Vibhor Bansal

Built to be Bought

Blog Post created by Vibhor Bansal on May 23, 2014

Having your company bought out by an industry giant is (almost!) every start-up's secret dream. Money, validation, growth - a buyout can deliver all of these. In Silicon Valley, young start-ups engineer themselves to become attractive targets for Google, Facebook and Twitter. In India, we are just beginning to see more of such acquisitions happen. How did these companies become so attractive to buyers? Did they too ‘engineer' themselves for acquisition? Let's find out...

 

Is the acquisition market heating up?

 

In January, Facebook announced its first acquisition in India - Bangalore-based Little Eye Labs which has developed a tool that helps Android app developers to measure, analyze and optimize their apps. Though certainly the most high-profile, 2013 saw a number of other acquisitions - Plustxt was acquired by One97, Get Cloud Ready was acquired by Aditi Technologies and web summarization tool maker Cruxlight was acquired by California-based Kno (which in turn was acquired by Intel) and 7 Strata was acquired by Mindtree. In a reverse move, Hyderabad-based Pramati Technologies has just announced acquisition of the assets of the visual Rapid Application Development (RAD) software platform WaveMaker from Silicon Valley based VMWare.

 

Pramati is an old hand at the M&A game and is one of the few companies that have been able to score a double exit in the Indian software start-up space. In 2012 it sold Qontext, an enterprise social collaboration platform, to Autodesk while earlier in 2005 it sold a business to US based Progress Software.  What is the secret behind the company's success model? Jay Pullur, Founder and CEO of Pramati Technologies, points out that the group's corporate structure spawns successful start-ups: "The core idea behind the model is to bring the strength of a big company, yet make each venture function in the true spirit of a startup - innovation, value-focused and nimble-footed. By making the ventures independent, we are able to achieve those three goals fairly easily as each venture gets its own independent management team. The Team at the venture thinks and worries only about their product and depends on shared services of the corporate as well as strengths and partnerships within the portfolio. As you would imagine, the shared services include HR, Finance, Corporate Development, Legal, etc." Pramati has also build in an ‘Ideas-to-Initiatives-to-Ventures' incubation model for bright ideas that are initially supported by staff time, and later (as they turn promising) by budgets and allocated teams.

 

Take the case of Injoos, which offered Team-ware, a collaboration platform for SMEs. Injoos was bought out by KineticGlue, which was in turn acquired by California-based BMC Software. Srinivas Seshadri, who co-founded Injoos, remembers being approached by KineticGlue's Vivek Paul at an event. "We had a fantastic platform, way ahead of Yammer and the like, but did not have the muscle power to sell and were restricted to the India market. We began encountering the name KineticGlue everywhere we went and Vivek Paul made a surprise acquisition offer that we then had to scramble and respond to." KineticGlue had big marquee name customers, which Injoos got access to. It became a healthy mix of both sides-each side brought something to the table. Seshadri, who became co-founder and COO of KineticGlue, points out that it was still a smaller player that could not crack the market on its own. "We targeted quite a few companies as potential buyers; the second layer, given that the top layer had already moved. BMC was interested in our IP, which was strong - we had created IP around the premise that it would be headless, could be used across the board and integrated with SharePoint, Salesforce, etc. BMC has taken our IP and is powering their products with it and our KineticGlue team is part of it." 

 

Can you build to sell?

 

Though Pramati seems to have perfected this model Pullar sets aside this notion: "Well, it makes no sense to build a product for an acquisition. If the product is not finding any market acceptance then its likelihood of getting acquired is very slim. Hence, we don't invest in products that do not have a market potential that we could build up on our own."

 

"The thought process of being acquired is there for all startups, since they are never sure if they can get big enough", says Manjunath Gowda, CEO i7 Networks, who oversaw the sale of the company he co-founded, S7 Software Solutions, to Blue Coat Systems. He has identified two buckets into which he feels companies fall: Companies that create a product to solve a customer problem, where acquisition happens unplanned, along the way, if the product is good. Then, there is a second set of companies where people jump out from a big company where they are working because they know the exact gap the company has and they come out and build a product that they sell back to the same big company. Here they know who their buyer is and when and why they will buy. They are not customer focused, but working to fill an existing gap.

