Acquihiring: On the Lookout for Distressed Startups
Acquihiring: On the Lookout for Distressed Startups
In May 2016, two young entrepreneurs, Deepak Modak and Abhishek Periwal, cofounders of online lending marketplace KountMoney, arrived at the offices of their larger rival Lendingkart in Bengaluru, reports Economic Times. Over the past year or so, the duo had built a promising venture, but in a market where funding was scarce and competition fierce, KountMoney needed help. Lendingkart had raised millions in funding (it would announce a $32 million tranche weeks after this meeting), and had ambitious growth plans. This meeting, orchestrated by common investor Ashish Goenka, was meant to provide some wise counsel for KountMoney’s founders. Instead, over the next two months, as it became apparent that their business was running aground, they opted to be acquihired by Lendingkart. “These entrepreneurs can hit the ground running from day zero... this is very valuable for a fast-growing company,” says Harshvardhan Lunia, cofounder, Lendingkart.
If the first exploratory meeting was held over cups of coffee at Lendingkart’s rooftop cafeteria, it took a couple of months and multiple interactions to seal the deal. In the end, Modak and Periwal made the shift, betting that their entrepreneurial energy and ambition would be better served at another flourishing venture, rather than risk running out of runway at their own startup. Twenty kilometres to the north, Sujayath Ali, cofounder of Sequoia Capital-backed Voonik, an online apparel venture, is using a patchwork of acquihires to grow his business. In the past year or so, Voonik has added a diverse set of technology and talent to its portfolio, by bringing aboard the founding team of fledgling (sceptics would call it floundering) startups TrialKart, Dekkoh and Zohraa, giving the company access to new technology and domain expertise. While TrialKart gives Voonik — which is in a door-die battle with the likes of Myntra and Limeroad — access to image recognition technology, Zohraa offers experts in ethnic silk apparel. Ali has kept his eyes peeled on distressed startups and swooped in to pick up the pieces.
By his own estimate, there are about 25 former CEOs working in Voonik, and acquihiring has been a successful way to hire the best talent and get access to technology and domain expertise. “Each of our acquihires has been working better than expected for us,” he says. “We like hiring founders of startups, because they are entrepreneurial and energetic and willing to chase seemingly impossible goals.”
For ambitious entrepreneurs, an acquihire is often the last option before a business is wound up. While a founder would ideally like to see his business grow, not everyone can expect it. Inevitably, some startups fail and entrepreneurs try to find themselves a soft landing when the funding fuel runs out — in the form of an acquihire. While large companies are often targets, their less nimble work culture often sees such deals failing. For example, Paytm acquihired online education marketplace Edu-Kart, but its founders left within months. Similarly, the founders of Appiterate and AdIQuity, acquihired by Flipkart, too quit.
While Paytm declined to get into details, a Flipkart spokesperson contended that other larger internet commerce ventures needn’t be bad destinations for such deals. The spokesperson pointed to PhonePe, the UPI-based payment service in the country, which has crossed 10 million downloads. The founders first came to Flipkart via an acquihire, built Flyte, its music business (which shut), stayed on in the company and were given senior roles. They left and worked on a new venture, which was again taken over and they returned to launch PhonePe last year.
In the past year or so, startups of all sizes have come face-to-face with a harsh new reality in India. If 2014 and 2015 were years of excess — in valuations and funding — 2016 was the year of bitter reckoning (See The Startup Stutter). Funding has dried up and many startups and entrepreneurs have been stranded. Some entrepreneurs have turned this distress into an opportunity, by acquihiring just the founders (and/or a select few team members), to survive this startup winter. “We are telling companies to do more with less,” says Bejul Somaia, managing director, Lightspeed Venture Partners, a venture capital firm. “There is significant focus on capital efficiency and building companies sustainably.”
