DevInfra Report H1 24 — The “Path to Regrowth in Software Infrastructure”
Are software infrastructure (“Infra”) companies focusing on growth or profitability? How is that impacting valuations? How are investors thinking about Infra? Where is India in all of this?
If these questions peek your interest, please keep reading on and download our full report here :)
At Grayscale Ventures we make it a point to monitor US-listed Infra companies, analyse trends, and identify gaps where startups can build. Thats why we created the Grayscale Infrastructure Index (“GII”).
The GII have significantly outperformed the EMCLOUD by nearly 30%, almost fully bouncing back to 2021 highs by the end of 2023. Why you ask? We believe it boils down to three factors: Interest Rate Expectations, Resilience and Growth Drivers, but we are going to focus on Resilience and Growth Drivers as Interest Rate Expectations are not dictated by company or sector fundamentals.
Resilience — Infra companies have a unique characteristic of being highly sticky within tech stacks, resulting in an Average Net Dollar Retention of 115% amongst GII companies. Along with sticky revenue is an asset light business model that allow for flexibility to expand margins in times where demand expectations are low. Our research finds that Median FCF Margin doubled from 7% to 14% whilst Median Revenue Growth only slowed by 4% between H1'23 and H2'23. In essence, greater efficiency was achieved without sacrificing much growth in a relatively short period of time.
Growth Drivers — We are seeing several trends within the GII. Datadog and Cloudflare has witnessed successful Multi-product strategies for expansion. Infra companies have also started to encroach onto the $37.7B Government software market, with an increasing number of FedRamp Authorisations and FedRamp Reuses every year. Pursing these expansion strategies whilst benefiting off AI-driven revenue streams have sparked bullish interest from investors.
Analysing the recent YC batches, we find that there is increasing focus in two categories Engineering, Product and Design and Infrastructure, occupying about a quarter of recent batches. Other software investors are also following suit. The focus shift is not just driven by the observations in the public markets but also the rapid emergence of AI applications, use cases, and infrastructure needs. AI sub-categories that did not exist two years ago now exist: Coding Assistants, Automated Front-end Builders, Automated Testing, Fine Tuning, Data Platforms, LLMOps, etc. VCs see this boom and are willing to bet on companies that they think can be early movers to capture a share of the trillion dollar (According to Bloomberg) AI market.
What does this mean for India?
India is going to become the largest developer community by 2027.
India also has no shortage of high-quality technical tertiary institutions like the world famous Indian Institute of Technology (IITs), where Sundar Pichai (CEO of Google, IIT Kharagpur) graduated. By virtue of size and education, India will have the right talent pool to compete against global Infra market incumbents.
The Grayscale Team has assembled the Grayscale Top 30 which tracks revenue performance of private Indian Infra startups across stages. We find that 26 out of the 30 startups have surpassed the $1M revenue mark whilst 6 out of the 30 startups crossed $100M in revenue.
Despite tailwinds boding well for Indian Infra startups, it has only received <1% of VC dollars when compared to its US counterparts — $150M vs. $16B according to Traxcn.
Now you might be thinking…why aren’t VCs pumping more capital into India Infra startups? The US is home to the world’s largest software market where enterprises pay Top Dollar for software. The geographical disconnect between Indian startups and US enterprises makes it more challenging for them to sell to US enterprises, not to mention the cultural differences when scaling teams from India to the US. That being said, we have seen an increasing number of Indian startups resolving these issues. Companies in the Grayscale Top 30 like Hasura, Postman and Browserstack are already championing for India and have cracked US GTM. In case you have not heard…Browserstack has surpassed $200M in revenue. We are also seeing a long tail of 1000+ Infra Startups originating from India tackling US GTM from the get go.
Grayscale Ventures believes it is ‘early days’ and sees immense potential in India. We aim to be day 0 partners with Indian founders building in Infra. If you are a Founder building in this space please contact us at ventures@grayscale.vc.
