Enterprise tech thru Arali Lens - Oct'23
IPOs are back, the Splunk acquisition, the B2B commerce conundrum, and the latest in Indian enterprise tech
Did we just catch a faint glimmer of the silver lining in the clouds in the private markets that everyone has been talking about…or hoping for?
After a long break (the last IPO in the US was in Dec’21), venture-backed software companies are back in the IPO market with Instacart, Klaviyo, and ARM going public last month. So, have we turned the corner? Seemingly not yet, given the lukewarm reception that the two of the three IPOs received. This, besides the general announcement of another possible rate hike in the next 6 months.
Meawhile, there was a large M&A announcement with Cisco announcing the acquisition of Splunk.
Lots to unpack, including the breakneck action in GenAI, some significant insights into the evolving Indian B2B commerce ecosystem, and seed investing market landscapes. Strap up for the ride!
The Klaviyo story and its underpinnings for Indian SME Tech
The first time I heard of Klaviyo was when we were researching the Shopify ecosystem last year. Blinkered views maybe, but we had never reckoned that e-commerce tech might be a large hunting ground for large enterprise-tech opportunities.
Digging in a bit deeper, realise that Klaviyo has built a very strong business, democratising powerful technology to SMEs. The numbers are very impressive: 130K customers, $585M revenues for 12 months until Jun‘23, upwards of 50% revenue growth over the last 12 months. More impressive is the fact that they have built this utilising only $15M for their business operations. Kudos to the early investors who backed these founders!
I couldn’t help comparing their numbers to businesses catering to Indian SMEs in the broad ecommerce/business enablement area. For the comparison, I used data from Indiamart. Yes, it is very lazy, not an apples-to-apples comparison, but there are still some very valuable learnings.
Klaviyo vs. Indiamart: 130K customers vs. 203K customers. Annualised revenue per customer: $4500 vs. $600. (Only 3% paying customers for Indiamart out of its entire subscriber base). Revenue growth of 55% vs. 31% as a proxy for tech adoption in the SME segment tells you a story.
The numbers also show that tech adoption amongst Indian SMEs is still in its early days. In this case, ease of use, ability to deliver, and extract value will be table stakes for SME-focused startups. Clearly , the offer a free version and monetise later theory hasn’t worked. With low average revenue realisations, low acquisition costs are absolutely necessary. Building a large business will be a long grind as the market depth is still unknown. No wonder, there is some jadedness in the investing circles on Indian SME Tech.
However, we believe therein lies the opportunity. It is obvious that the market is expanding. Just look at this tweet to see how huge the increase in mid-size companies has been over the last few years in India
Startups who can get the tech adoption timing right, build super efficient/frugal operations, and are able to deliver and extract value will be huge winners…
…which takes us back to the big question:
Will the next 10 years be the decade for Indian SME tech?
Cisco’s acquisition of Splunk
The Splunk acquisition announcement by Cisco has been lauded by multiple analysts as a win-win for everyone involved. There seem to be significant synergies in product offering and significant GTM leverage to be exploited. However, I also suspect it is as much about getting a large subscription business as much as valuable data in the new AI world for Cisco. And the market seems to suspect what is only the beginning. There will be more acquisitions in the forthcoming period.
This only reinforces the fact that M&A is a great driver of exits in enterprise tech.
B2B Commerce dynamics in India
Here’s an interesting and comprehensive report put up by Avendus earlier this year. We are cautiously excited about B2B Commerce plays in India, largely because there is significant fragmentation in most supply chains. However, we realise that businesses need large amounts of capital, contend with low margins, and have high working capital requirements.
Our thought process is as follows:
The way we have parsed the ecosystem is by annual contract value (ACV) and end customer segment of the commerce platform—a. Retail-segment-focused commerce plays like Udaan and ElasticRun, b. Commerce plays focused on the larger customer segments like Zetwerk and Infra.Market, and c. Cross-border plays. While there is the allure of a being the digital-first large organised player in the markets these players operate in, investing in these businesses is like navigating minefields.
