A good time to sell

This has been the biggest year Indian startups have ever had. More than 30 companies have become unicorns. Zomato listed in July, Freshworks listed on Nasdaq in September, and Paytm is about to go public. Venture funds that used to write a few cheques a year now write a few a month.

For a firm that buys companies, a year like this needs a different playbook.

Prices are high

When money is cheap, every asset gets more expensive. Small software companies are no exception. A business we’d have valued at a few times its annual profit two years ago now gets offers at many times its revenue, often from a venture backed startup that just raised a large round.

We can’t compete with that, and we don’t want to. If we pay boom prices, we need boom conditions to last for years to make the money back. They rarely do.

Buyers are everywhere

The other side of high prices is that there are suddenly many buyers. Startups with fresh funding are buying small companies to add features, enter new markets, or hire teams quickly. Edtech companies in particular have bought many smaller businesses this year.

That means this is a good time to sell. When a buyer offers far more for a company than we think it’s worth to us, the right move is to take the offer.

Cash, not stock

One rule matters more than the rest when you sell in a boom: take cash. Many of the offers this year come with most of the price paid in the acquirer’s stock. That stock is priced at the top of the market too. If the market turns, a deal that looked great on paper can lose much of its value before anyone can sell the shares.

We’d rather accept a lower headline price in cash than a higher one in stock. We give the same advice to founders who ask us.

Getting ready for what comes next

Booms end. We don’t know when this one will, but when it does, there will be many useful companies that raised at high prices and can’t raise again. Founders will need a buyer, and there won’t be many around.

The companies we keep paying attention to are the ones that help businesses move and manage money. When the market changes, that’s where we expect to be buying.

Happy Diwali.