The recent fracas over Snapdeal’s potential sale to Flipkart has opened a big can of worms, especially in terms of investor participation in the Indian start-up space. SoftBank, the biggest investor in the online marketplace, had written off losses worth $475 million.
It brings into the spotlight the role that investors play in startup businesses. The Snapdeal case shows how to signal market leadership and warn away foreign entries, and how consolidation is becoming the new mantra. Also, activist investors are primarily driving these M&A strategies.
Who are activist investors? They buy up shares of a company and attempt to maximize the returns to their shares, usually by replacing members of the board of directors with handpicked candidates who will push the company to cut costs. Activity by such investors has skyrocketed off late.
In India, Ola founders became powerful acquiring TaxiForSure, their closest competition in $200-mn deal in 2015. In just two months, TaxiForSure CEO resigned and OLA appointed Pallav Singh, one of their earlier employees, as CEO. TaxiForSure co-founders, CFO, CTO, HR Head, CMO, Product Head along with 50 mid-level employees also left post acquisition- technically giving away to Ola the entire platform.
We also saw the Housing.com vs. Sequoia spat that lead to the ouster of Rahul Yadav. Zivame founder Richa Kar resigned after investors said they were not able to handle pressure of running a multiple-shareholder company.
The Global cases prelude that Activists are going after the bigger game and companies like Apple, JCPenney, Dow, PepsiCo, Hess, Microsoft, DuPont and more have all been recent targets. According to data from Activist Insight, in the first half of 2015, activists called for the outright sale of 28 companies.
What would be the 4 Brace-up strategies for Start Ups?
Be clear on corporate strategy
Steve Maraboli once said ‘“A lack of clarity could put the brakes on any journey to success.” True. It can. This is one reason why you should strive for clarity, specificity and transparency when discussing corporate strategy with your investor. Making the investors understand the company’s core vision and why that has been able to establish optimal shareholder value can go a long way, and in the right direction. Startups must impress how their approach has been driving phenomenal success financially and operationally.
Continuous dialogue with investors on plans
It always pays if you choose investors who share your investment preferences and time horizon. To bring upon something which will be of mutual benefit, companies should increase their dialogue sessions with institutional investors. This helps to set expectations and strategies within range and lead to a workable agreement that can uphold shareholder value.
Seek out negotiable terms in advance
A stitch in time saves nine. An old proverb but makes sense even today. Prepare yourself and don’t hesitate to discuss your tolerances, negotiable and non-negotiable aspects of the company strategy before the entry of the activist investor. Keeping the Board’s core strategy in place, it is many a times a wise decision to restructure the capital in a way that can recover shareholder returns or better them even.
Proactively remove investor discontent
Never let go off the chance of selecting your own army before fighting the battle. Proactively one can erode all source of discontent by taking strong pro-investor positions on shareholder issues such as director selection and election (sometimes called proxy access), executive compensation etc.
Owning your business and staying to see it succeed can happen only if you play the game right from the very start. Brace yourself up against all odds so that you don’t have to give in to any potential activism.
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