Representative image of venture capital funds.
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A number of venture capital funds in the country are rejigging their investment strategies to align with the global trend of increasing portfolio weightage for companies catering to other businesses.
According to the ‘India e-Conomy Report’ jointly published by Google, Bain & Company, and Temasek, India’s B2B (Business to Business) e-commerce is likely to jump 13-14 times to $105-120 billion while the SaaS market may expand 5-6 times to $65-75 billion by 2030.
The total investment in B2B startups grew 46 per cent annually since 2015 to stand at $3.5 billion in 2021, as per a report by Matrix, which added that $8.5 billion have been invested in B2B startups since 2015. Overall equity investment in B2B startups stood at $2.1 billion in 2022, despite a broader slowdown in investments, it added.
After a funding boom in the past few years that saw many consumer facing companies (D2C) receiving overvalued investments, the pockets of investors aren't as deep anymore. As they navigate the ongoing funding winter, investors are looking at startups that have a measured growth path and lesser cash burn.
Whilst VCs in the American and European markets were always inclined towards the business-to-business model, in India it is emerging as a phenomenon now, as per experts.
“B2B companies don't have a lot of pitfalls and disadvantages that consumers facing businesses do. For instance, high competition and limited product differentiation causes companies to spend a lot of money in acquiring new customers. Over the previous five years, when more capital was available in the market, those models were prevalent across different VC funds as deep pockets were needed to acquire customers,” said Arjun Rao, Partner at B2B focused early stage VC Speciale invest.
With lesser availability of capital and more scrutiny from investors, those companies that had a higher customer acquisition cost were instantly affected. Therefore, the broader ecosystem is now expressing a renewed interest in business models that are more sustainable from a unit economics perspective, he added.
B2B companies generally have a lower branding and advertising spend and instead focus on acquiring long term customers. While this can lead to longer sales cycles that require multiple rounds of communication, it generally results in sticky customers that offer a higher lifetime value. Additionally, such business deals, while being lower in numbers, offer a higher profit margin for companies.
In comparison, D2C companies have a hard time ensuring customer renewability, have to invest significantly in marketing to ensure visibility and offer huge discounts to attract customers, resulting in a longer road to profitability, said Anirudh A Damani, director, Artha India Ventures. Artha’s Fund 1 has scaled its portfolio allocation for B2B companies from 40% in 2012-18 to 70% today, owing to the business model’s growing potential.
Formalisation of the economy, and government-led digitisation processes like GST, UPI and KYC have also created a huge market for fintech firms in terms of lending to small and medium businesses that were erstwhile excluded from credit facilities. B2B commerce is also expected to flourish as countries around the world look at India as a China+1 sourcing destination, according to Nishit Garg, Partner at RTP Global.
Indian businesses also have the opportunity now to scale overseas after testing domestically. A number of companies in India are looking at expanding their operations overseas to South east Asia, the Middle East and the West, as per Dhruv Kapoor, Partner at Anicut Capital.
In the past 6-8 months, his firm has invested in companies that are operating in the climate tech space, B2B commerce, solar power generation and drug discovery. 65-70% of Anicut’s angel fund portfolio is made up of B2B companies. Kapoor also expects deep tech, space tech and climate tech companies to become innovation hotbeds that will attract capital.
All this is not to say that investing in B2B companies doesn’t come with its own set of challenges. Since such companies involve a lot of technology and domain expertise, VCs may have to add these capabilities to their expertise teams going forward, which may not happen overnight, said Endiya Partners managing director Sateesh Andra.
Different sectors also face their own challenges in scaling up. For instance, B2B commerce firms may find it difficult to manage their working capital as it is often locked with customers for a longer time. SaaS firms are also reeling with macro headwinds right now as firms across the globe are cutting down on spending. Technology firms also require a high amount of research and development, take time to go to market, and require a more expensive talent pool.
“We probably have the most evolved digital ecosystem in the world. We are seeing the offshoots of that across sectors. I think it's net positive for investors who are looking at both domestic and international opportunities,” Anicut’s Kapoor said.