India’s real advantage in SaaS
Since the turn of the millennium, software product companies from India have threatened to become The Next Big Thing. After many false starts, the industry finally seems to have hit its stride. A combination of technology trends, talent availability and market maturity have brought about what feels like a “Y2K moment” for Indian SaaS companies.
During this period of rapid growth for the industry, Aneesh Reddy, founder of Capillary Technologies, has been in the driver’s seat. His company, which provides customer engagement and loyalty software to retailers, powers 25,000 stores in more than 30 countries. I spoke to Aneesh about his experience building a SaaS company in India, and his learnings about the market opportunity for such companies.
What are the advantages of building a SaaS company from India?
Aneesh: There is no absolute right answer to this question, but in my personal view, there are two key advantages for Indian startups. They are:
Cost: If you look at the typical cost structure of a SaaS company, sales is the most substantial component — as much as 40% of cost for most SaaS companies globally. In SMB and mid-market sales, Indian startups have a significant advantage because there are low-cost call centers to acquire and support customers.
This is why Freshworks can only exist in India — you cannot build a telesales-oriented company focused on SMBs in the US. Although engineering costs are also lower in India, that is not as big an advantage because you don’t need a lot of engineers to build a product company.
Location and culture: Geographically, India is well-situated to serve all of Asia — we are a 4-hour flight away from the major markets in the Middle East, Indonesia and China. Apart from geographical proximity, there is also a cultural proximity to the rest of Asia that allows us to sell better in these countries than in developed markets. Therefore, I believe that the second type of SaaS company to emerge from India will be focused on enterprise customers in Asia.
Enterprises are a massive opportunity in the Asian market since even large companies move directly from no-software to SaaS. There is no incumbent to displace. Also, in my experience, 90% of the time, when an enterprise problem is solved in India through SaaS, the solution will be applicable to South-East Asia and the Middle-East as well.
What about the disadvantages that Indian SaaS companies face?
Aneesh: The disadvantages are very simple:
The lack of marketing and sales talent: In my opinion, the biggest weakness of our country isn’t a lack of products, but a lack of marketing and sales talent. While one needs product capabilities to get to the first $6-7 million revenue number, scaling to $100million requires a different marketing and sales capability, which is lacking in India. This is why a lot of product companies are stuck in the $7-10 million run rate range. Even if they were the first ones to build and pilot the software, someone else optimises it and overtakes them in the market.
Tendency to do too many things and lose product focus :If you look at any Indian company’s product portfolio (including ours), you’ll see that they usually have a wide range of products. We also deploy too many people to solve a problem, which results in terrible UIs. It is usually easy to figure out when a product has been built by 100 people! On the other hand, most of the US products are extremely focused — they might just do three things, but they do those three things well.
How should founders think about selecting markets for their products?
Aneesh: Identifying the target segment and market selection go hand in hand. Based on your target segment, you should assess how large the market you are trying to address is. This is something we missed in our early days. If you can put even an approximate number to it, it brings a lot of clarity to subsequent decision-making.
Of course, even before you answer these questions about target segment and market size, the foremost question to ask is, “are people looking for what I’m trying to build?” Too many people first build a product and only then ask: “are people looking for this?”
If you are building an SMB product, target global markets. If you are building for large enterprises start with India first
I personally believe SMBs in India or Asia are not yet ready as SaaS markets. This is down to two key reasons:
– There is no self-service mindset among SMBs in India and Asia. Also, it is very hard to provide a full-service offering at price points that these SMBs can afford.
– Collections and long payment cycles are a problem in India. Multiple follow-ups for a Rs. 5000 cheque are not worth the effort. India’s credit ratings and auto payments methods need to improve to make this market viable.
So, if you are building an SMB product, you should target global markets. On the other hand, if you are building a company for large enterprises, I would suggest you start with India first, to build the required knowledge about the market.
At Capillary, we were operating in the US for a while when there was no need to. Had we mapped out the Indian, Middle-Eastern, and the Southeast Asian markets, we would have realized that these three markets alone have an addressable size of $2 Billion for us. At the time, we were not even at 1% of this. So the question is: if you are so far away from saturation, why open another market when you know you can win in three?
Your biggest competitive advantage is the market share
Remember that in SaaS, there is an early mover advantage. People won’t replace you if some other company has an extra feature or if a new product is launched which is 5% better than yours or 20% cheaper than yours. The cost of integration and getting things done is very high.
Once you are in and the next guy’s product is 5% or even 10% better, your customer will tell you to improve upon those things. Then, you can try to catch up. Stay close to the market, as sometimes your biggest competitive advantage is the market share.
How did you capture market share in SEA/Middle-East?
Aneesh: We went with our customers. We started with India for the first few years and scaled to about $2MNn in revenue. At that point, some of our Indian customers like Pizza Hut and Puma told us that they were facing the same problem in the Middle-East and Southeast Asia and would like to deploy our product. So, they helped us start out in these markets, and as we got in we realized that with some small modifications to the product we were able to serve those markets as well.
