The Next Bil­lion Dol­lar Idea?

IN­VESTORS ARE BE­GIN­NING TO SHOW IN­TER­EST IN B2B START- UPs, BUT FUND­ING RE­MAINS A STUM­BLING BLOCK.

Business Today - - BUSINESS BHEL - By De­vika Singh Pho­to­graph by Deepak G Pawar

In2013, R. Narayan, founder and CEO of Pow­er2SME, was in Mum­bai for a meet­ing with a top VC firm which had re­cently made huge in­vest­ments in nu­mer­ous start-ups. Dis­cour­aged with his re­cent meet­ings with other in­vestors, Narayan was spe­cially look­ing for­ward to this one. But he was dis­ap­pointed. “We are only in­ter­ested in in­vest­ing in B2C ( busi­ness-to-con­sumer) mod­els,” Narayan was told by the in­vestor at the Ban­dra Kurla Com­plex.

To­day, Narayan’s Pow­er2SME, an on­line buy­ing club for small and medium en­ter­prises, is one of the top funded busi­ness-to-busi­ness (B2B) start-ups in In­dia. How­ever, to get five peo­ple to in­vest in his start-up, he

had to meet more than 100, he says. “When we started out, B2B was not an at­trac­tive space to be in. In 2015, when we met peo­ple, all of them asked whether we were do­ing some­thing in food de­liv­ery or lo­cal ser­vices or lo­gis­tics,” re­counts Rahul Garg, Founder of Moglix, a B2B com­merce com­pany.

But, a shift is un­der way. In­vestors who have turned cau­tious af­ter their re­cent misad­ven­tures with start-ups are look­ing for safer bets.

More to Of­fer

Year 2017 proved to be a game changer for B2B star­tups in In­dia. A re­port by in­dus­try body Nass­com says that in 2017, of the 1,000-plus new ad­di­tions to the In­dian start-up ecosys­tem, al­most 50 per cent were in the B2B seg­ment, up from 34 per cent in 2016. The re­port also claims that the av­er­age fund­ing for B2B start-ups rose 5 per cent in 2017, while the B2C av­er­age fund­ing saw a de­cline of 10 per cent.

One fac­tor be­hind the at­trac­tion of B2B start-ups is that they are less cap­i­tal in­ten­sive than B2C star­tups, the re­port states. Fintech, health-tech and B2B en­ter­prise prod­ucts are driv­ing the seg­ment, with in­creased fo­cus on tech­nolo­gies such as an­a­lyt­ics, ar­ti­fi­cial in­tel­li­gent, In­ter­net of Things, aug­mented re­al­ity or vir­tual re­al­ity, and Blockchain, among oth­ers. In 2017, about 26 per cent B2B fund­ing ($145 mil­lion) poured into en­ter­prise and SMB-fo­cused hor­i­zon­tal so­lu­tions, 90 per cent of which was in soft­ware-asa-ser­vice.

While val­u­a­tions of these com­pa­nies are still not as high as that of top-val­ued con­sumer-fo­cused star­tups, some of which are val­ued at a bil­lion dol­lars, B2B start-ups have gained sure foot­ing in the ecosys­tem. Ac­cord­ing to data from start-up an­a­lyt­ics firm Tracxn, the top 35 B2B start-ups in In­dia have raised a to­tal of $677.09 mil­lion since Novem­ber 2016. The top val­ued firm is JustBuyLive, an e-dis­trib­u­tor that con­nects shop­keep­ers with con­sumer brands. It had raised about $100 mil­lion from Ali Cloud In­vest­ment (as of Feb­ru­ary 2018).

B2Bs have shown a fair bit of in­no­va­tion, some­thing that top-val­ued con­sumer start-ups lack. For in­stance, one of the in­vestors in Uniphore, which has built a speech recog­ni­tion soft­ware, is John Cham­bers, for­mer CEO of Cisco Sys­tems, who re­cently picked up a 10 per cent stake in the com­pany. An­other ex­am­ple is Cap­i­talFloat. Its co-founder and MD, Gau­rav Hin­duja, says they were the first ones in In­dia to think about lend­ing on­line to SMEs. “Though there was a lot of scep­ti­cism about the idea ini­tially, to­day the seg­ment had many play­ers,” he adds.

Some B2B start-ups had bet­ter luck and did not face as many fund­ing is­sues as oth­ers. “We did have to make an ef­fort to raise funds but I don’t think I have met in­vestors who have been un­rea­son­able. We got the right set of in­vestors on board,” says Man­ish Pa­tel, the ret­i­cent CEO of Mswipe, a mo­bile point of sale-based pay­ment en­abler.

Some of the B2B bets have paid off. Data from Tracxn shows that out of the top 10 play­ers, three are al­ready prof­itable. Sa­ha­janand Med­i­cal re­ported a rev­enue of ` 100 crore, and a net profit of ` 16 crore, in FY16; NeoGrowth re­ported a rev­enue of ` 138 crore and a net profit of ` 6 crore in FY17; and sales readi­ness and en­able­ment plat­form MindTickle had a rev­enue of ` 24 crore and a net profit of ` 2 crore in FY17. In con­trast, many top B2C start-ups in In­dia, such as Zo­mato, BigBas­ket and Snapdeal, are strug­gling to be prof­itable.

