With software adoption gaining speed amidst the pandemic, investors in India and globally have started evincing interest in the country’s burgeoning business-to-business (B2B) enterprise segment that was often overlooked by risk capital investors earlier.
While software-as-a-service (SaaS) and deep technology in India are emerging as sweet spots for the investor fraternity, these sectors are still at a developing stage in the country. Startups operating in this space will have to chart out global expansion plans and tap large enterprises in the developed markets of the US and Europe to be able to scale and attract big investments at later stages, said Inflexor Ventures Managing Partner Venkat Vallabhaneni in an exclusive interaction with DealStreetAsia.
“With the liquidity availability and low-interest rates, a lot of money is flowing towards leveraging this technology for the competitive advantage. But to scale in the long run, these companies would be required to align their product strategy with the go-to-market strategy,” he said.
Inflexor Ventures is currently investing from its second technology fund, which hit a close at $81 million recently. The fund will focus on fintech, healthtech, consumer tech, agritech and also invest in futuristic sectors like space technology.
What is the thesis behind investing primarily in B2B enterprise startups leveraging deep technology capabilities?
Our second fund is sector-agnostic and it will look at some special and futuristic opportunities such as space. From 2015 to now, a lot of funds in India have moved towards the enterprise sector and B2B. Globally, especially in the developed markets, the focus is moving from B2C consumer to the internet and increasing the whole value chain from the customer focus to the backend using the current technologies like deep tech. With the availability of liquidity and low-interest rates, a lot of money is flowing towards leveraging this technology for a competitive advantage.
The term deep tech is used broadly and involves everything from semi-conductors to AI to electric vehicles and so on. While a lot of venture capital firms invest in the space, there are few dedicated funds. Overall, what’s the deep tech scene in India?
Deep tech is an overused term. It could be energy storage, energy-saving technologies, pollution control, or space tech, which is futuristic as well. Outside that, the usual suspects are AI and machine learning (ML), Internet of things (IoT), blockchain, but these should have a solid IP. Idea is that they should disrupt a business model considering what is happening today. In the Indian context, we look at companies that can make a difference and are scalable.
For example, from portfolio one we invested in Atomberg, which makes energy-saving fans. These fans claim to save 70% more energy efficient than traditional fans. Our other investment, Chakr Innovation, is a clean technology firm focused on reducing air pollutants and improving emission control. It doesn’t need to be an IoT. We have also looked at cybersecurity where a lot of deep technology can be applied as well. We are also interested in deep tech companies focused on the SaaS model that are looking beyond India.
Inflexor’s second fund took lesser time to close than the first vehicle. Was it because of the rising LP interest as they see potential in deep tech or is India maturing as far as understanding deep tech is concerned?
It’s a combination of things. People are looking for more avenues to get better returns. Awareness about alternate investments such as venture capital, private equity, and family offices has gone up. Traditionally, the VCs were focused on the B2C sector, but now the technology awareness has gone up significantly in India, especially among the family offices. They have started to look at global markets. The top 10 companies in the US are all technology companies. The technology shift is happening globally and in India as well. Besides, our portfolio one performance also helped attract investors.
When we look at deep tech startup investments, the seed-to-Series A funding can be comfortably raised. But, getting hands-on bigger cheque sizes as part of Series B and upwards gets tough despite the availability of capital. Deep tech demands big investments at later rounds. How do you see this?
It’s the evolution of the ecosystem. Indian VC system is probably less than 10 years old and the reality is that even entrepreneurs are coming up right now. It’s true that a lot of companies come in at Series A or seed-stage while Series B onwards, the number gets small. But that’s changing now as more funds are available within India, and international funds are coming in as well. The Atomberg(s) and Chakr(s) of the world are raising money. A91 Partners came in and funded them and they are now looking at Series B and Series C. Our other portfolio company Play Shifu recently raised Series B. Their key market is the US but they are an Indian company and exist here as well. Within our small portfolio, three companies have raised Series B, and we see more going towards Series B.
One challenge facing the SaaS companies is that for them to scale they need to go to the developed markets of the US and Europe. How do they do that? When they go to Series B, will they go to the international or the US funds to raise the money? Would they be required to switch the location to achieve the same? All these questions need to be considered when looking to scale in the future. Such scenarios will evolve as we go forward.
In the last 18-20 months, SaaS has produced a number of new unicorns as far as India is concerned. There are over 1,000 SaaS startups in India, of course, not all are funded. While some of them are operating and developing products in India, for adoption they are primarily looking at the developed markets. How do you see this segment grow going forward?
SaaS companies will have a limited market in India even after they mature. If you look at these unicorns, the majority of their market is in the US. So, initially, these companies will gain market share in India and have some clients, but eventually, they’ll end up in the US or Europe. Even at the mature level, say after five years, 30% of their market share or revenue would be from India, rest 70% will be outside. So that’s a model they need to adopt. They will continue to have the advantage of the talent availability in India, have the back office here and even develop software here, but finally may head to the West.
The challenge here is that a market like the US market is very open for new innovations, but they are also discoverers. Large enterprises will have issues embracing and adopting the technology of these startups. Initially, they will make them sweat. So startups may initially focus on mid-market companies in the US and then go to the larger companies.
One of the companies we invested in is Kale Logistics, which focuses on cargo logistics for airports and seaports. They are already doing Rs35 crore in revenue, and have many clients in India and overseas. Such companies will not have problems. But the majority will have an issue getting into the larger enterprises in the US market. The go-to-market strategy has to be defined very well for them to be successful.
With so many SaaS companies cropping up in India, what is the value add and differentiation that Inflexor brings in as an investor? Also, in terms of exits, this space is still far away from delivery, maybe one or two IPOs coming up in the US.
If you look at our team and our experience, we have been entrepreneurs and have worked for large companies in the enterprise sector as well. So we understand both sides of the coin. Many of the early-stage companies in India need a lot of hand-holding initially for the product and go-to-market. That’s where we wear our entrepreneurial hat and help them out.
Talking of exits, there are deals that attract the attention of media, and then there are exits in the $50-100 million range that go unnoticed. For early-stage funds like us, exits might come from Series B and Series C. We don’t need to wait for an IPO all the time. We had two reasonably good exits of which one was a strategic acquisition and while in the other a senior fund came and gave us an exit. Our average investment lifecycle is around five years. The ecosystem is definitely evolving in terms of providing exits along with the maturity of the companies.
There’s a lot of debate on Twitter India right now on tech talent and salaries in certain roles being at par with the Valley. It’s not related to deep tech particularly, but generally speaking, tech salary in India is quite steep. We still produce the largest number of engineers. So, where is the shortage?
The same debate happened when I came back to India in 2008 and joined Bank of America to head their technology division. We could then create a 7,000-people team in India and it delivered. There will always be such debates, and there will always be people in large numbers coming into the system as well. The need is to identify the talent and leverage them. The fundamentals may not be clear unless they go for structured training knowing our education system. Once you focus on them, give them adequate training, they will do extremely well. There’s no dearth of talent in India.
For a sector like deep tech, how active are Chinese funds in India? Did the ban on Chinese investments in India last year have an impact on fundraising by deep tech startups?
Chinese investors were more focused on consumer tech and the internet economy. In terms of deep tech, there was never a gap to fill. The capital requirement to scale in a sector like SaaS will depend a lot on their go-to-market. A lot of companies will probably end up raising money from the developed markets and international funds.