When we were $3 million in revenue we opened ten markets in a single year, and failed in all of them
From our experience, I’d say, if an existing customer takes you to a new market, measure the ROI closely. For every launch, move the initial team from India (the headquarters) to reduce the number of variables till the product/market fit is proven in the new market. Once you arrive at the ROI for your customer (and consequently a product-market fit), hire salespeople and ramp up.
Don’t just randomly say “I want to launch the US or China or Europe.” Think and study the market opportunity. A lot of times, after raising capital, startups open up multiple markets and spread themselves too thin. We were $3 million in revenue when we opened ten markets in a single year, and we failed in all of them. I see the same temptation in most startups once they raise VC money.
You spoke about sales and marketing as the key gap in the Indian SaaS ecosystem. Where do you think are the key challenges?
Aneesh: Sales and marketing are integral parts of a business at every stage. A lot of people struggle with planning for the next stage of business while executing for the current stage.
For example, $7-8M in revenues is an impressive milestone, but I know that subsequently there comes a huge sales and marketing chasm. If you observe closely, a lot of Indian businesses struggle to grow after a great early run. Initial sales typically happen online and startups start seeing significant traction, which leads to a sense of complacency, preventing the team from thinking deeply about sales and marketing.
Many people argue that at that scale, it’s the product that defines your marketing as well as churn. But I feel the way we look at marketing as a country is very poor. I am yet to see a great example of content marketing emerge from here.
India has always had an advantage with building services/applications related businesses. Having done that for so many years now, it is time to level up our marketing game in order to build true product businesses.
What is the right way to go about product expansion?
Powerpoint slides are the best MVPs
- Build with a customer:
For early-stage startups, it is always good to build with the customer — that’s how we did it. Powerpoint slides are the best MVPs. Once you know that a certain value proposition fits with a customer need, then you start building. If you try to build any product without a customer, it won’t be built well.
- Validate feedback from your existing customers:
If you want to build something, don’t depend on the feedback of just one customer. At Capillary if someone asks for a feature, we go back to at least 8-10 customers who we believe are ahead of the market and ask them if it is relevant. We try to find out if they would be interested in buying this and how much they would pay for it. If it is a priority for at least 50% of them in next 12-18 months, then we build it.
- Assess your stage and expand accordingly:
You should think about opening up more markets and making new products once you get to about 10% in the market-product intersection. In our case, we had *200* large enterprise customers, and we knew we could now sell a lot more to them. So, building more products and selling them to the same customer base was quite logical.
On the flip side, if you have only two customers it makes no sense to want to make more products. Look at how large the market is and where you are. If you are at 1% of the addressable market, there is no point in building one more product or opening one more market.
You should aim to capture 10% share in a competitive market, and about 20-25% in a non-competitive one, before expanding to other geographies or products.
- Build only when the need is real
In India, the developer’s time is looked at as free time, and there are many pieces that people build which never get used. When there is a customer requirement, we need to assess whether it is a serious requirement or not; whether the customer will pay for it; whether the customer keeps following up on it. We follow this straightforward rule: if a customer asks us for a modification, we wait until someone asks for the same thing about 3-4 times before we start working on it.
How should founders assess churn at an early stage?
Aneesh: Churn is the most important metric in scaling a SaaS company, and unfortunately most founders don’t take seriously. If you have 250 customers, then 5% churn is okay, as there’ll always be a few unhappy people. But if you have just 5 customers, there is no reason why anyone should be unhappy.
Many companies I have invested in or worked closely with have a leaky-bucket problem. A 5-8% monthly churn means you lose most of your customers within a year. Even if you are adding new customers rapidly, if you churn as much revenue as you add in a given year, your revenue trajectory ends up flat.
Fixing churn is not just a product problem – it is also about fixing implementation and delivery. The questions of “why did the customer buy?” and “is the customer realizing the value they sought?” need to be continually addressed even after the sale.
In enterprise SaaS, more than 10% annual churn is a sin
At Capillary, we do a three-month pilot for every customer we sign up. At the end of the three months, we show them sales growth, and they see that they gain 4 rupees for every rupee spent.
A lot of the time, people just go and sign up customers and then their implementation/business case for long-term adoption is terrible. As a result, half the customers exit in 6 months.
In enterprise SaaS, more than 10% churn rate is a sin, especially since in enterprise you don’t have too many businesses to sell to, even in the mid-market. So once gets out that these products don’t work half the time, it becomes tough to scale up a business.
What do you look for when you invest in startups?
Aneesh: Of late I have started to look for a sales founder because I have realized that building tech in India is not so hard. Even if you cannot build your tech, you can outsource it. But the business side (sales and marketing) is still a hard problem. So I look for founders who think in that direction.
Second, I look for very strong early success: at least a couple of customers who are very happy, some repeat business from customers who have been around for 3-4 months.
The easiest products to sell are ones that increase sales, followed by those that cut costs substantially. The third and the hardest products to sell are those aimed at improving quality. It’s tough to demonstrate value in the third category, so I prefer to invest in the first two.