While a traditional acquisition may net some returns for investors like him, an acquihire offers little chance of redeeming their investments, much less making a profit. “To investors, the difference between acquihire and winding down a business is not that different.” If startups benefited, arguably, from netting more capital than they should have, now they are compelled to sort things out — if a company is not working everyone has to take the next logical step.
As this happens, the ones which survived the clear-out, are circling with interest. “There are plenty of young, energetic and passionate folk out there,” says Alok Bajpai, cofounder of Ixigo, a travel meta search platform. “Unfortunately, due to the inhospitable funding climate, many have struggled and, with increased competition, look unlikely to make it to the next level.” Ixigo hasn’t been afraid to swoop in and cut some deals; In December last year, it announced an acquihire of Reach, a mobile content-sharing venture.
While Ankur Warikoo, an angel investor for both companies, played matchmaker, it was a skillset match that sealed the deal. In the months since the deal was signed, both cofounders have been given prominent roles at Ixigo and seem to be sticking around. “For such a deal to be successful, entrepreneurs need to be given the freedom to executive bold plans,” Bajpai contends. If you are running a well-funded startup, odds are that one of your stressed peers may have reached out, to try to broker such an acquihiring deal. Dhruvil Sanghvi, cofounder of LogiNext, a logistics platform, says he has been approached by 25 to 30 founders, trying to get themselves in through the door. He’s not convinced on any of their plans.
For the one deal he agreed on, for YourGuy, a last-mile delivery platform, he spent two months speaking to the founders and a few select team members he wanted to bring aboard. The time was spent judging not just their numbers, but also how they would fit into LogiNext and the kind of goals they had set themselves. In LogiNext’s case, the temptation was also to get talent, for cheap. This doesn’t mean that they were poorly compensated but that a three-year-old venture, which was sipping on its funds, could attract top technical talent and not burn cash to pay them. “We got access to top-tier talent willing to be primarily compensated in stock,” says Sanghvi. “That would be almost impossible to find in the market.” Then he repeated the process with another undisclosed Bengaluru-based tech platform: it was acquihired in late 2016. In a fast-consolidating startup market, GirnarSoft (which owns, among others, the CarDekho brand) is snapping up companies.
While some are traditional takeovers, it more recently acquihired Drishya 360s, a virtual and augmented reality venture, and Valueserve Consulting, a boutique consultancy. “These entrepreneurs are a key driver to our long-term plans to change how people buy and sell automobiles,” says Anurag Jain, cofounder, GirnarSoft. Such deals help GirnarSoft think ahead of the rivals — it lets the company measure better who is using the site/ app, and predict with greater confidence who will buy a car and when. It also allows the firm to personalise content for users, Jain adds. In the case of Drishya, the technology is futuristic, letting GirnarSoft consider new ways (virtual and augmented reality) of showing what is for sale.
An acquihire can also handsomely benefit the company that is being acquired. In March 2016, Ritu Srivastava, cofounder of Obino, a fitness and wellness venture, met the founders of Fitard, a fitness gamification company, to discuss plans to be a rewards partner. That conversation, initiated by a common investor, quickly pivoted to an acquihire as Fitard’s founders discovered by August-September that it was better to be part of a larger team. The duo found themselves playing new — and pivotal — roles at Obino. “The levels of motivation these entrepreneurs have and the minimal supervision they need are key reasons to use this strategy,” says Srivastava.
For a startup in a hurry, it helps that it doesn’t have to supervise top management. In the case of Obino, Srivastava is steering the company’s fortunes beyond its initial focus on weight loss into five or six new areas. For one, it has built a strong premium subscription fitness business as its core offering and is now adding layers to this, like lead generation for insurance and health companies, an outsourced dietician provider for small hospitals, a white label product to be installed in a million Intex handsets. It also plans to build a custom news feed and be an affiliate marketer for brands. “Entrepreneurs need to be handled differently,” says Srivastava. “They thrive on being needed… they need to feel that their presence makes a difference.”
SJP @DigitalAsian - ShareYaar
SJP @DigitalAsian - ShareYaar