MONTH : JUNE 2022

The Rise of SaaS in India

Bessemer Venture Partners dropped a note on The Rise of SaaS in India. We share key learnings & illustrations from the note combined with our on ground experience in early stage India SaaS.

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India SaaS at an inflection point

From $10B in ARR in 2020, India SaaS is expected to grow by:

a. 20% CAGR from 2020 to 2025 and reach $25B in ARR

b. 17% CAGR from 2020 to 2030 and reach $50B in ARR

India SaaS in its early days

Despite a tremendous amount of capital flowing into India SaaS, there are just about 70 SaaS companies in India which have crossed the $10M ARR mark.

This shows a long runway for growth in India SaaS, especially in early stage. Why?

a. India SaaS has approx. 1000 companies in the <$1M ARR1 with more and more companies entering the pipeline every day

b. Every investor will fight for the the same ~1000-odd companies keeping demand intact

c. Early stage deals will remain unaffected by the nuclear funding winter. However, expectations of valuations may rationalize2

India SaaS advantage

A. Capital efficiency

Indian SaaS companies are more efficient than their global counterparts. The chart below measures sales efficiency which is the amount of new revenue generated for every dollar invested in selling and promoting.

It shows us that India SaaS companies with:

a. ~$10M in ARR generate $1.65 in revenue for every $1 spent on sales & marketing

b. ~$25M in ARR generate $1.25 in revenue for every $1 spent on sales & marketing

c. $50-100M in ARR generate $0.85 in revenue for every $1 spent on sales & marketing

Compared to:

a. Global SaaS companies generating $0.35 for every $1 spent, and

b. BVP Global SaaS portfolio generating $0.55 for every $1 spent

Other highlights:

a. Global SaaS

Most best in class SaaS companies in the global SaaS market have approximately 70% sales efficiency at $10-$30 million ARR. As a business grows its revenue, efficiency drops to about 30-40% by the time the company reaches scale (e.g. $100 million ARR).

b. India SaaS

…most Indian SaaS companies run at 80 -100% or higher sales efficiency even when these businesses approach $100 million ARR. Best in class early stage Indian SaaS companies usually have 150%+ efficiency. This means most Indian SaaS companies will spend less than $100 million to get to $100 million in revenue. Across the number of businesses we’ve gotten to know in the region, the ability to break even at 10 million dollars of ARR is far more common. Leaders tend to raise capital only when the business is primed for hyper growth.

B. Multi-product strategy

SaaS businesses in India build products faster and much earlier in their lifecycle. A typical global SaaS company will focus on one product until it reaches $30-40M in ARR. But we see India SaaS belt out second and third products even before its first one crosses $5M in ARR. Mainstream examples of this are Zoho & Freshworks.

Examples in early stage include Creditas which started on Ethera. Referral hiring company RippleHire which has referral hiring & talent acquisition cloud as its listed products. A Bangalore based company has eCommerce personalization, optimization, and email marketing as its 3 products.

C. Personalized customer facing activities

Building in India for the world has cost-arbitrage which allows Indian companies to set up dedicated inside sales teams, personalized after sales support, and customer success. The outcome is happy (spoilt) customers, cross-selling opportunities, leading towards higher net dollar retention.

A trend we see is to hand hold global customers via the Done-For-You (DFY) customer success model for the first few weeks or months of onboarding a new customer. A dedicated customer success executive (CSE) follows up with, and hand holds customers for some time, helping them fully explore the product, proactively address queries, and increase usage. This helps avoid early churn, leading to longer life time value per customer. The low cost of an in-house CSE ($1000 per month) who can handle tens of clients makes it possible, which the West can not replicate without having on-ground teams in SEA or outsourcing.

Summarized by BVP: Achieving higher net dollar retention (NDR) leads to sustainable growth and higher value creation as customers are not only more engaged, but also increasing the amount they spend.

India SaaS framework to evaluate

The India SaaS team at Bessemer pays special attention to two metrics: Net Dollar Retention and Sales Efficiency. Best-in-class efficiency scores in India are above 150% and NDR can exceed 140%.