Fru­gal Finds

The in­ter­est in B2B start-ups is not sud­den, though the B2C un­der­per­for­mance helped tilt the scales. “We are see­ing a lot of start-ups com­ing up in the B2B space, pri­mar­ily be­cause B2C is a tough mar­ket to be in,” says Ganesh Raju, Part­ner and Leader, Start-ups, PwC. In­vestors are look­ing at com­pa­nies that have health­ier fi­nan­cials and need less cap­i­tal to grow. “In B2B, you don’t have to spend mil­lions of dol­lars on cus­tomer ac­qui­si­tion and you don’t have mar­ket­ing costs. So, in an en­vi­ron­ment where fund­ing is avail­able but cau­tious, fo­cus is on solid busi­nesses with bet­ter eco­nomics,” says Su­mit Jain, Part­ner, Kalaari Cap­i­tal. The VC has in­vested in sev­eral B2B com­pa­nies such as mo­bile data com­pany Ac­tive In­tel­li­gence, B2B on­line com­merce por­tals In­dus­try­buy­ing and Pow­er2SME, fintech plat­form Cred­itVidya, etc.

While larger funds are still hes­i­tant, the smaller ones are go­ing full steam ahead. Karthik Reddy, MD of Blume Ven­tures, is per­haps one of the few in­vestors in In­dia who has al­ways be­lieved in the po­ten­tial of B2B start-ups. The seed-stage ven­ture fund, even in its ini­tial days (2010), had put 45 per cent of its money in B2B start-ups. “You don’t have to throw $2 mil­lion to just un­der­stand whether you are ad­dress­ing the right prob­lem or not. In these start-ups, you re­alise very early on whether the busi­ness is sus­tain­able or not, as the first step is build­ing rev­enue. And all of this hap­pens with a very low cost burn,” he adds.

The pic­ture is not all rosy though. In 2015, Satish Gupta, Ankur Ma­jumder and Sid­dharth Arora re­alised how un­or­gan­ised the truck in­dus­try was in In­dia. The trio de­cided to start a truck ag­gre­ga­tor, and launched Tu­rannt in 2015. How­ever, many oth­ers launched sim­i­lar busi­nesses and while most of them got seed fund­ing, later in­vest­ments did not come, and most of them, in­clud­ing Tur­rant, shut down.

It’s the same story in food-tech, e-com­merce and a few other seg­ments in which sev­eral start-ups emerged to­gether. B2B, too, has fallen prey to this prob­lem. The space is crowded with fintech firms, e-com­merce com­pa­nies and agri­cul­ture mar­ket­ing plat­forms. Not only has this in­creased com­pe­ti­tion, it has also made rais­ing cap­i­tal a chal­lenge. Most B2B start-ups find it dif­fi­cult to raise money be­yond the first round be­cause in­vestors are doubt­ful about scal­a­bil­ity and don’t want to be in a sit­u­a­tion where they are not able to exit.

“B2B usu­ally doesn’t scale up vi­rally the way con­sumer fo­cussed-busi­nesses do and even­tu­ally, when you go to sell these busi­nesses, the judge­ment on val­u­a­tion will de­pend on met­rics such as PE ra­tio and rev­enue mul­ti­ples. Com­pa­nies have to look as if they have a cer­tain scale; only then will some­body be in­ter­ested in buy­ing them, and then you will get your exit,” ex­plains Reddy.

Some B2B start-ups also have a hard time at­tract­ing tal­ent, while oth­ers are still try­ing to get a foothold in B2B sup­ply, a seg­ment that has not seen in­no­va­tion in many years.

While there is no data avail­able on the num­ber of B2B start-ups that have shut down op­er­a­tions in the past few years, most of those that have closed, such as Proph­e­see, Truck­mandi, In­tel­li­gent In­ter­faces, Tolexo, Buildzar, Zip­pon and Om­nikart, cite lack of fund­ing as the main rea­son.

Uni­corn-wor­thy?

Ex­perts are di­vided on the op­por­tu­nity that the B2B space presents for growth. While some say that such start-ups can never grow as big as con­sumer­fac­ing com­pa­nies, oth­ers think their po­ten­tial is huge. “All the top com­pa­nies in the world are con­sumer-fac­ing. There is a limit to how big B2B start-ups can be­come,” says Raju of PwC.

How­ever, ex­perts do agree that the out­look for B2B star­tups is pos­i­tive in the short run as there is a dearth of com­pa­nies cater­ing to busi­nesses in In­dia and of­fer­ing out-of-the-box so­lu­tions. And some of these could move to other coun­tries to scale up, af­ter gain­ing some ground in In­dia. “Look at just the MRO (main­te­nance, re­pair and over­haul) op­por­tu­nity in In­dia. If two-four star­tups in In­dia build all of this to­gether un­der one um­brella and make it ef­fi­cient, just imag­ine the im­pact this can have on busi­nesses. There is hope for build­ing very large com­pa­nies out of In­dia, just for serv­ing In­dian busi­nesses,” says Jain of Kalaari Cap­i­tal.

But a road­block that B2B start-ups need to ad­dress first is lack of in­ter­est from big global in­vestors. Given the in­no­va­tion tak­ing place in this seg­ment, they may well be able to over­come this dif­fi­culty.

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