Dr. A K Puri
Last week I got a phone call from a friend sharing with me an information about his son which was high on excitement and adulation. His son, in late twenties, had sold off the startup he created just two years back, for a hefty sum of over Rs200 crores. An incredible figure considering that this entrepreneur was never formally trained in business, had no formal education like MBA and assiduously refused to join family business his father had been running for over two decades.
How does it happen? An entrepreneur creates a startup, gives her time and energy to build it up, makes it large or puts on the path to a scale which attracts suitors in the form of investors in many avatars- evangelists, angel investors, venture capitalists and private equity investors. One may wonder as to why an entrepreneur would kill its own creation by selling it off.
Till a few years back it was unthinkable that an entrepreneur who started a business will eventually even allow someone else to run it, forget selling it to someone for pure money considerations. An enterprise used to be a creation for the family. Not just the first generation entrepreneur as owner, the business will change hands from father to son or daughter in succession for generations which could well span over a century. Those days setting up a business was the monopoly of the few. All it needed was connections with decision makers in the license raj ecosystem. Businesses could easily be destined to be near monopolies as the demand far exceeded the supply for goods and services. The successful entrepreneur using the strings utilized for easy entry through connections could create road blockers for others as entry barriers in the name of public good as a cause.
Economic liberalization set off in early nineties initiated dismantling of the license raj. Progressively, barriers to setting up business were dismantled one step at a time. Anyone with innovation and creativity had an opportunity to create business without governmental intervention to a large extent. India’s rank on ease of doing business improved drastically in recent years from 142nd among 190 countries in 2014 to 77th in 2018, thanks to accelerated reforms put in place by the current entrepreneur friendly dispensation as law makers. In real terms it means setting up business in India is more hassle free, raising capital is easy as lot of FDI is taking place and there is high freedom to the entrepreneur to dream big, think big and act big.
This facilitating eco system has led to an explosion in number of new startups. It has further attracted large moneybags of global proportions as investors to spot talent in Indian entrepreneurship. And an easy way to gain entry into India’s largest growing economy of the world is through buying out the successful businesses.
India witnessed a massive demand of startup acquisitions in 2018. Over 110 new businesses were purchased by investors at amounts unheard of in the Indian business fraternity. Some of the acquisitions in 2018 are:
- Walmart’s $16 bn purchase of a majority stake in Flipkart was the biggest. It was big in terms of size profit to investors and an element of surprise and disbelief.
- Walnut- a Pune based Fintech firm was acquired by Capital Float for $30 mn. With Walnut having 7 mn app downloads, 1 mn monthly active users, and 300K daily active users, it offered great synergy to Capital Float operations.
- Food listing company Zomato took over TongueStun, a Bangalore based company for $10 mn.
- Amazon acquired Tapzo, a consumer services company from Bangalore, for about $40mn to strengthen its operations under Amazon Pay.
- Mettl, a Gurugram based talent assessment company has been taken over by Mercer, a US based HR service firm, for an estimated value of $4-5 mn.
- Mumbai based HolaChef has been taken over by Foodpanda (owned by Ola) for over $9 mn.
- Zopper Retail of NOIDA has been taken over by PhonePe (owned by Flipcart) for $25mn.
- TicketNew, an online ticketing startup from Chennai was taken over by PayTM for about $30mn.
- RIL invested in edtech startup Embibe for $180 mn to claim majority stake.
- Curefit has acquired Fitness First for business growth in Delhi and Mumbai
- Paytm has acquired tech Startup Cube26 for more social engagement features to Paytm’s products and services
- Times Internet acquired South Korea’s MX Player in a $144 mn deal
- Swiggy acquired on-demand delivery platform Scootsy in an all-cash deal to provide the widest restaurant choices for the consumers
Let us look at some of the issues involved in determining appropriate exit strategy in business. A business exit strategy is a plan for the transition of business ownership either to another company or investors. Even if an entrepreneur is enjoying good proceeds from the firm, there may come a time when he wants to leave and venture into something different. When such time comes, the business can be sold, left in the hands of new management, or acquired by a larger company. Even if it will be decades before the entrepreneur can sell his business, what he does in the present moment can set it up for a smooth exit or make the process more challenging.
While different businesses will require different tactics in their exit strategy, there are key elements that can be helpful across the board. These elements factor into play the company’s financial circumstances, market conditions, objectives, and timeline.
One aspect that should never be missed in a business exit strategy is the owner’s individual goals. Upon exiting the business, is the owner interested in getting profits or does he also want to leave a legacy? Establishing the purpose of exiting the company helps to identify the specific objectives and activities to be prioritized.
Another factor that should be considered is the time frame of the business. When does the owner intend to sell the business? When establishing this time frame, a business owner should allow for flexibility. This way, he will have more negotiating power. However, if the time frame is tight, the business sale might not go through smoothly since everything will be done in a rush. Similarly, the stakeholders might not have enough time to make the business reach its full potential.
Does the firm owner want to see his business continue its operations or does he prefer that it gets dissolved? Answering this question will help to establish whether the company will end up being liquidated, merged with another, sold or set up for transition via succession planning.
Coming up with an exit strategy helps firm owners decide whether they should go after short, medium, or long-term income projects. This way, if an individual intends to exit the business within the next few months, he can focus his efforts on activities that bring in cash quickly. These would include items such as monthly subscriptions, automatic renewals, and membership models that remain active up to when the customers cancel them. Such income-generating projects require minimal effort, yet they keep money flowing into your business.
So there need not be any emotion in exiting a business set up and nurtured by sweat and blood of the entrepreneur. So long the price is good there is wealth creation in selling off the business. After all creating wealth is the objective of business.