This article is part of KrASIA’s “Spotlight” series, where our writers from different editorial tables work together to give you a closer look at the tech scene in Asia. Read more about how China’s B2B tech startups are flourishing under the radar here, and learn about Southeast Asia’s new herd of B2B unicorns here.
India’s startup ecosystem, one of the largest in the world, kicked off to a solid start in 2021. The country has spawned, on average, almost one unicorn each week in the first four months of the year.
In total, India added 12 unicorns—companies valued at over USD 1 billion—from January to April, a tally that narrowly exceeded the total 11 unicorns the country produced last year. Even more surprising is that four of these companies—Infra.Market, Innovaccer, Gupshup, and Chargebee—hail from the B2B category. As things go, the Indian startup ecosystem might see more B2B companies making it to the unicorn club in 2021, experts and industry insiders predict.
Consumer-facing technology companies in India have been able to historically command higher valuations compared to startups that create products for other businesses or small and medium enterprises (SMEs). People in the industry cite multiple reasons for this delta in valuation between B2C and B2B startups.
“The unicorn list is dominated by consumer-facing startups. The B2C market in India is more attractive than B2B essentially because consumer products have begun to reach masses much faster due to increasing internet penetration in smaller cities,” Anas Rahman Junaid, managing director at Hurun India, told KrASIA. He added that companies’ valuations are highly affected by the size of the market.
Hurun India, the local chapter of the global market agency, releases an Indian unicorn list every year. In its 2020 edition, the report highlighted that Indian companies, on average, need seven years to become unicorns. The study did not make a distinction among B2B and B2C firms for this data point.
Beerud Sheth, co-founder of B2B conversational AI company Gupshup, which hit the billion-dollar valuation mark after a USD 100 million investment from Tiger Global in April, explained that the characteristically slow growth that B2B startups experience, compared to consumer-facing companies, is one of the reasons to explain why it is harder for startups operating in the B2B vertical to command higher valuations.
“Consumer companies have a different problem: it’s easy for them to show growth, but harder to show profitability. Instead, B2B companies can show profitability relatively easier. Gupshup was fortunate to have both profitability and growth,” Sheth told KrASIA.
Sixteen-year-old Gupshup started as a consumer company that allowed its customers to send group messages over SMS. “We were running a free service which grew exponentially, but we were paying the operators for messaging traffic, which was very expensive. Then the telecom regulator said we couldn’t advertise on messaging, so we couldn’t monetize it,” Sheth said.
He realized that his company had the required technology to offer customer services to enterprises that require automated communication channels with their customers for support, troubleshooting, and billing nudges. Before pivoting to a B2B model in 2010, the team spent a few months speaking with enterprises and their customers to understand their pain points.
“Although we had the tech, we didn’t have the exact product ready for enterprises, so it took us some time to develop that. We added new meaningful features for enterprises to chat with their customers. We made the conversation flow simple and personalized,” said Sheth.
The firm currently provides application programming interface services to businesses, helping them increase engagement between enterprises and their clients across different messaging channels. Valued at USD 1.4 billion, Gushup claims to deliver six billion messages per month across 30 plus messaging channels.
Harsh Pokharna, co-founder of OkCredit, a B2B startup that digitizes physical ledger books for SMEs to keep track of their daily purchases and sales, said that India will see more billion-dollar companies from the enterprise segment in the next few years. “With more capital in the market and software companies coming up with products that can be distributed digitally instead of having a dedicated on-ground sales team, we are at the cusp of creating highly valued companies.”
Indian B2B companies are also becoming unicorns faster than before, based on the examples of firms like Glance and Udaan.
AI-powered platform Glance became a unicorn in only two years—the fastest company in India to do so. The firm provides personalized media content, news, casual games, and short videos on the lock screen of smartphone users. Platforms like Paytm and Netflix have used Glance’s services to deliver targeted advertisements to increase traffic and engagement on their platforms.
