Three-year-old iZooto is celebrating. The software-as-a-service (SaaS) startup, which powers e-commerce companies with web push notifications, has crossed $1 million in annual recurring revenue (ARR) despite having under $100,000 in investment and zero equity dilution.

This is news because most startup stories are of venture capital (VC) funding rounds, sometimes seed money, crossing a million dollars. Last year, Indian SaaS startups raised over $1 billion venture capital in 217 deals, according to data tracker Tracxn. The number could be bigger this year as the total funding raised has crossed $713 million in the first six months. Yet, industry estimates peg the entire annual revenue of Indian SaaS companies below $1 billion.

That’s why iZooto’s revenue of over $1 million, which is more than 10 times what the company invested, is unusual. It isn’t alone. A number of young SaaS entrepreneurs say they’re not chasing “vanity metrics"—read funding rounds—but are trying to build capital efficient companies. If you can make $4-6 for every $1 of investment, you are capital efficient—they call it building a “value SaaS" company.

Skin in the game

The catalyst is the youngest accelerator in town, Upekkha. It runs a two-year acceleration programme for SaaS startups serving small and medium-sized businesses, or SMBs, around the globe. Upekkha gets just 1% equity in its portfolio startups until they hit revenue milestones. No other accelerator has tied its success this tightly to the financial outcomes of its startups. “This way we have real skin in the game," its co-founder Prasanna Krishnamoorthy says.

Upekkha’s first cohort of four startups has just graduated—three of them crossed the $1 million revenue mark a few months ago, and the fourth is almost there. All four—iZooto, SocialPilot, Interview Mocha and Appknox—have become angel investors in the accelerator that helped them.

Upekkha’s second, third and fourth cohorts are on. “We’re now a tribe of 22 value SaaS startups, clocking total annual revenue of over $12 million," says Krishnamoorthy with pride.

Before starting Upekkha in 2017, Krishnamoorthy co-founded two startups, and worked with around 120 startups as chief technology officer at Microsoft Ventures in Bengaluru. He knows how tough the trek to the first million dollars in revenue is for SaaS startups. That’s when most of them die. “That’s why Upekkha chose to get paid—both 8% equity and a share of revenue—only when a startup hits the milestone of $1 million in annual recurring revenue," he says. Former head of product for Intuit India Thiyagarajan Maruthavanan and serial entrepreneur Shekar Nair later joined Krishnamoorthy as co-founders.

Recently, CB Insights analysed data of US tech startups from 2010 onwards to see if pumping tonnes of money into startups led to better outcomes. “After IPO (initial public offering), the most highly funded startups tend to underperform those that raised less. In fact, the companies that raised the most, almost uniformly struggled to create long-term growth," it found. Yet the number of funding rounds over $100 million to US startups tripled between 2016 and 2018.

“For a VC (venture capitalist), the price of missing out is much higher than that of making a mistake by betting on the wrong guy," Maruthavanan says. He says VC is good for startups growing 10% or more month on month, citing the examples of Housing.com, Snapdeal and Inmobi.

Hemant Mohapatra, partner at Lightspeed Venture Partners, puts Upekkha’s ARR marker into perspective. VC investors evaluate companies based on many factors, including the team, traction, market need and timing. “Some of this is a slice in time, some is future potential. An ARR number is but one of many things that matter while making an investment decision," he says.

VC could just be the shot in the arm a startup needs to be first and fastest in the market. But that’s not as important in business-to-business SaaS, says Krishnamoorthy. The scope to boost revenue trumps the need for funding. US-based Veeva Systems, a provider of CRM software for life sciences, is an example. It raised $7 million and went public when it was clocking $50 million in revenue, which is now $700 million. “That’s proof that capital-efficient companies can be built and can become fairly large, even when there is competition," he says. “That’s a value SaaS company." In India, Zoho, Wingify, FusionCharts, OrangeScape and Gofrugal are a few value SaaS companies outside the Upekkha cohorts.

One of the first tasks startups at Upekkha go through is assessing what’s at hand. “When startups say we need capital, we ask what do you need the money for. Then we will find a way for you to get that within your network," Maruthavanan explains.

At the core of Upekkha is a peer-learning model. The startups in its cohorts have to learn from each other and from other startups. “If you get product/market fit without burning much equity—less than 10%—later on, if you want to raise money to scale-up, you can do it without losing control of your company," Maruthavanan explains. “Even debt instead of VC is an option as you have enough revenue to show."

Picking the right customers

Vivek Khandelwal, Neel Kothari, Shrikant Kale and Sachin Grover bootstrapped to start iZooto in 2016, grew it to a 20-person team, and were clocking annual recurring revenue of around $240,000 by 2017 when they came into Upekkha. One of the first exercises was to figure out who wanted their product the most. “Who are the businesses that needed our product badly, saw value in it enough to pay good dollars for it? That’s how we zeroed in on the e-commerce segment," Khandelwal recalls.

The second inflection point came when it reset its pricing. “Most people think of pricing as cost plus 10%. That’s not it. We tell our startups—don’t price the product, price the customer. The same product will have a different value for different customers," Maruthavanan says. This enabled iZooto’s third surge, which came with structuring the business to sell more products to an existing customer. That’s how it made it past the $1 million revenue mark. And that’s when Upekkha got equity as well as a share in revenue.

Upekkha raised a small round of funding from friends and family in the beginning. An angel round from 15 SaaS industry founders and investors—Pallav Nadhani, founder of FusionCharts; Aneesh Reddy, founder of Capillary Technologies; David Hauser, founder of Grasshopper and Chargify; Shekhar Kirani, managing partner of Accel, to name a few—followed.

Usually, it is a bad idea to raise small investments from a number of people as it means a lot of administrative work. But the angels Upekkha raised from are known for backing a community-supported model. It is now closing a second round from 15 more angels. Krishnamoorthy likes to quote the proverb: “It takes a village to raise a child." He could be describing his own accelerator as much as the startups they incubate.

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