Key learning here is to leverage the cost arbitrage. Affordable talent in India means companies can provide personalized sales & customer success teams to its customers. Inside sales to enable high sales efficiency, and customer success to enable higher retention. Two other important aspects are a ~$1BN market, 60%+ gross margins.

India SaaS attracting global eyeballs

India SaaS companies are also attracting attention from global and local public market investors. In the last eight months, we’ve witnessed two IPOs coming from both the local and global market (e.g. Freshworks and RateGain, respectively) and a number of global strategic M&As.

India SaaS predictions

a. Rise of global category creators and leaders

b. Fintech for all

c. Enabling e-commerce

d. Productizing services

e. Digitization of healthcare

Of which we strongly believe in the following:

a. Fintech for all (non lending, service enablers)

Emergence of software products to support incumbent financial institutions like banks, insurance companies, asset managers to provide better service at lower cost across the country. Every step of financial service delivery will be reimagined by cloud software companies built on top of the digital financial rails of Aadhar e.g. products for easier KYC, authentication, underwriting, loan or insurance processing, credit monitoring, loan collections, insurance claims processing etc.

b. Enabling e-commerce (shovels in the gold rush)

New software solutions will emerge to ensure even the smallest business can go online and serve every single pincode in the city with the same level of efficiency and customer satisfaction that these multi-billion dollar marketplaces have made consumers expect.

Solutions enabling consumer companies (both Indian & global) grow revenues, streamline operations, and run on the cloud will be the winners

c. Productizing services (Think dal-chawal and not bread & butter)

India is a services heavy economy with massive fragmentation in supply, and will remain so. These services, particularly B2B services, will get productized as mobile internet penetration increases and as financial rails get standardized with ease of KYC and payments across vendors and customers. These software businesses could be pure software tools or software enabled marketplaces. Leaders in these businesses will use cloud software to organize the fragmented supply, standardize service delivery, increase transparency, and facilitate payments.

Connect with us!

India SaaS is clearly on the rise, and we see no better space to be an early stage investor. If you are a founder, investor, or specialist in SaaS, believe in the rise of India SaaS, and would like to connect, please reach out to:

Siddharth: ss@malpaniventures.com

Dhruv: ds@malpaniventures.com

Learnings from our startups

Learnings from our startups

At Malpani Ventures, we are grateful to work with a bunch of smart founders and management teams. Through this piece, sharing some of our key learnings which we hope will help other early-stage founders as well:

Attack a limited white space rather than a larger, more competitive market:

• At the early stage, a larger TAM (Total Addressable Market) attracts founders. Most founders estimate that they have a better process, technology, or people to take on industry heavy-weights. While this may well be the case for a few, most early-stage companies are better off seeking an untapped/ non-catered market rather than a competitive one

Sridhar Vembu of Zoho puts it well that founders should go after OPAM rather than TAM - Organically, profitably addressable markets

• Companies building in funding blind spots can develop their business at a relatively slower scale and build more sound businesses

Startups that solve hard things plant deeper roots

• Several of our startups faced existential crises when Covid struck in 2020 – a few of them veered dangerously closed to bankruptcy. 
• However, one pattern we saw emerging was that companies that provided value to their customer by solving their problems rather than simply providing tech-based solutions were supported by the ecosystem:  Investors funded them, customers and creditors were more accommodative and these businesses emerged stronger after the crisis

GTM Channels/ Distribution matter:

• Companies need to create/ develop a channel that gives them a disproportionate chance to convert their clients profitably vis a vis their competitors
• A portfolio company that struggled to attract customers opted for the B2B2C route and has now earned more revenue through this route within 12 months vs the combined revenue through B2C over the last 36 months

MIS should be designed to make you see reality:

• An inside joke among VC circles is that an investor only receives updates when things are going well or when the company needs cash in the foreseeable future. 
• Clichés aside, a well-designed MIS helps the founder to assess both the operational and financial health of a company. In our experience, founders who diligently track 4-5 key variables in their operations tend to build more robust businesses 

Do you have any learnings to share ? Write to us at pitch@malpaniventures.com with takeaways from your building journey!

Customer service

Customer service: An often overlooked but essential element for your software business

During a recent in-depth review with a portfolio company, customer service featured in a big way. The debate was three-fold:

Why set goals?

