Good morning and welcome to the thirty-eight edition of The Skeptic Investor!
In 2005, Babu was trying to finish his class 12 at a local government-run “corporation school” and get a job. His father was in a tough spot, fighting diabetes and working long hours operating a printing press machine to keep the family afloat. Soon after, Babu became one of six young people recruited into what would become the first batch of trainees at Zoho University. Zoho University’s strategy? Hire talented young adults from low-income households, like Babu, straight out of class 12, and train them to build software products in India for the world.
Quite radical isn’t it? Then again, Zoho has always done things differently. The company never raised VC funding, which is almost unheard of at their scale - they reported a profit of INR 516 crore in the financial year 2019. Forbes even wrote a profile of co-founder Sridhar Vembu and called him “The Bootstrapped Buddhist.”
Thanks to companies like Zoho, SaaS companies founded by Indian entrepreneurs are poised to reach between $18 billion and $20 billion in revenue, with the potential to capture a 7%-9% share of the global SaaS market by 2022, according to a Bain report.
In this issue, we try to provide some historical and global context into the Indian SaaS space and decode the various strains of the Indian SaaS industry. We also explore ESG in Private Equity, Justin Kan’s lessons from Atrium, and lots more.
Let’s dive in!
An Update: We will be hosting a Clubhouse discussion-room on the ‘North Star Metric’ and growth strategies next week. Shoot us an email if you’re already on Clubhouse and would like to join the discussion.
Charting The Indian SaaS Story - A Global Context
The Software as a Service (SaaS) business model evolved during the 1990s in answer to the shrinking cost of computers and the internet-led digital transformation of businesses in the US. Along the way came about a proliferation of technology-driven businesses and thus, numerous US-based global SaaS superpowers. The Indian SaaS story, however, finally came into its own with the technology reaching a growing number of SMBs in the global markets and the increasingly complex software requirements of organisations in the 2010s. To fully gauge the power and opportunity of SaaS in India, it is important to look at the historical context of SaaS, the business model.
But first, what is Software as a Service (SaaS)? SaaS is a cloud computing service model, in which a software application is delivered to the customer entirely through the internet. The software is usually license- or subscription-based and can be accessed based on the specific requirements of the user i.e. on-demand. Most consumer-facing web applications are also essentially SaaS, however, in this article, we would be referring to business-facing or enterprise SaaS applications.
SaaS models gained prominence as businesses preferred the asset-light and low-storage consumption features of web-hosted software. Furthermore, technologies like virtualisation and multitenant infrastructure enabled SaaS providers to scale-up with minimal marginal costs, leading to a high margin and recurring revenue business model. Thus, multiple SaaS players emerged towards the early-2000s, solving business software needs for customer relationship management, enterprise resource planning, accounting, payroll management, and marketing.
Notably, the first SaaS company was Concur, which started out as a packaged software provider and finally pivoted to a SaaS or a web-based model once it sensed a product-market fit. The company is an epitome of the scale offered by the SaaS business model, getting acquired by SAP in 2014 for $8.3 Billion.
The Emergence of a Goliath - Salesforce
The journey of Salesforce, the world’s biggest SaaS company and an integrated horizontal SaaS player, provides important lessons into the future of SaaS. Founded in 1999 as a pure-play SaaS player, Salesforce quickly emerged as the leading customer relationship management (CRM) solution.
Salesforce is essentially a horizontal SaaS player, providing an array of tools for sales, services, marketing, commerce, analytics (Customer 360) and thus, helping all kinds of businesses achieve their customer management goals. Along the way, through acquisitions, internal development and most importantly, the introduction of Salesforce Platform/ Lightning platform/ Force.com (a platform or Platform-as-a-Service enabling the customer to develop and integrate their own tools), Salesforce has evolved into an integrated SaaS company.
The company has been instrumental in introducing the consultative sales practises and the customisable and on-demand ‘Enterprise’ plans now common across the SaaS landscape. The presence of consultative and personal relationships with clients, customised offerings, and complex integrations (through Lightning), has endowed Salesforce with a sticky customer base over the years, and thus, a powerful moat.
As the future of work takes hold and distributed teams take shape post-pandemic, Salesforce is destined to become even bigger. What’s more, with its $27.7 billion acquisition of Slack, the company is fast moving towards creating an “operating system in the cloud”. Slack, the business communication and collaboration software, has the potential to become the user interface for all of Salesforce’s services, thus enabling seamless organisational communication and interaction among all Salesforce products. Furthermore, with Salesforce appexchange, the company shall be in a powerful position to tap the benefits of the API economy.
An Army of David(s) – The Rise of India SaaS
The story of Salesforce indicates that the logical first move for any SaaS provider would be in the horizontal play, to chase the exponential scale provided by integration. And that’s why the Indian SaaS story, starting in the early 2010s was led by horizontal players like Freshworks, Zoho, and Agile CRM. While SaaS has no global boundaries, these companies banked on India’s engineering talent base and chased the global SMB gap in the SaaS market. Lower costs and in many cases, better product quality, led to these companies gaining huge traction in the global markets. And now, they are increasingly tapping the burgeoning domestic SaaS market as well.
