Photo: iStock
Photo: iStock

Opinion | To become market leaders, b2b startup founders need to look west

Reports and surveys estimate a $3-$4 billion SaaS market over the next few years

Business-to-business (B2B) startups are having a moment. Founders might do well to steer clear of Indian businesses and focus on the US market.

Venture capital funds, much like fashion labels, love seasonal themes. In the early part of this decade, e-commerce companies were all the rage. As the prospects of these companies waned, investors favoured consumer services apps. Most recently, delivery services were in vogue. Perhaps exhausted with the high burn and low returns of their portfolio companies, venture capitalists are now enamoured with the unglamorous cousins of consumer startups, B2B startups.

Graphic: Sarvesh Kumar Sharma/Mint
Graphic: Sarvesh Kumar Sharma/Mint

Unlike consumer companies, B2B companies build software for other businesses. The most popular type of products within this category are SaaS or software-as-a-service products. Last year, B2B startups took in more than $3 billion in investments, 28% more than the number from 2017.

A study by the storage company NetApp and consulting firm Zinnov estimated that B2B startups have seen threefold growth since 2014. But nothing signals the arrival of B2B startups as the news that Tiger Global, the New York-based hedge fund and an early investor in Ola and Flipkart, is now focused on enterprise software startups in India.

As with every investment wave, it’s easy to find a narrative to fit the sentiment. One reason given for the interest in B2B startups is that Indian businesses are undergoing a digital transformation. Consultant reports and trade body surveys cheerfully estimate a $3-$4 billion SaaS market in the next few years. Based on the growth of India’s business-to-consumer (B2C) startups, founders may be tempted to build products for Indian enterprises.

That would be a mistake. India’s SaaS market, similar to its other markets, teases with big numbers, but never quite delivers on the promise. Market sizing estimates often equate technology spending with SaaS readiness. To understand how far behind India is as a market for B2B products, compare the technologies used by the US and Indian websites. A website is the face of a business, and the technologies used are a good indication of a company’s appetite for newer products.

Data from SimilarWeb, a web analytics service, validates the wariness of targeting Indian businesses. Indian websites aren’t in the top 10 of any of the products measured. SaaS staples like Salesforce, Zendesk and Marketo, which are an integral part of most technology stacks, have barely 2% of Indian customers.

Even for homegrown SaaS startups like Freshdesk and Zoho, Indian businesses constitute only a single digit share. With such low adoption of leading SaaS products, Indian businesses have a long way to go before becoming a sizeable market.

Freed from any thoughts of targeting local businesses, startups can use their Indian base to their advantage. In the past, selling products to enterprises overseas was a challenge. The overhead of having equipment and software installed “on premise" made enterprises leery of engaging with smaller companies.

But the near universal adoption of cloud computing has made companies comfortable in working with startups. If the service isn’t up to snuff, companies can simply cancel their subscription. There’s also a happy spillover from the consumer startup boom. India now has a workforce that is experienced in building products within the constraints of a startup.

Crucially, the cost arbitrage benefit gives Indian B2B startups an edge. Traditionally, B2B sales required a sales team that met with customers. This meant staffing a field sales team in the US, an expensive proposition for a startup based in India.

But SaaS products, by design, are built for a “low-touch" sales model. Primarily sold via digital marketing channels, most SaaS tools rely on in-house sales teams, also known as inside sales, to close deals remotely, via phone and email. Products that focus on smaller companies, and not large enterprises, can avoid the need for a field sales team all together.

A 2016 study by Google and Accel, a venture-capital fund, estimated that savings by hiring local talent for product development and inside sales cuts the cost by almost a third. A smaller cost base allows Indian companies to put more pricing pressure on competitors.

The growth of companies like Postman, Freshdesk and Zoho has shown that India can build market-leading B2B products. The ingredients are there: a large market, competitive cost structure and access to product-minded talent. All it needs is for product builders’ need to focus on the right market.

Shailesh Chitnis is with Compile, a healthcare data firm. This column looks at the business of tech, from an insider’s lens.

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