What goals to set?

Which metrics to track goals?

One of the points we discussed was ‘why set goals in the first place?’. “Shouldn’t we start and then as we get more tickets, we will understand what to track?” asked the founder. Fair argument. However, in the absence of a process, it is easy to lose track of what we were out to capture and track.

WHY SET GOALS?

Focus & direction

The team knows what they’re supposed to do, what authority & independence do they have, at what point are they supposed to engage their Team Lead. The more autonomous decisions, the less time consumed (or wasted) for the customer.

Performance management

Predetermined goals help organize the efforts on feedback, and over time provide a benchmark for team members to measure themselves against

Alignment

If everyone knows what the goal is, their actions can be directed towards solving towards the goal and not just ‘doing their own job’. This inculcates a culture of entrepreneurship within the team

WHAT GOALS TO SET?

Customer happiness

Customer service is to ensure customers are happy. Happy customers use more of your product, may refer it to their network, and may become advocates. Salesforce found that 91% customers are more likely to make repeat purchase after a positive experience.

Reduction in waiting time

Speed is the key of success. Nobody likes waiting. Especially businesses that maybe using your service for an essential need. Your first response to a customer query has to be quick, urgent, and with the right tools. If customers reach out via phone, you can measure the amount of time they were on hold. If customers reach out via email, measure the first response time (FRT).

FRT is the measurement of the average time it takes for customer support agents to respond to the company’s customer issues. It can be seconds, minutes, hours or even multiple business days. What are some industry best practices?

Reduction in cost per contact

Most companies have a limited budget for customer service. This means adding more seats to solve tickets is not ideal. Keeping costs low is key because if it costs more to service customers than they pay you for the service, your business will eventually fail.

Companies should measure CPC (Cost per contact) which is the total cost of all support services (manpower, tools, telephony, and other costs) divided by total support requests. One can go granular by doing this per channel (email, social media, phone, live chat etc).

Reduction can be done by analysing channels and the quality of questions. If you are solving simple or mundane requests like location of a particular button or time to expiry, you can move these to a chatbot where users can self-serve, and contact a customer support team member in case the options are not available for self-serve.

WHICH METRICS TO TRACK GOALS?

Number of tickets per X

This X can be:

New customers

Per 100 customers

Per channel (phone, email etc)

… (anything else you can think of)

Identify the common denominator and solve for it. This may lead to the Number of tickets per X going down.

What to track within?

Development bugs, user experience issues, product features or use cases etc

How to improve?

Quality testing, better onboarding, pre recorded product demo videos to highlight specific features or use cases will lead to lower number of tickets raised for these issues

Customer satisfaction of issue resolution

Customers satisfaction becomes better as tickets per X reduce. However, tickets per X can also reduce if the product is difficult to use and customers give up, or you make it so difficult for customers to reach you so the customers give up. Take it with a pinch of salt. How to measure? Read more here. There is no one size fits approach to this.

Profit margin of customer service

More channels mean more costs. Early-stage companies usually have 1 or 2 channels due to the costs involved. Here, it is important to keep tracking CPC and reduce for both numerator (costs), and denominator (contacts or tickets raised). As you optimize, you will find happier customers and eventually a better service margin

These are high level metrics we could brainstorm over a short period of time. They are easy to identify and calculate, and most good products have a way to find these costs. If you have not yet started post service resolution customer survey or feedback, you should consider starting now.

Most customer service departments will have in depth metrics that they track, but eventually the ones above will account for most high-level ones.

At the end of the day if you want to really understand your company, products, customers, and their problems, becoming a customer service agent for a day is the best way to gain perspective.

Conflict management between founders at startups

Conflict management between founders at startups

Startups often take birth when a couple or more individuals come together on a common insight to solve a specific problem or create a new space. Typically, co-founders tend to be college mates or professionals who get inspired by an idea and commence on a journey to build a business around it. In this excitement of starting up, key tough questions may be ignored as the business is built up.

As more founders commence new businesses, it is unavoidable that conflicts creep in between them. As new undertakings are often a work of love and sweat, it’s natural that entrepreneurs become emotionally attached to them. This can often result in disagreements between founders on how to run the business, responsibilities to be shared, capital calls, and several more.

