Over the past few years, there have been a lot of investments in the B2B Technology Product space. One can broadly classify B2B Tech into two categories, based on the size of the end clients and the delivery model (on-premise or cloud).
Most of this recent investment activity in the B2B Tech space has been in ‘SaaS’. This is because SaaS products are relatively easier to scale globally, as compared to enterprise software products. Some of the drivers for this are as follows:
That being said, we see a huge opportunity for Indian Enterprise Software product companies. The edge such companies have over typical SaaS companies are as follows:
- Only a handful of global players are fighting it out for the larger clients. For example, in the case of Enterprise CRM, competition is primarily between Oracle Siebel, Microsoft Dynamics, Salesforce (for large enterprises that are comfortable with SaaS), and SAP. In the case of Contact Center Software, it is between Avaya, Cisco, Aspect and Genesys. In contrast, for most SaaS products, the vendor market is quite cluttered, since the barriers to entry (and exit) are much less for SaaS products.
- Incumbents in Enterprise Software are large (and relatively slow moving) firms with ‘legacy’ products. Large enterprises have seen lesser innovation as compared to SMEs – there is immense opportunity for younger product companies to be nimble-footed and have more contemporary product platforms, in this space.
- Enterprise Software platforms are typically more comprehensive and feature-rich, whereas SaaS offerings are relatively more “point” solutions.
- As a result, an Enterprise Software vendor has more opportunities to expand and penetrate into adjacent add-on offerings, and can do so with great ease.
- Higher customer stability; typically much less churn, since integrations and customizations are an ‘investment’ and provide stickiness to the vendor.
- India is a great place to start. Hooking in large Indian enterprises as customers, and then expanding overseas (to other developing regions like South East Asia, Middle East and Africa) is a trend often seen.
- In developed markets, even large enterprises have adopted cloud infrastructure and software, and made them integral to their businesses. In India, however, mid-to-large enterprises are still in the early-cycle of cloud adoption.
So if you are an Enterprise Software company, and are looking to raise funding, what are some key aspects to look at, from a VC fund-raising perspective? Here are a few that we at Zanskar Advisors have learnt from our past engagements.
- Difference in the revenue scale: The bar seems to be higher for Enterprise Software companies, as compared to SaaS. For example, an Enterprise Software firm would need to have a revenue of approximately $ 5m to attract the amount of funding (for similar dilution) a SaaS product firm would attract with, say, $ 2m (and that too, on an annualized run-rate basis).
- Established partnerships, especially for overseas customer acquisition/servicing: As “expansion” would be primarily occurring overseas, some instances of having sold to overseas customers - preferably through channel partners, direct sales are less scalable - will help.
- Instances of displacing established incumbents (large product companies) at key accounts (for reasons other than just the cost).
- Revenue Trends% of Product revenue (License + AMC), as against Services revenue (upward trend is favorable)
- % revenue from top x (say 5) clients (downward trend is favorable)
- % revenue through partners (upward trend is favorable)
- Average revenue per customer (an indicator of “upselling” – could be in terms of no. of users or no. of modules – the upward trend is favorable)
- Global recognition, say, from the likes of Gartner, Forrester etc., is a plus.
We strongly believe that a new wave of Enterprise Software product companies from India will soon take on the world, in line with the campaign of “Make in India” (and sell globally).
About the author:
Mandar Kulkarni works at Zanskar Advisors - a boutique investment bank based out of Mumbai