Although there has been a healthy and steady amount of investment in Indian technology startups, there is also a disparaging gap between the funding that business-to-business (B2B) companies receive compared to business-to-consumer (B2C) startups. According to Tracxn data, funding in B2B startups was less than half compared to what B2C companies received in the same period in 2018. While B2B companies managed to get USD 3.7 billion in 2018, B2C companies garnered USD 7.6 billion in the same year.
With the intention to bridge this gap between B2B and B2C startups in terms of the kind of attention and funding they can receive, Sajan Pillai, former CEO of California-based IT services giant UST Global, has recently launched his own venture capital fund, named Season Two Ventures. His company will solely focus on providing equity capital to Indian companies that are into India’s USD 5.6 billion B2B sector, he said to KrASIA.
The freshly established California and Bengaluru-based Season Two Ventures is now in the market to raise a total of USD 50 million. Pillai said that he expects to complete the round within a year to be able to start investing about USD 1 to 2 million in early-stage startups working in healthcare, energy, fintech, and logistics space.
KrASIA discussed with Pillai about the investment psyche of Season Two Ventures and the importance of focusing on B2B startups in India.
KrASIA (Kr): Why did you launch a B2B focused fund for India?
Sajan Pillai: If you just look around you can find a lot of B2C companies that attract a huge amount of money on a regular basis creating high value. But B2B startups rarely get monetary help and when they do, they don’t get the right pricing. If you look at the number of companies that are succeeding, a large number of them are B2C, but very little are B2B. So, that’s one clear opportunity. Secondly, large companies in the world are the ones that need innovation the most, yet today they are unable to reach these startups directly.
For about 50 years, India has been an authority and a go-to-market for several companies for their technology needs. So, we thought that we can use this 50-year-old context and build on the expectations the world has from India to create successful B2B firms.
Look at what Israelis have built: About 30 years ago, they started focusing on B2B startups and today a large number of Israeli startups have either gone public or have huge valuation and will go public soon. They have put a lot of focus on B2B. But Israelis never had the backing of big companies which we do, and we are actually better positioned than Israel, but no one has really leveraged that.
There is a huge gap and we have just stepped in to connect this gap.
Kr: How long did the planning go for this fund?
SP: I have been in the B2B space for a long period of time and have been looking at startups in this space this whole time. I have just retired as the CEO of UST Global and we have an internal funding mechanism for startups for the last 10 years. So you can say the muscle work for this new fund has been going on for the last 10 years. This was one of the reasons I moved on from UST, so that I can focus on this fund.
Kr: How much money are you going to raise? News reports say you are seeking USD 100 million.
SP: Since this is our first fund, we are initially looking at raising around USD 50 million, and 30% to 40% will come from me personally. In the last six weeks, we have already got commitments from a few investors, and LPs are interested in this fund because our focus is India. For a fund of this size, it takes about 18 to 24 months to complete the fundraising, sometimes even longer. We are hoping to complete this sooner, probably within a year. We have already started the process of investing and we are at various stages of talks with at least five companies, while we have already signed the term sheets with a couple of companies.
Kr: Why do you think there is a dearth of B2B focused fund in India?
SP: Almost all global firms, as well as Indian companies that are huge, fall into the B2C space. Google, Facebook, Amazon, these are all B2C players.
Funds typically focus on creating and having unicorns in their portfolio. They invest in 50 startups and hope two or four will turn out to be unicorns. That typically happens for B2C companies. But our focus is not necessarily to create billion-dollar companies. Investing in B2B companies is quite different than B2C. It’s a different model and there are very few funds that operate on that model, which means you have to invest in fewer companies and must look at early-stage companies. If you invest in late-stage companies that already have customers, you are not going to get the margins that you expect as you have come in late.
A B2B investor or a fund has to have a deep understanding of how the technology works, so that when you see the product you know if it’s going to work or not. Funds will typically look at usual proof points such as the number of customers, frequency of usage, and revenue models. But since we have a deep understanding of the technology, we know if a company is going to be big or not at a much deeper level.
Number two is, the company must have a very good distribution system. Every company we invest in we have already found markets for them and if we can’t, we will not be able to invest in them. There are very few funds that have the capability to do that. Since we have been in B2B space for three decades we know and understand the challenges young companies are likely to face.
Kr: At what stage of a company’s journey will you invest?
SP: We follow two investment models. Because we are constantly in touch with customers, we look for entrepreneurs or startups to whom we will provide the technology and strategy, as we already have customers who are looking for specific solutions. So, we come up with the idea and connect with the startup team to work on a specific model or idea.
The team is free to further build more models on top of it but we will be an active partner throughout their journey. Although this is a small part of our overall investment strategy, we think it’s very important for us to have such portfolios in our kitty.
The bigger portion of the fund will be focused on early-stage companies. We are looking at pre-revenue companies in which we will invest anywhere between USD 1 to 2 million.
Kr: Typically we see SaaS-based solutions in the B2B space. What are the sectors that you are looking at?
SP: A lot of the B2B companies are software companies. Typically, B2B is not just pure tech business as technology alone doesn’t move the business layer. Technology is mostly just a distribution mechanism, and SaaS is given for any B2B company. What we are more interested in is the main driver of the business.
We want to work in four sectors: healthcare, logistics, energy tech, and fintech.
These are the most important sectors that need attention in terms of innovation and we want to disrupt the existing models in these spaces. The entire fintech has such a big impact on banking. Now banks need a layer of tech innovation to compete with these fintech startups. We want to invest in fintech companies that can assist banks. This opportunity is huge.
Secondly, we see healthcare opportunity as something which is growing fast and will become massive in the coming years. If you look at healthcare space, basically these are hospitals that provide care that relies on a lot of technology.
Logistics has become big due to what the e-commerce companies have managed to do. As Flipkart, Amazon, and other players have expanded their operations, the supply chain management vertical has been massively disrupted and need more innovative solutions.
Energy technology is the most important of these all, as you can survive without Facebook and Flipkart, but without electricity, water, and natural gas you can’t. Energy-tech is massively underserved, and we want to be one of the few early movers in these sectors.
Kr: Apart from the funding, how else are you going to help startups?
SP: So, the investment that we put in will be, of course, a big driver for them. Other than money, we will work hands-on with them to identify potential clients and possibly take them overseas. We actively work with corporates to help them identify startups that can help them, so there will be an automatic distribution system for our portfolio companies.
This interview has been edited for clarity and brevity.