What Can Indian Startups Learn From The Facebook Acquisition That Didn’t Happen

Little Eye Labs was not the only acquisition Facebook was chasing in India last year. Salorix, a social media analytics startup that had raised $3.5 million in Series A from Inventus Capital Partners and Nexus Venture Partners in November 2011, was approached by Facebook in October last year. But by December, the acquisition talks were stalled.

After several months of negotiations, Salorix investors, its founder and Facebook couldn’t agree on the acquisition price. And finally, few weeks ago, Facebook poached the startup’s founder Santanu Bhattacharya, leaving investors with few staff staring at an uncertain future for Salorix. A Facebook source confirmed Santanu’s new role at the company after looking at internal directory of employees. Madhusudan Therani, the Salorix CTO, also seems to have quit according to his LinkedIn profile that shows his role at the startup under ‘previous’ jobs.

Two back-to-back acquisitions by Facebook in India would have really helped. Currently, Indian ranks quite poor on M&A exit returns, as this iSpirt and Signal Hill analysis noted recently.

Officials at Inventus and Nexus, and even Santanu are not talking about what really led to this fallout. But several people, some of whom are directly familiar with the discussions, said the investors wanted much more than the price initially offered by Facebook. 

The Salorix episode offers several learnings for entrepreneurs and investors, especially in a nascent startup ecosystem like India.

“First of all, there is a real danger of many Indian startups giving away too much equity (50% and even more) during very early stages of funding,” one of the persons familiar with the Salorix episode told me.

By the time Salorix closed a bridge financing round of around $0.5 million after its Series A funding last year, the founders had given away in excess of 50% equity.

And since a startup like Salorix is valued far cheaper than its counterparts in the Valley, raising subsequent rounds of funding with lesser and lesser equity becomes very tough. A bunch of investors and founders I spoke with over the weekend said a typical Indian startup can expect anywhere between $70,000 to $100,000 per head in acqui-hire transactions. The same is around $2 million per person for a Silicon Valley startup. These figures are of course subject to the profile of buyer and the quality of talent.

“Secondly, even the investors need to understand what can be a realistic exit in India, especially for a startup that’s not any big disruption in the space,” he added.

But investor expectations cannot be blamed solely for what happened. Even the management failed in execution and delivering on their promise of building sustainable revenue streams.

It’s not really uncommon for investors and entrepreneurs to differ on what route should a startup be taking, what’s good for it and what’s not. But in Salorix case, the acquisition offers also distracted the management’s attention from fleshing out the core product and also spending more time chasing revenue opportunities. 

It all started when Google first showed interest in the startup.

“There was too much focus on finding an exit, especially after Google showed interest very early last year,” one of the persons familiar with the talks told me. “After Google backed out, Facebook logged in, and that ensured the same pattern of not focusing on business, product,” he added.

Amit Ranjan, co-founder of SlideShare that was sold to LinkedIn for around $119 million in 2012, said while evaluating exits both investors and founders are looking at the opportunity cost of forgoing the current acquisition.

“However at the back of their minds, each one is trying to get answers to some questions without necessarily disclosing it to each other,” said Ranjan.

So what happens to Salorix next?

Clearly, the chances of Facebook still acquiring Salorix look bleak. It will be the end of Salorix unless the investors can find another buyer, or manage to convince Facebook on still acquiring the startup, for whatever it’s really worth. 

As the Little Eye Labs acquisition has shown, there’s growing interest from Facebook, Google and Yahoo in acqui-hiring from India, but the expectations of the investors need to be aligned better. These little acquisitions mean a lot for the country’s nascent startup ecosystem where exits in any form are rare, and hard to come by.