The IT boom during the last few years has helped the valuations of IT companies. However, with the markets down, their valuations are expected to be lower, which has increased interest among investors to take the M&A route since they can now take advantage of acquiring companies at a lower cost. The forecast for VC backed exits through M&A’s is expected to increase this year.
“IT companies had a PE of over 25 and even younger companies were not discounted. IT offshoring was invented by India and it consumed a lot of time. No doubt it helped build big companies with high valuations but now with growth at a slower pace, valuations are coming down,” said Sudhir Sethi, managing general partner, IDG Ventures India. He said that in 2004, there were 29 venture-backed exits through M&A, 72 in 2007 and 25 in 2008. Already, in the first six months of 2009, 25 venture-backed exits were recorded and more are expected till the end of year. Sethi expects the number of VC-backed exits through M&As in 2010 to reach the levels achieved in 2007.
Sethi was speaking at Nasscom’s Product Conclave and Expo 2009 in Bangalore. Speakers at the conference were of the opinion that despite the global economic slowdown, investments would continue to come into India.
With its stable government, legal system, transparency and openness, participants felt that India is the most attractive option among fast-growing economies like China and Brazil.
Participants in the panel said that start-ups should think of their positioning when going for M&A because they help the acquiring company fill a gap. They said that a start-up requires differentiation and niche. The core can be technology or product positioning. They also questioned the logic of companies having an eco-system for networking at the top-most levels and not a the lower levels. This was unlike the trend a few global companies.
Even as entrepreneurs debate amongst themselves on whether it is the right time to enter the market, Guy Kawasaki, MD of Garage Technology Ventures, said that it is always a good time for entrepreneurs to enter the market and that good products will always find their markets. He advocated that companies should jump to the next curve and not work around existing ideas.
Speakers were unanimous in their opinion that marketing tools like Twitter and Facebook were a must for any entrepreneur wanting to enter the business. “Twitter is the best marketing platform for any company. In the present situation, an entrepreneur gets free tools online, free marketing platforms. Entrepreneur should create a great product and ship it as soon as possible, leaving the testing for after the product reaches the people,” said Kawasaki who was the keynote speaker of the conference.
