Why B2B Startups Are the New Gold Rush For VCs

VCs have fallen in love with this era of digitization and for B2B startups this is the shining moment to become the superheroes of this digital culture.

The pandemic has changed how humans interact and how enterprises function, not to mention the surge in the adoption of technology to address the needs of digitization. In such a scenario, digital transformation has become one of the top priorities for organizations and their go-to-market strategy now involves partnering with start-ups as external innovation partners. As per IDC, businesses that embraced cloud and other emerging technologies to spur their digital transformation during the Covid-19 crisis fared better than those businesses with conventional IT systems. VCs have fallen in love with this era of digitization and for B2B startups this is the shining moment to become the superheroes of this digital culture.

Ready to be disrupted

Enterprises are now faced with two options, either they must pivot or be disrupted amidst the digital storm which has engulfed industries in the past few months. B2B startups have the responsibility as well as the credibility to respond to this situation by co-innovating with their enterprise counterparts.

Co-innovation has become a norm between startups and Indian enterprises. Last year Nasscom released their Co-innovation: Enterprise Startup Collaboration report which mentioned that 100% of the surveyed enterprises collaborate with startups to create disruptive solutions and fuel innovation. Furthermore, collaboration with startups enables enterprises and our society to safeguard from future disruptions by insuring themselves on the backbone of cutting-edge technology services.

Into the mind of a VC

The Indian startup story saw a significant growth with the rise of the internet economy when we witnessed B2C unicorns like Flipkart, Ola, and Paytm. It is interesting to note that the current wave amongst the Indian startup ecosystem is being led by born in the cloud,deep tech startups with the potential to rival established corporations across the globe. The leap of faith for VCs can be justified by factors such as:

• Profitability– B2B startups offer multiple advantages to investors. They have a clear path towards profitability with lower spending on marketing and sales as compared to their B2C counterparts. This provides investors with faster exit options, less capital requirement, and above all a realistic valuation.
• Global market approach–B2B startups are software vendors with the potential to tap global markets from day one. They are at an advantage when it comes to delivering their solutions through a cloud-based SaaS model to global enterprises which are extremely cost efficient when compared with their global counterparts. As per Nasscom, the global SaaS market is pegged at a whopping $100 billion. In India, 150+ firms out of the 1000 firms big SaaS industry are generating an ARR of $1 million. The report also states that there is a huge $400 Bn untapped addressable opportunity for SaaS, and a chance for India to increase global market share by 2025.
• Exponential risein the last few years–Stats show that 43%of all Indian unicorns are B2B startups working in the areas of AI/ML, big data and blockchain, among others. Unicorns like Udaan, Freshworks, Druva, and Postman are Indian examples in recent times of the exponential rise of Indian B2B startups which, as per a report by Zinnov,have already grown from 900 to 3,200.
• Increased investment – India is at the cusp of a technological revolution with a huge potential to innovate across a broad spectrum of AI, DevOps, and cloud enabled services. Investing in a B2B startup, will help VC firms, to seize the right opportunity of adding a potential unicorn in their portfolio. Attractive funding and big-ticket deals due to increased digital transformation have also turned a lot of attention towards them. The total equity funding received by B2B tech startups in 2019 was over $3 billion across 415 deals compared to $1.6 billion raised across 450 deals in 2018.

• Right time to invest– The ongoing crisis has further acted as a catalyst for tech adoption and deep tech startups are at the forefront of helping enterprises fix their technology gaps. From an investment point of view, now is the opportunity to invest in early stage B2B startups. India has over 1450 global MNCs contributing and driving digital transformation mandates for their respective headquarters. With an abundant pool of software talent in our country, entrepreneurs will be developing enterprise products for the world from India, enabling enterprises to build innovative business solutions.

• Rise of deep tech–There are over 4,200 B2B tech startups in India and 63% of them are working on enterprise technology in the BFSI, healthcare, retail, and automotive verticals. A total of 18% of all startups in India are advanced tech startups and B2Bs hold a 24% share in this pool. VCs will now be more inclined towards deep tech startups using AI, ML, and IoT as they have proliferated at a faster pace in the ecosystem, given the current circumstances.

Riding the B2B wave

Organizations today are not merely looking at service providers who help in modernizing their infrastructure but consultants who partner in their IT transformation journey. For an investor, B2B startups are the new digital consultants, a segment that will contribute towards the advancements of technology and digitization in India at a massive scale in the coming days as they will provide enterprises with the bedrock for futuristic possibilities that will shape the economic landscape of the country in the coming years.

Bain and Company’s India SaaS report 2020 states that over the past five years, the number of funded SaaS companies has more than doubled and the number of SaaS companies drawing series C or later-stage capital has quadrupled.

As a SaaS powerhouse, India will facilitate significant interest in B2B startups, as they continue to innovate both at local and global levels. Deep tech startups are more suited to pivot their business goals in the times of crisis. For a VC, this is raw gold that needs to be mined and polished to derive the best value out of them.

(Madhurima Agarwal, Leader, NetApp Excellerator and Director, Engineering Programs, NetApp and the views expressed in this article are her own)