BackEnterprise software start-ups catch VC investors’ attention
B2B start-ups record 71 deals in January-April 2016, up from 44 in the same period last year
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Bengaluru: Enterprise software start-ups are fast becoming the favourites of investors, who are keen to diversify their portfolios after many of their expensive bets last year on consumer Internet companies soured.
Apart from established venture capital firms such as Accel Partners, Sequoia Capital and others that are increasing their investments in enterprise start-ups, some new funds such as Ideaspring Capital and Utilis Capital are launching with a sharp focus on enterprise deals.
After pumping in more than $9 billion—mostly into consumer Internet start-ups—since the beginning of 2014, investors started pulling back late last year because of a mix of global macroeconomic factors, such as a growth slowdown in China, as well as growing concerns over the unproven business models of consumer Internet firms. India’s most valuable e-commerce firm, Flipkart Ltd, has been hit by valuation markdowns by four of its investors and analysts have also questioned the worth of other highly valued start-ups such as Zomato Media Pvt. Ltd.
Between January and April last year, there were 44 investments in enterprise or business-to-business (B2B) start-ups, as against 71 deals in the same period this year, according to Mint calculations based on data available on the website Trak.in.
“In the current environment where there is a correction in valuation for consumer start-ups, investors are looking for start-ups that can turn profitable quickly, and realized the importance of having a portfolio mix of both consumer and business-focused start-ups," said Manish Singhal, an angel investor who is in the process of setting up a fund, which would also have strong focus on artificial intelligence-based B2B start-ups.
There are several business factors that make enterprise software start-ups attractive. As firms become increasingly comfortable buying software on the Internet, Indian enterprise start-ups such as Freshdesk Inc. are rapidly expanding in international markets without necessarily building large, costly sales teams. In India, too, small businesses as well as consumer Internet firms are spending more money on digital solutions provided by enterprise start-ups.
“As a fund, we are bullish on B2B. The last five years have been about building out the front-end of the Internet business—acquiring customers and building brands. The next five years will be about building the back-end of consumer Internet—getting supply chains in place, logistics, payments. That is why consumer Internet leaders are becoming core customers of B2B tech and platform companies, and that is one of the reasons we’re so confident about enterprise investments," said Sanjay Nath, managing partner, Blume Ventures, an early-stage fund that has made investments in logistics technology companies such as Grey Orange Robotics and Locus.
The financial factors behind the growing popularity of enterprise start-ups are evident—they need far less cash to expand and many of them are even profitable, compared with cash-heavy, loss-making consumer Internet start-ups.
Take Freshdesk, one of India’s most valuable enterprise start-ups, which makes customer management software. Started in 2010, it has so far raised about $90 million in venture funding from the likes of Tiger Global, Google Capital and Accel Partners. Figures from the Registrar of Companies show that for the financial year ended March 2015, its Indian entity’s revenues were around ₹ 44 crore, compared to ₹ 16 crore a year earlier, while profits were around ₹ 5.8 crore, as against ₹ 1.5 crore a year ago. Flipkart entities, on the other hand, reported losses of ₹ 2,000 crore on revenues of ₹ 10,000 crore.
Then, there’s the promise of exits—either in India, which is wooing start-ups with relaxed listing norms, or through buyouts as larger companies scout for new technologies.
“Although exits are a huge challenge right now, they will happen through M&A connect programmes like the one iSpirt has, TiE has one as well. Even multinational corporations like Accenture, through their Innovation Labs, are approaching us looking for good companies and trying to leverage the start-up ecosystem," said Naganand Doraswamy, managing director, Ideaspring Capital, a fund launched last month to invest in product start-ups. Software products think tank iSpirt, and TiE, a non-profit global network of entrepreneurs and professionals, both aim to foster the product start-up ecosystem in India.
To be sure, enterprise start-ups will never provide the huge exits and revenues that the likes of Flipkart, Snapdeal and Ola can. Yet, there’s no denying they offer less risky bets for investors.
“I see this is as sector rotation. The sector that is in fashion becomes unfashionable and another sector, ignored thus far, becomes the new hot sector," said Sharad Sharma, an angel investor in start-ups such as Druva Inc. and Frrole Inc.
Within the B2B space, investors are keen on start-ups that use technologies like artificial intelligence, machine learning and big data to help other businesses with digital solutions.
For instance, Qubole Inc., a big-data-as-a-service start-up, raised $30 million in January in a round led by US-based Institutional Venture Partners. Headquartered in California, with a base in Bengaluru, Qubole offers its users a simplified way to work with large amounts of data on the cloud. Pune-based Altizon Systems Pvt. Ltd, which helps enterprises build Internet of Things products using machine learning, in February raised $4 million from Wipro Ventures, Lumis Partners, The Hive and Infuse Ventures.
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