The first phase of Indian startup funding euphoria is credited to business-to-consumer (B2C) ecommerce startups. It was mostly about emulating western ideas in an Indianised manner.
We have seen a complete cycle of angel investment to VC funding to IPO in many B2C Indian startups. From a retail investor’s perspective, the outcome of most IPOs is not as rewarding as it was for VC investors who exited through the IPO.
Zomato, Paytm, Policybazaar, and CarTrade are examples that have not vanished from our memories.
The second phase of Indian startup funding shifted the focus to business-to-business (B2B) startups. B2B business models do not mandate severe cash burn compared to B2C business models. They have a better chance of being cash positive and profitable quickly. It sounds less risky.
In the last three years, B2B startups have mushroomed and gone B2C way in terms of fancy valuations. The primary reason for these fancy valuations is Addressable Market Size—an important parameter every investor would consider before making an investment decision.
Let us dig deeper. As per the Ministry of MSMEs and NSIC, India has 63 million MSMEs, of which 13 million have Udyog Aadhar numbers. It is a huge number in itself.
That’s why Indian MSMEs are the highest employment creators, drive significant exports, and contribute a whopping 27% to the GDP of India. But they have their problems, pains, and challenges. Obviously, there is immense scope for solutions.
Any B2B Software-as-a-Service (SaaS) targeted to this sizeable addressable market sounds like a sure success. That is where, I believe, Indian startups worked hard to understand their problems and develop SaaS product ideas and apt solutions. It was so convincing that it made investors fund SME-targeted B2B SaaS products at fancy valuations.
Of course, B2B SaaS companies are targeting large enterprises, helping them with analytics, cybersecurity, artificial intelligence, machine learning, and IoT.
However, the majority of the angel and pre-VC funding has gone to SME-focused B2B startups offering HRMS, CRM, ERP, accounting, sales automation, lead generation, and logistics management. The largeness of the addressable market and valid pain areas warranted these investments.
Fast forwarding to today, most of these B2B SaaS companies have de-Indianised their offerings for the global markets and shifted their focus to overseas SMEs from Indian SMEs.
In the last two years, this was the under-current. SME-focused B2B SaaS startups would get Series A onwards funding from VCs only if they sell the subscription out of India.
Look at numerous examples—Druva, Zoho, Freshworks, AgileCRM, Easysendy Pro, IBSFintech, Cloudcherry, Facilio, Paperflte, Vymo, and many more. They are Indian B2B SaaS companies garnering most of the subscription revenues from overseas SME customers.
Most of them targeted Indian SME markets in the beginning, struggled, and shifted their focus. There are specific reasons why these B2B SaaS companies struggled in India’s large addressable SME market and had to shift focus to survive and thrive.
Let’s look at these reasons that drove away these companies, or in other words, made them give up on large and lucrative addressable Indian SME markets.
The first reason is their mentality. Meet any SME owner in India and give them a choice between owning the land for the factory/office by paying ten years EMI or paying the long lease rental, i.e., 5% of the property’s value annually. Though the second choice is more tax-efficient, gives better cash flows, and is pure OPEX, most SME owners would opt for the first choice.
Indian SMEs have demonstrated a sharp inclination towards CAPEX over OPEX. Professional CEOs at large enterprises try not to block capital and liquidity on CAPEX and opt for OPEX if it is an option.
Indian MSMEs prefer ownership to subscription. The success of on-premise solutions like Tally and many such offerings in the Indian SME market reflects this mentality very well. The idea of paying a subscription (rental) to use a SaaS application has not appealed to Indian SMEs.
The second reason is the low perceived value of software. Until five years ago, in the absence of online license validation, any and every software was available in pirated versions.
The Indian SME sector was infamously the second-biggest user of pirated software after households. That phenomenon led to the low perceived value of the software. It is still haunting the SaaS companies, and their value proposition is undermined due to this psyche.
The third reason is the cost and availability of the Internet in the pre-Jio revolution. Internet was costly and was not readily available in remote industrial areas before Jio commoditised it. In those days, SaaS meant dependence on the Internet to be able to use it. Such a situation did not create a conducive ecosystem for Indian SaaS companies, and most B2B SaaS startups moved away from the Indian SME market. This reason may not be a hurdle in current times.
The fourth reason is the rampant parallel economy in pre-demonetization and pre-GST times. Willingly or unwillingly, SMEs were part of it. When these B2B SaaS companies pitched them the idea of keeping their business data on the cloud to use SaaS, they probably found it disastrous.
It is one of the critical reasons why B2B SaaS companies did not succeed initially in the Indian markets and shifted their focus to developed countries.
The fifth reason is cloud-flation. In the past five years, the cost of cloud infrastructure has increased exponentially. Most SaaS companies depend on the cost of sourcing cloud infrastructure from Google, Microsoft, and Amazon.
Indian SMEs are highly price-sensitive and are tough on accepting frequent upward price revisions. That squeezed the margins of B2B SaaS companies, leading them to look for a dollar or euro-paying markets.
These reasons impacted the most on why Indian B2B startups got funded on India SME story and had to give up on the same India SME story. It has profoundly changed the investment thesis of many VCs who look for Indian B2B startups serving SMEs out of India.
Vishal Prakash Shah is the Founder and CEO of Synersoft.
Edited by Suman Singh
(Disclaimer: The views and opinions expressed in this article are those of the author and do not necessarily reflect the views of YourStory.)