Is there an alternative approach to fund SAAS?
Should all early-stage business aim to become Unicorns? (Unicorn is a term coined for a startup having a valuation of > $1 billion). A typical Silicon Valley VC assumes 9 out of the 10 businesses they fund would die, thus they aim to hit a home run with each investment they make. Are there blind spots in this approach? We felt so. This approach of hockey stick growth doesn’t work well with many business models which are built in a more sustainable way with moderate growth. Pushing these businesses to grow explosively results in poorer outcomes. In fact, many such models if built the way they are meant to be can result in a much better outcome for their founders and the early backers. Many investors realizing this are working on alternative models, they even have a name for this — a zebra movement.
SAAS business is more like a flywheel rather than rocket-ship. Flywheels are not as exciting as rocket-ships to watch, but they don’t crash- they keep spinning. As we all know, building software from India has its added advantage, India has the right talent and has an affordable infrastructure to build SAAS compared to other geographies. Today, when infrastructure is available on cloud and distribution is possible digitally, a good sweet spot is available to build a SAAS company from India for the world. Not to undermine the burgeoning SME market in India, where software adoption is becoming more important and provides an excellent opportunity to sell in India.
There are different financial structures which could fund sustainable SAAS businesses like convertible instruments where investors can make revenue linked payment structure capped at 3–4X of their investment with the upside of converting into equity if another funding round happens. This is a win-win structure where investors make decent IRR and founders may choose to not dilute themselves and thus keep their destiny remains in their own hands.
We feel the VC model looking for the next billion-dollar startup is broken. A lot of such multi-million-dollar opportunities are missed if one only focusses on the next Unicorn. A highly capitalized VC funded business may risk running a negative contribution model for a really long time and this is nothing but a race to the bottom. To give you an example over 350+ companies entered the grocery delivery business since 2011 in India only a few in single digits have survived ever after raising enormous capital.
Hoping for a increasing focus on alternative approaches to fund SAAS businesses.