As with Salesforce, these companies shall continue to have a growing opportunity to tap the integrated enterprise cloud ecosystem. Through in-house development, acquisitions, and API integrations, such SMB focused players can potentially aggregate all enterprise software needs under a single interface and thus, continue to gain on global rivals like Salesforce in their SMB niche. Furthermore, by facilitating PaaS (Platform as a service) features to enable customisation and development of native applications by customers, these players can enhance retention and value-generation.
Vertical SaaS plays, while not offering the aggregation scale of horizontal players, are an important opportunity for the Indian ecosystem. Given the enhanced ecosystem created by the first wave of SaaS players, numerous Indian startups have moved to tap vertical opportunities, catering to complex industries like hotels, Kirana stores, BFSI, Healthcare etc. requiring custom-made solutions. Companies like Zenoti (for salons & spa), Innovaccer (for healthcare), and Khatabook (for kiranas) have made major headways. Such vertical opportunities, both global and India-first, would continue to open up as industries get ever more complex, however, the scale could be a concern from an investor standpoint.
With both the horizontal and vertical SaaS players embracing the power of integrations and the API economy, there has been a proliferation of service-specific niche players in domains like marketing-tech or Martech, Chatbots, data security, analytics, HR-tech, and e-commerce. Some large and exciting players in this domain include Druva, vernacular.ai, Yellow Messenger, Airmeet, and WebEngage. Depending on the opportunity size of their niche, these SaaS players may either be able to scale heavily and eventually offer integrations and independent solutions or may scale up enough to be acquired by bigger horizontal players.
Up next is the most exciting India-specific SaaS opportunity, brought into focus by the likes of Postman. With a thriving domestic ecosystem, an increasingly internet-driven economy, and a large talent pool, there has been a surge of startups building emerging solutions for the world. These may be pure-play PaaS products in niche categories like API development (Postman), other developer or infrastructure-focused tools like LambaTest or several emerging SaaS players primarily building differentiated offerings for the global developer community. As showcased by Postman, these players have tremendous scale opportunities, banking on the close-knit developer ecosystem to grow rapidly.
So What’s The Play?
The historical context of the wonders that are SaaS and cloud computing, provides important lessons into the “Why?” of SaaS and provide a direction into the future. In this globally boundless business, India provides an enticing investment opportunity. Here’s how we see the Indian SaaS opportunity shaping up in the next few years:
The continued evolution of the horizontal players into integrated solution-providers and a greater embrace of PaaS models.
Vertical SaaS companies playing on increasingly India-first themes like Dukaan-tech and Agri-tech.
Niche service-specific players embracing themes like Future of Work, AI-ML based solutions for marketing, AI-enabled Voice solutions, Blockchain tools etc.
Infrastructure and Developer focused tools in emerging areas like APIs, testing, GraphQL.
Thought Leaders
Lee Holloway is one of the most impactful coders of our generation. He built the technology behind Cloudflare and is a co-founder of the company that is now worth over $24 billion. Suddenly he became apathetic, distant, and unpredictable—for a long time, no one could make sense of it. Read The Devastating Decline of a Brilliant Young Coder.
What We're Watching
By the end of September 2020, Private equity investments in India hit a record high of $28.66 billion, significantly over the $16.27 billion invested in the entirety of 2019. In 2018, PE investments stood at $10.8 billion. 2021 promises to see even bigger numbers.
However, the focus for funds can no longer be only about the number of companies they fund and the amount of money they put in. There’s also a huge focus on the type of companies that are being funded, viewed from the lens of ‘impact investing.’ Environmental, Social and Governance (ESG) investing has become mainstream, with the reported global pool of ETF assets under management considered “ESG-focused” now exceeding US$100 billion. In this video, INSEAD Professor Claudia Zeisberger discusses how PE firms can meet responsible investing expectations and the role that ESG is playing.
What We’re Listening To
Capitalism in its current form has been brought into question several times over the course of history but to no avail. However, the stark inequality that exists in society was brought to the forefront during the height of the pandemic. How can society do better? Is it possible to pay people ‘enough’? What is enough.
In this episode of TED Business, PayPal CEO Dan Schulman argues that “capitalism urgently needs an upgrade” and it starts with paying people enough to actually invest in their futures. He explains the epiphany that led PayPal to create a whole new metric for adequate pay, Net Disposable Income, and why investing in employees' financial health is just good business.
Twitter Thread of the Week
What We're Reading
Jeff Bezos might have been overtaken as the richest man in the world a few days ago, but he still has boatloads of wisdom to impart. Through this collection of Bezos’ writings, "Invent and Wander: The Collected Writings of Jeff Bezos" you'll gain an insider's view of the why and how of his success. The book includes his annual shareholder letters, his speeches, and interviews.
“Spanning a range of topics across business and public policy, from innovation and customer obsession to climate change and outer space, this book provides a rare glimpse into how Bezos thinks about the world and where the future might take us. Written in a direct, down-to-earth style, Invent and Wander offers readers a master class in business values, strategy, and execution.”
That's all for this edition! We hope you liked it and would love to get any feedback you may have. This newsletter is written and curated by Mishaal Nathani and Ashutosh Gehlot.
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Disclaimer: This content is for informational purposes only, you should not construe any such information or other material as legal, tax, investment, financial, or other advice. Nothing contained in the newsletter constitutes a solicitation, recommendation, endorsement, or offer by us or any third party service provider to buy or sell any securities or other financial instruments in this or in any other jurisdiction in which such solicitation or offer would be unlawful under the securities laws of such jurisdiction.