 

George Zacharias, Strategy Consultant, Mindtree, also sees this trend and gives Cisco as an example of a firm that encourages its engineers to go out on their own and build a product, which, if good, Cisco purchases. Cisco thus has a number of small companies clustered around it, which have good, proven products that are then plugged into Cisco. "A small company thus achieves global scale and customers and can see a billion dollars within a year or two as part of Cisco", points out Zacharias.

What happens to the people?

 

In a situation where a company is acquired by another, what happens to the staff? Does one see a mass exodus of people or do most get retained and absorbed into the bigger company? Seshadri feels that as long as you convince the buyer that your people are of value, you can minimize attrition. He sees having people with know-how as the hallmark of a product company, and says that unlike service companies, product companies also give one leeway to retain good people.  "For us, as the numbers at KineticGlue were small, we only terminated outsourced contracts and transitioned all our full time people." The transitions were quite seamless - Injoos flowed into KineticGlue and now almost everyone is working with BMC.

 

Zacharias feels that staff retention depends on both the buyers and sellers and factors post the first few quarters, during which time there is generally a plan for the acquired company's workforce. "Industry attrition standards are between 20-25% and post integration, it usually remains the same", he says. At the end of the day, it comes down to individual abilities and needs, like with any organization.

 

To buy or not to buy...

 

Market acceleration is the biggest reason that companies play the M&A game. "Most often they (the acquirers) are public companies and would like to avoid false positives, markets that get subsumed (for example, photo sharing, which got subsumed into the broader social networks market) or products that are ill timed (launching ahead of time does not work). By acquiring startups, they avoid the expensive mistakes of innovation. They enter markets at the right time when their market presence, customer base and organization reach can make a difference in growing the revenue stream," points out Pramati's Pullur.

 

At Tech Mahindra, start-up partnerships are seen as an important part of the company's vision for growth. "We look for synergies between Tech Mahindra and startups. We engage with startups which help us to bridge a gap in the market or help us in addressing key concerns of our customers, and yes, they complete our portfolio and in fact, help us augment our offerings", says Sirisha Voruganti, VP and Head of Innovation Team, Tech Mahindra.

 

Tech Mahindra has in fact created a specific initiative called i5 Startnet with the objective of accelerating innovation outside the company in conjunction with external players. The program works with start-ups, incubators, etc. to build solutions for the future. "Innovation the world over is moving from being a firm-centric endeavor to the one centered on co-creation," says Voruganti. i5 StartNet is  structured as a series of networking events for startups where they engage with Tech Mahindra's Leadership team to identify areas of synergy and mode of engagement. Across various verticals and through two events, to date i5 StartNet has involved 22 startups working on emerging technologies including Analytics, Mobility and Social Media. Adds Voruganti, "Currently we are also exploring the option of acquiring two startups. We see these startups opening up doors for Tech Mahindra in new areas and enabling us to go up the value chain. Hence we consider startup partnership as important cog in the wheel for achieving our 2015 strategy. "

 

Will we see sustained M&A activity in the Indian market now?

 

Sustained M&A requires a market pace that necessitates the acceleration that acquisitions typically bring. And that is where India still falls short, says Alok Mittal, Managing Director, Canaan Partners, a US based venture capital company. "The Indian market is not yet operating at the pace when the in-house build option becomes unattractive." This could be the reason why large Indian tech companies are yet to announce significant acquisitions of start-ups (intentions not withstanding!). Without technology as the glue for acquisition, revenue lines of even small to mid-size tech businesses remain too insignificant to bring them into the radar of would be acquirers.

 

Would Indian start-ups be attractive to global companies? Or is the Facebook acquisition of Little Eye Technologies just a flash in the pan? "The quality of teams and level of innovation leaves much to be desired, beyond a few exceptions," points out Mittal. His view is borne out by the hard numbers on the Indian tech M&A story. A recent study by US and India-based Investment advisory Signal Hill and software industry body iSpirit, places the ratio of exits in Indian software product start-ups at 1.1, far below levels in the US (5) and Israel (7).
Clearly there is still a long way to go before the innovation-acquisition virtuous cycle gains momentum in India. But, as the ecosystem matures and more start-ups take off, it may soon be time to fasten your seatbelts for take-off.

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