Revenue Based Financing – a new alternate financing option for Indian SaaS entrepreneurs?
There has been recent buzz globally about a relatively new financing avenue, particularly for early stage Software-as-a-Service (SaaS) businesses. Popularly known as Revenue Based Financing (“RBF”), it entails an upfront financing into the company, while the repayments are a fixed percentage of the monthly revenue until a pre-agreed cumulative amount has been repaid. Specifically, this makes sense for SaaS businesses as their revenue is predictably recurring in nature. A recent Techcrunch post lists out the active financers in the space, and the typical RBF structures used by them. The average ranges for the criteria and key terms are as follows From a financer’s perspective, RBF presents itself as an asset class that has some of the upside of traditional VC, with some level of downside protection like debt. From an entrepreneur’s perspective, RBF is a non-dilutive financing avenue which can be closed relatively quickly. Illustrative IRR scenarios for a typical early stage SaaS company Let’s get down to the numbers to study the relative IRR performance of the three financing structures. We use the following assumptions: The IRR profile for various levels of company’s performance (measured by MRR growth %) looks as below The table below summarizes the pros and cons of the three financing structures for a financer and for an entrepreneur. RBF in India – an opportunity for both sides of the table RBF hasn’t made inroads into India yet. Based on our conversations with some of the active US based RBF financers, they are open to looking at India based SaaS opportunities as long as significant percentage of revenue comes from US based customers, and there is a US subsidiary which generates a certain minimum MRR. Looking at the pros and cons, while RBF may not be a panacea, it indeed looks like an option which the Indian SaaS entrepreneurs will look at with some interest.
Enterprise Software Products – Big Clients, Big Opportunity
Over the past few years, there has been a lot of investment activity in the B2B Technology product space. One can broadly classify B2B Tech into two categories based on the size of the end clients, and the delivery model (on-premise or Cloud). Most of the recent investment activity in the B2B Tech space has primarily been in “SaaS”. This is because SaaS products are relatively easier to scale globally as against Enterprise Software products. Some of the drivers for this are as follows: That being said, we see a huge opportunity for Indian Enterprise Software product companies. The “edge” such companies have over typical SaaS companies are as follows: Only a handful of global players are fighting it out for the larger clients. For example, in case of Enterprise CRM, the primary competition is from Oracle Siebel, Microsoft Dynamics, Salesforce (for large enterprises that are comfortable with SaaS), and SAP. In case of Contact Center Software, it is from Avaya, Cisco, Aspect & Genesys. In contrast, for most SaaS products, the vendor market is quite cluttered since the barriers to entry (and exit) are much lesser for SaaS products. Incumbents in Enterprise Software are large (and relatively slow moving) firms with “legacy” products. Large enterprises have seen lesser innovation as compared to SMEs – immense opportunity to be nimble-footed and have a more contemporary product platform for the younger product companies in this space. Enterprise Software platforms are typically more comprehensive and feature-rich, whereas SaaS offerings are relatively more of “point” solutions. As a result, an Enterprise Software vendor has greater opportunities to expand and penetrate into adjacent add-on offerings, with great ease. Higher customer stability – typically much lesser churn, since the integrations and customizations are an ‘investment’ and provide stickiness to the vendor. India is a great place to start. Getting large Indian enterprises as customers and then expanding overseas (to other developing regions like South East Asia, Middle East and Africa) is a trend we keep seeing. While in developed markets, even large enterprises have adopted the Cloud infrastructure and software as integral to their businesses; in India the mid-to-large enterprises are still in the early-cycle of Cloud adoption. So if you are an Enterprise Software company, and are looking to raise funding, what are some key aspects from a VC fund raising perspective? Here are a few that we at Zanskar Advisors have learnt from our past engagements: Revenue Scale already achieved: The bars seem to be higher for Enterprise Software companies as compared to SaaS. For e.g. an Enterprise Software firm would need to have approximately $ 5 mm of revenue to attract similar amount of funding (for similar dilution) as a SaaS product firm can attract with say $ 2 mm (that too on an annualized run-rate basis). Established Partnerships (especially for overseas customer acquisition / servicing): As the “expansion” would be primarily coming from overseas, some instances of selling to overseas customers (preferably through channel partners – as direct sales are less scalable) will help. Instances of displacing established incumbents (large product companies) at key accounts (for reasons other than just the cost). Revenue Trends % of Product Revenue (License + AMC) as against Services revenue (upward trend is favorable) % Revenue from top x (say 5) clients (downward trend is favorable) % Revenue through Partners (upward trend is favorable) Average Revenue per Customer (an indicator of “upselling” – could be in terms of no. of users or no. of modules – upward trend is favorable) Global Recognition (from the likes of Gartner, Forrester etc.) is a plus We strongly believe that a new wave of Enterprise Software product companies from India is going to take on the world – in line with the thesis of “Make in India” (and sell globally).