Enterprise tech thru Arali Lens - Oct 22
Seed investing in this macro environment, cloud adoption and other Indian B2B action
While October has been a tepid month for enterprise-tech action, it has worked well for us. We have been busy getting ready to deploy from fund 2. In this newsletter, we attempt to take a broad-brush look at the public and late private markets, macro winds blowing across the enterprise-tech landscape as well share some musings on what has shaped our fund construction and investment strategy.
Markets, trade wars, and other things macro
Bessemer Growth has been publishing an interesting Parting the Clouds newsletter with a data-filled analysis of public and private late-stage cloud.
In the mid-month edition, they report the EMCLOUD is down 53% YTD, with software multiples now 75% below highs and 50% below the 5-year averages. The top multiple is just north of 20X and median is around 4.6X (just above 5X towards the end of the month). This is a significant depression from the heydays of 2021.
This meltdown is seeing its impact in the VC world as well. Multiple well-funded SaaS startups have been shedding jobs, including our home-grown ones like Chargebee , Fareye. For those wondering why it is so, these companies are ensuring they don’t have to fundraise in this environment and risk a down-round. Also, focus on what the markets want now—capital efficiency (read profitability). Here’s a detailed view on this phenomenon.
All of this slowdown hasn’t translated into valuations dropping as much as we would have liked in the seed and early A rounds. Perhaps, most seed and early investors don’t care too much about the macros.
More macro news—The US announced an export control policy on artificial intelligence (AI) and semiconductor technologies to China. The emphasis is to retain stranglehold or a “chokepoint” over AI chip designs, electronic design automation software, semiconductor manufacturing equipment, and equipment components that are key for China’s advanced AI computing and supercomputing facilities. What this means for India remains to be seen.
Investing in the current scenario
As we polish our investment strategy in the current environment, Sapphire Ventures released their updated analysis on exits and VC outperformance since 1995. Historically, our investment strategy and focus on enterprise tech has been shaped by no-small-means by Sapphire’s earlier analysis; their current drop only seeks to validate our plans going forward.
Here are some key points summarised:
Portfolio value creation in enterprise tech is often driven by a cohort of exits, while value creation in consumer tech is generally driven by large, individual exits.
Looking back to 1995, aggregate enterprise exit value has been greater than aggregate consumer exit value. There are more billion-dollar enterprise exits than billion-dollar consumer exits. So, there may be more opportunities for a large outcome in the enterprise space.
Billion-dollar enterprise exits can occur in both upward and downward-trending markets, as enterprise companies’ exits come from both IPOs and large M&As to PE and corporations.
How will this drive our investing? We will continue to focus on building out a concentrated portfolio (no need to spray to find that one consumer company that will drive returns), stay super-focussed on ownership levels, and focus on startups that drive enterprise value.
While we are on the topic of M&A in enterprise tech, here’s an interesting titbit on how M&A happens. Unlike the widely held view, M&A takes time. If you are planning to get acquired, it is important to engage with your potential acquirers early.
Reports galore
The Gartner 2022 CIO Survey revealed that CIOs’ future tech plans remain focused on optimisation rather than growth. CIOs’ top areas of increased investment for 2023 include cyber and information security (66%), business intelligence/data analytics (55%) and cloud platforms (50%). However, just 32% are increasing investment in artificial intelligence (AI) and 24% in hyper-automation.
SVB released their H2 SaaS report, emphasising the following:
IT spends by enterprises have not dropped; in fact, there is an increased focus on productivity tools, cloud migration, and next-generation analytics. Cloud spend is projected to outpace all other IT spending categories.
Record dry powder available for deployment is ensuring that deals continue at a healthy pace.
Debt financing requests are on the rise as startups begin to hedge against a tougher equity markets heading into 2023.
Further, PwC released their India Startup Deals Tracker report for the last quarter, which emphasises that VC slowdown is real in India. Overall, investments fell by 40%, and average deal sizes at the growth stage shrunk. SaaS and Fintech seem to have the highest share of funding, which goes to show the shift of capital from B2C to B2B plays. M&A also seems to have perked up, with large well-funded players in SaaS and consumer making easy pickings.
Contrarian views
Chanced upon this user disengagement blog by the Zerodha CTO. Made for a compelling read and forced me to sit back and think about user engagement and the tech investments flowing into this area. I can’t disagree that most user engagement interventions are overrated. Notifications are a big nuisance; more often than not, drive user fatigue and induce the reverse of stickiness. I am also overtly sceptical about the often bandied-about “mass personalisation.”
However, the question in my head is where to draw the line?
Does it mean build “fit for purpose” and the users will come?
Can all businesses really live on zero marketing spends and totally rely on word-of-mouth?
It does seem to give a huge thumbs-up to user-centric, non-intrusive design, leveraging the community and enabling bottoms-up adoption. More on this in the near future!
Noteworthy B2B action in August
B2B building materials startup GlobalFair raised capital in a Series A round. This is yet another cross-border commerce bet being made in the last few months.
Pharma retailer focussed Saveo also raised funds last month. Kudos to them for building and scaling the business in quite a challenging space.
In other news, strategic finance SaaS platform Drivetrain AI raised funds in a Series A round.
Arali Perspectives
Scaling up post series-A requires founders to scout for experienced talent. Here’s Rajiv’s views about tapping a rather unexplored talent pool for startups.
From Arali’s Portfolio
This month, we added Bimakvach to our portfolio. Bimakavach is building business insurance for the midmarket and SMEs in India.
It’s been a busy month for Oivi! The company was awarded the prestigious EIC accelerator grant for €2.5m. Kudos to the team! Meanwhile, Oivi showcased the ‘Oivi Camera’ to stakeholders at RSSDI 2022 and at the 6th Digital Health Conference 2022 in Malaysia and received great feedback all over!
AI-powered travel OS Pathfndr was nominated under the World’s Best AI Travel Technology Provider 2022 category at the 2nd annual World Travel Tech Awards, standing shoulder-to-shoulder with global tech giants!
Signing off, folks!
If you are building something in the enterprise tech space from India or associated with enterprise tech in general, we would love to hear from you.
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