Before Glance, B2B e-commerce platform Udaan reached a valuation of over USD 1 billion in 2019, a process that only took three years. The Bengaluru-based company, launched by former Flipkart employees in 2016, operates a digital marketplace to connect manufacturers and retailers, allowing the latter to place bulk orders to fill their inventory. Tencent- and GGV Capital-backed Udaan has raised a total of USD 1.1 billion so far. Its latest USD 280 million fundraising round in January this year valued the company at USD 3.1 billion, according to a report by TechCrunch.
The valuation game
People who KrASIA spoke with said that the valuation of a company is predominantly commensurate with its growth, its estimated future revenue, and the industry’s market size. According to Junaid, investors value consumer companies more generously compared to companies that offer software-as-a-service to enterprises.
“For a B2C company, the valuation is anywhere between three to five times of their gross merchandise value, or 20 times their contribution margin. But for B2B companies, it’s around two times its GMV, or ten times its contribution margin,” Hurun India’s Junaid said.
Junaid, who is also an investor in Indian startups, mentioned that when negotiating valuations with founders, he tries to mark their valuation at eight to ten times their forward-looking revenue. “We are founder-friendly, but we still have to ensure we are valuing the company correctly. Valuation in the first round is more about dilution [of the founder’s stake] than the valuation. You wouldn’t want your founder not to have enough equity,” he told KrASIA.
OkCredit’s Pokharna prefers to steer away from the valuation game. “Valuation is a consequence of building a better product for consumers. Once that happens, valuation will automatically go up,” he said.
While India has already produced five B2B unicorn companies in four months, over 100 enterprise companies are waiting to be valued over the one-billion-dollar mark, according to a report shared exclusively to KrASIA by market research firm Tracxn. These companies fall into diverse categories such as health tech, video-on-demand, loans to SMEs, logistics, e-commerce, ride-hailing, and more.
Breaking away from the trend of making software products for international markets such as the US, Europe, and the Middle East, Indian B2B companies are slowly finding buyers in the domestic market, as COVID-19 has sped up the digitalization of businesses.
Gupshup, for instance, has its largest client base in India, with 80% of revenues coming from the local market. “We are one of the few companies that have been able to make money from local enterprises, and we have been scaling fairly rapidly. Indian enterprises are cautious about spending money on software. In the US, it’s a little different as enterprises spend much more on software. That’s why the enterprise software market in the US is much bigger than India,” Sheth said.
Indian companies won’t have to solely depend on global markets in the coming years, said Junaid of Hurun India, even though the US has represented “about 60% of the consumer base for Indian SaaS companies.”
Cloud-based data management is a hot sector where more Indian enterprises are opting for local B2B services due to an upsurge in digital adoption ushered by the effects of the COVID-19 pandemic, according to Jaspreet Singh, co-founder and CEO of data protection and management startup Druva. “Due to the pandemic and work-from-home-like situation, we have seen a lot of SMEs adopting tech solutions. It’s just a matter of time when more and more Indian businesses will allocate budgets to adopt technology,” he said. Druva, founded in 2018 by Singh and Milind Borate in Pune, India, and now headquartered in California, reached unicorn status in 2019 and doubled its valuation to USD 2 billion last month after a USD 147 million capital injection in a round led by Caisse de dépôt et placement du Québec (CDPQ).
Whether B2B startups will lead the next wave of unicorns depends on how quickly these companies can exploit the current digitization wave to onboard more business. Junaid said that startups might offer more flexible pricing models to increase the local demand.
Sheth agreed with Junaid’s analysis. “If you give your service at a slightly lower price, you can get millions of users, and then you can record hyper-growth, thus getting investors’ interest.”
Yet, both Sheth and Junaid said that it would take two to three years to start seeing a large number of enterprise companies getting a billion-dollar valuation, including for the 100 enterprises highlighted by Tracxn.
“I think we will start seeing more of it happening from now on. But the imbalance will stay for a little longer,” Sheth said.