Team alignment is essential to running a successful company, says Harvard Business School professor Noam Wasserman in his book ‘The Founder's Dilemma’. In the book, the professor states that conflict among co-founders causes 65% of high-potential firms to fail. While, team and co-founder conflicts are among the most common reasons that startups fail, right up there next to financial problems and a lack of market need/ PMF.

We share some thoughts on what actions early-stage founders can take to avoid this predicament:

• Discuss the hard questions before starting up!
  • Indian founders often tend to avoid conflict and prefer to postpone sticky issues rather than address them. The mindset is that co-founder conflict is bad, so if we minimize how often it happens, that’s the best possible case. This often results in key decisions never being fleshed out in the open. Instead, co-founders should spend quality time deliberating on some of the points below that may help avoid disagreements in the future:
    • Founders’ present financial strength requirements and expectations of salary
    • Make a list of all of the areas needed for your business. Then figure out who is best at each part, and assign one person to it.
    • Personal concerns – Health, family, others
• Enter into an inter-founders’ agreement
• A founders’ agreement is an operating agreement that solidifies the responsibilities/ duties of a company and outlines how the organization will be managed. This contract will depend on the nature, size, and stage of your business but, ideally, a solid agreement codifies the following:
  • Responsibilities/ duties of every founder
  • Founders’ salaries and title
  • The financial stake of every partner
  • Dispute resolution mechanism
  • Procedure to be followed in case a co-founder does not wish to continue/ exit
  • Reverse vesting – This is a key clause often overlooked in the Indian context. Reverse vesting ensures that a stake in a company only vests to a founder if he has spent the requisite time on the business and solves for dead equity on the cap table
• Potential action points during disputes:
  • Despite the best of measures, disputes are inevitable. Experts agree that co-founders should seek to address the issues when they germinate rather than allowing them to fester. Usually, unaddressed points tend to result in rifts between partners which can then potentially derail the business.
  • It is essential to keep communication lines open between co-founders at all times. It usually helps if founders talk to trusted friends, investors & mentors and seek guidance. An unbiased mentor can often provide the best path to conciliation!

Have any other suggestions to address conflict amongst management teams at startups? Write to us with your ideas

We love B2B SaaS companies

We ❤️ B2B SaaS companies, especially the ones building in India for the world. Why?

- SaaS sales brings early validation

- SaaS has non linear growth

- SaaS requires smaller teams

- SaaS sales cycles are fairly predictable

- SaaS can be profitable

Let us show you exactly why?

Early validation

A portfolio company was at ~1cr in recurring revenues in its first year and was building the product alongside marquee customers like the top 2 IT companies, 2 banks, 2 insurance companies in India with growing ACVs with each deal.

Non linear growth

A portfolio company in B2B SaaS has grown over 5x in revenues this year, crossing $1mn in sales, and every time we revisit our thesis we believe this business can still grow 100x.

Small teams

A portfolio company in B2B SaaS has closed FY22 at $2mn ARR, is profitable with a team of less than 20, and is looking to set up a 1-3 member sales team for Egypt and/or LatAm which can potentially double revenues.

Predictable sales cycles

A company in B2B SaaS has a sales cycle of just 1 month from lead to conversion because it has a laser sharp focus on its ideal customer profile and knows the triggers in the customer life which lead to purchase of the software tool it provides

Profitable

A company in B2B SaaS gave us a dividend this year which effectively returned our capital, while our equity value that remains invested has grown multifold.

Does this look like your company in 3 years?

We are always looking to fund B2B SaaS. Companies with a ready product, early customers, B2B sales market and mindset, and solving an important need are always welcome. Prefer monthly 'recurring' revenues of 5 lacs+ since your (returning) customer is your best validation. Our quick B2B SaaS diligence framework will help you identify whether your company fits what we are looking for.

Please reach out to us if you are building one such seed stage company.

We'd like to know:

a) Your founding story

b) What problem are you solving?

c) How will you make money?

Our first cheque is $250-300k, we can lead rounds, we love to follow on.

Please email us with title 'B2B SaaS: Company Name' on:

Siddharth: ss@malpaniventures.com

Dhruv: ds@malpaniventures.com