Backed by a maturing startup ecosystem and growing opportunities, the B2B startup space is emerging as the next big investment opportunity in India.
- B2B startups are growing at a fast pace in India and accounted for 43% of all startups in 2018.
- Funding has been growing in the B2B startup space at a faster rate as compared to B2C enterprises, signalling a shift in investor interest.
- B2B is viewed as the next big growth opportunity in the Indian startup space and is valued at around US$ 1 trillion.
- Year 2019 is expected to witness the emergence of quite a few Indian B2B unicorns like GreyOrange, Freshworks, Druva and Rivigo.
Source: ET, DKODING Intelligence
The rise of the Indian startup ecosystem has disrupted many sectors over the years including cab services, retail, food delivery, payments, travel, financial services and movie ticketing. After more than a decade of changing the game for end consumers, it’s time for startups in India to finally mean ‘business’. And we mean that in a very literal sense.
A report by Zinnov reveals that B2B startups accounted for 26% (900) of the 3,100 startups in India in 2014. Their share had grown to 43% (3,200) of 7,400 startups in 2018. Even funding in B2B startups has increased at a faster CAGR of 46.8% from US$ 797 million in 2014 to US$ 3.7 billion in 2018 according to Tracxn. B2C funding in comparison has increased at a CAGR of 14.6% from US$ 4.4 billion in 2014 to US$ 7.6 billion in 2018.
At the seed stage, B2B companies consummated 33 deals compared to 60 for B2C in 2014. In 2018, the gap had reduced significantly with B2C deals at 88 and B2B at 71.
Annie Parker, Global Head of Microsoft for startups affirms:
“We have seen the rise in B2C startups in India and now is the time for more B2B tech solutions with a country-specific problem in focus.”
Source: Zinnov, DKODING Intelligence
Less style, more substance
There are significant differences between B2B and B2C startups. The latter were built largely as copycat models, adapting successful tech businesses (largely American) to the Indian market. Examples include Flipkart (Amazon), Ola (Uber), Oyo Rooms (Airbnb) and Paytm Mall (Alibaba).
The very focus areas of B2C startups that we have seen over the years is huge investor funding, heavy cash burn, high discounts, cashbacks, aggressive customer acquisition and rapid growth. Due to this, despite having huge valuations, startups like Ola, Paytm and Flipkart continue to make huge losses since inception. But investors have continued to back them, often on the charisma of their founders and in the lure of a profitable exit at a future date.
In comparison, B2B startups are neither headline grabbers nor followers of the valuation-centric business model. Their funding rounds are generally smaller and lower in frequency. Apart from money, they also expect strong domain expertise from their investors. Having said that, India is expected to have over 10 B2B unicorn companies in 2019, including GreyOrange, Freshworks, Rivigo, Pine Labs, LendingKart & Druva.
Unlike B2C startups, B2B companies are generally looking at scale from day 1 with a global product. Investments are seen to follow when they have a strong product and revenues. But since they work on long sales cycles, B2B startups won’t show similar growth trends either. They tend to not rely too much on funding and build a strong balance sheet early in the growth stage. Therefore, profitability tends to come early. Vidhya Shankar, Executive Director, Grant Thornton India emphasises:
“If the software product of a B2B startup is good, then the incremental cost of acquiring the next customer is virtually next to nothing.”
Moreover, deep discounting is not perceived in the same way as a B2C market. In fact, enterprise customers are known to be suspicious of such practices.
On the other hand, B2C startups tend to attract better talent due to their higher visibility and awareness in the public domain.
New challenges, grand opportunities
The rise of cloud computing is one of the major drivers for B2B businesses. This trend has brought in several Software as a service (SaaS)-based companies like Freshworks and Darwinbox. Investments have been growing at a steady pace in B2B startups for areas like AI, fintech, IoT, blockchain and logistics.
Digitisation of SMEs is a hot trend for Asia as a whole, as SMEs form 90% of the corporate sector in the region. The rising penetration of smartphones and increasing formalization of SMEs post the introduction of GST are key triggers driving the rise of SMEs as a huge potential market.
For instance, around 11.7 million registrations were done under GST, out of which 5 million are new registrations. This formalisation brings with it a whole new set of challenges (read B2B opportunities) like getting credit, logistics, efficiency improvements, GST filing, etc. Consequently, startups serving these SMEs have unprecedented opportunities of scale.
While these entities are fund constrained, Indian startups are built on a DNA that enables them to optimize costs for the needs of SMEs. They are further helped by models like SaaS-based pay-per use and cloud computing.
Suresh Sambandam, CEO, KiSSFLOW, stresses on the role of SaaS in driving the B2B opportunity in India:
“India missed all the three digital waves in the past of mobile, social and cloud. Think of Whatsapp, Facebook and AWS. We became big users without any homegrown companies capturing the market. India has a rare US$ 1-trillion opportunity to ride the SaaS wave.”
The rise in B2B startups is also being fuelled by the growing influx of investors who understand and are willing to invest in enterprise technology. These include IFC, Pi Ventures, Stellaris Venture and YourNest.
- B2B startups have radically different business models and growth strategies compared to B2C peers.
- These startups generally don’t have mega funding rounds like B2C startups, and don’t attract top talent either.
- However, several trends including the rise of SaaS, AI, logistics, blockchain, fintech and digitisation of SMEs have turned the B2B startup space into a hotbed of potential.
- Investors with deep domain expertise and the willingness to co-create are further fuelling the B2B startup boom.