduct of this is the "hygiene" which includes records, processes, and positioning of the company, can be maintained at all times within the company.
Build a base of potential acquirers
Most technology acquisitions start with a partnership relationship. Understand which partnerships you want to nourish, and be proactive in developing those partnerships that could potentially lead to an acquisition.
Have a dual-track IPO process
Some of the best acquisitions in the U.S. were made after the company filed for an initial public offer. A dual-track IPO process is one where a company pursues both IPO and M&A options in parallel, and then decides which one to consummate. One of the reasons to acquire companies is scarcity value, which is if a company does do an IPO, it becomes that much harder to acquire later. So when a company files for an IPO it motivates potential acquirers to make a quick decision and potentially pay a "scarcity premium" to convince the company to be acquired instead of going public.
This column shouldn't be seen as a discouraging India's entrepreneurs from planning an initial public share sale for their company. But it's worth noting that going public for most companies is a high-risk scenario, and entrepreneurs would be better off understanding how to mitigate that risk by using acquisitions as a tool. For every LinkedIn IPO, there's always a Skype acquisition!
However, the business model of most venture capital companies in the U.S. depends on outsized returns typically generated by portfolio companies either going public or getting acquired at high valuations. While the split between the number of acquisitions versus the number of initial public offerings varies on an annual basis, data clearly shows that mergers and acquisitions remain a significant percentage of the total exits for venture-capital-backed companies in the U.S.
While high-profile acquisitions such as Google Inc.'s $1.6 billion purchase of YouTube or Microsoft's $8.5 billion buy of Skype are highly profitable for the venture capitalists involved, a slew of smaller acquisitions in the $50 million to $400 million range enable venture-capital companies generate positive returns. It's like hitting singles and doubles in a baseball game instead of every player trying to hit a home run.
The venture capital model is still nascent in India, but M&As will have to play a significant role in making the model successful here, especially since public share sales alone may not be able to support exits for all venture-capital backed companies.
However, the business model of most venture capital companies in the U.S. depends on outsized returns typically generated by portfolio companies either going public or getting acquired at high valuations. While the split between the number of acquisitions versus the number of initial public offerings varies on an annual basis, data clearly shows that mergers and acquisitions remain a significant percentage of the total exits for venture-capital-backed companies in the U.S.
While high-profile acquisitions such as Google Inc.'s $1.6 billion purchase of YouTube or Microsoft's $8.5 billion buy of Skype are highly profitable for the venture capitalists involved, a slew of smaller acquisitions in the $50 million to $400 million range enable venture-capital companies generate positive returns. It's like hitting singles and doubles in a baseball game instead of every player trying to hit a home run.
The venture capital model is still nascent in India, but M&As will have to play a significant role in making the model successful here, especially since public share sales alone may not be able to support exits for all venture-capital backed companies.
This gap between an entrepreneur's expectations and the reality that an IPO is not a feasible for all companies will hurt both entrepreneurs and venture capitalists in India in the form of missed opportunities. Entrepreneurs need to be educated about M&A options, a base of acquirers needs to be built up, and significant mergers and acquisitions need to happen to keep the technology ecosystem vibrant in India.
Here is a quick take on mergers and acquisitions that India's entrepreneurs need to think about:
Being acquired is not a bad thing
An entrepreneur's job, in a way, is to maximize shareholder value with minimal risk. If an entrepreneur is able to generate positive returns for everyone, it is a good thing. Personal goals, especially emotional goals, should not be the criteria for making exit decisions.
Life exists after an acquisition
Many entrepreneurs are nervous about their career prospects after an acquisition. The reality is that a deal on the right terms frees an entrepreneur to explore other opportunities.
Position your company for an acquisition
I am not suggesting that you put up your company for sale. Rather, build a mindset among your employees, management, and the board that the company has to be ready to be acquired at any point for the right terms. A significant positive byproduct of this is the "hygiene" which includes records, processes, and positioning of the company, can be maintained at all times within the company.
Build a base of potential acquirers
Most technology acquisitions start with a partnership relationship. Understand which partnerships you want to nourish, and be proactive in developing those partnerships that could potentially lead to an acquisition.
Have a dual-track IPO process
Some of the best acquisitions in the U.S. were made after the company filed for an initial public offer. A dual-track IPO process is one where a company pursues both IPO and M&A options in parallel, and then decides which one to consummate. One of the reasons to acquire companies is scarcity value, which is if a company does do an IPO, it becomes that much harder to acquire later. So when a company files for an IPO it motivates potential acquirers to make a quick decision and potentially pay a "scarcity premium" to convince the company to be acquired instead of going public.
This column shouldn't be seen as a discouraging India's entrepreneurs from planning an initial public share sale for their company. But it's worth noting that going public for most companies is a high-risk scenario, and entrepreneurs would be better off understanding how to mitigate that risk by using acquisitions as a tool. For every LinkedIn IPO, there's always a Skype acquisition!
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