The toughest segment is the first one, i.e., Retail-focused commerce plays. Not that it isn’t a large opportunity…far from it. But, it requires the startup to build a bunch of ecosystem enablers (e.g., distribution muscle, financing) along with its core digital offering, get adoption, build trust, increase wallet share and penetration, and scale it to its potential within 8-10 years (the tenure of a fund). All this is easier said than done. In a diverse retail landscape like India, it might be still easy to penetrate the larger category A retail, but Tier 2/3/4 will take time and eventually affect outcome size.
The enterprise-focused and cross border plays have it slightly better. The ACVs are higher plus building distribution and credit offerings are marginally easier. However, the key to evaluating these plays is to understand whether there are one/two latent needs of the buyer persona/buying organisation that aren’t typically solved by the typical merchant/trader in existing supply chains. These latent needs are generally beyond quality, consistency, and reliability of supply. For example, traceability in food supply chains, sustainability-related factors in manufacturing. In some ways, it is to do with evaluating whether the timing of a value-adding new-age, digital-first platform is right. We do foresee a lot more action in these plays in India over the coming years.
Seed investing market perspectives
Here’s some interesting data from Carta on valuations across rounds over the last few years. While the data might be very US-centric, it still gives a very good picture of how SaaS deals tend to be priced. The numbers indicate that
Seed stage investing has just got a lot tougher and entry valuations are up, while later stage valuations are significantly lower.
It will take longer for a startup to reach anywhere close to even a $500M valuation and probably more rounds. It is therefore paramount to be very disciplined about equity targets and have an adequate follow-on allocation strategy.
All the action in AI
Lots of exciting action, including OpenAI, seemingly working on building a device specifically designed for AI. Here’s a couple of links that will give you an overview of what’s hot in AI: https://www.therundown.ai/ , https://www.youtube.com/mattwolfe
I found a very interesting article on how monetisation is happening in AI and how it might evolve from a “pure subscriber” to a “subscriber + usage” model. Also an interesting experiment conducted by Intercom, which has started charging based on the successful resolution of an AI query.
It seems still early days of GenAI being leveraged extensively to create enterprise-level products, but the direction is getting clearer—a fundamental shift is starting to take shape; the next generation of enterprise-tech will be AI-first and seems to displace the current crop of players.
Latest B2B action in India
According to Inc42’s Indian Startup Funding Report H1 2023, the enterprise tech sector saw the maximum acquisitions in H1 2023. Of the total 67 acquisitions in H1, one-third, or nearly 23 acquisitions, were from the enterprise tech sector alone.
Bunch of startups raising funding, however, the most eye-catching one amongst them has been Perfios raising a large round to build out its lending enabler solutions. Do we read into this as a leading indicator of increased penetration of credit offerings by financial institutions to the SME/MSME segments?
Arali Perspectives
In continuation of our series on Data Governance & Privacy, here is part II on Data Privacy — objectives, initiatives, and opportunities.
From Arali’s Portfolio
FRIGATE received the Confideration of Indian Industry’s Best Innovative Practice Award in Digital Transformation at DX Awards 2023 for “AI powered procurement platform” under the Operational Excellence Category.
FinBox participated in the 4th edition of the Global FinTech Festival in Mumbai, where CEO and co-founder Rajat Deshpande spoke about credit infrastructure for FinTechs and how the market is evolving in the light of recent regulations.
Bimakavach has partnered with Lakshmi Financial Services to offer business insurance advisory and solutions.
WIZ conducted Cold Chain Unbroken 2023 - A Thought Leadership Event in Bengaluru on September 14–15, 2023.
Prolance hosted an industry interaction and networking session at Prolance Interior Design Hub, which saw a great response. The company also presented the Prolance platform at SketchUp 3D Basecamp in Bengaluru.
Unbox Robotics co-founder and CEO, Pramod Ghadge, and CPO, Rohit Pitale, recently showcased the benefits of the UnboxSort solution to the logistics industry and investor community at the Oxagon x McLaren Accelerator Demo Day in Riyadh.
Meanwhile, we also made 3 new additions to Arali Fund 2 — invoice generating software firm Ezo Books, insur-tech platform pitbit.ai, and Water Intelligence SaaS firm Fluxgen.