SaaS startups in India have seen significant growth in recent years. The country’s SaaS market is expected to grow at a compound annual growth rate of 22.5% from 2020 to 2025, reaching a value of $6.3 billion.

A few of the factors driving this growth are:

• Increasing adoption of cloud computing
• Availability of advanced tech infrastructure in India
• Support from the Government of India for funding, mentorship, and other resources to entrepreneurs.

In India, there are Investors and founders who have witnessed the evolution of SaaS in India. With his notable investments like Whatfix, LimeChat, GTM Buddy, Alok has built his own thesis for SaaS over the years.

Tune in to hear Alok sharing about the top SaaS companies in India, what all has changed in his investing thesis, the categories he’s most bullish on, and why SaaS sector is only going to rise in the coming years.

Notes –

01:53 – How Alok got into investing

02:44 – Evolution of SaaS in India

08:16 – Definition of global category leaders in SaaS

10:02 – Is there a known pattern in the US for his portfolio companies in India?

13:23 – SaaS investments in 2022

14:02 – Next 3-4 years for SaaS in India

19:03 – Building a GTM engine in the US with a seed round in India

23:00 – Focus on reducing burn

24:51 – Growth in more & more $100Mn ARR companies in India

29:14 – The Edge India has in creating successful SaaS startups

31:28 – Major shift in his thesis in the past years

38:21 – His focus on AI automation startups

43:55 – Thesis on Developer-Centric Softwares

48:50 – Backing founders at Idea Stage

58:34 – What he looks for in founders?

Notes –

Find the Transcript Below:

Alok 0:00

Can you just meet them (Whatfix Team) once? And I declined that also, until one day he (one of the associates) gave me a demo himself, because I refused to even spend half an hour, he gave me a demo, I loved the demo so much, I said, I got to meet. And in my last 10 years, the fastest check I have written was Whatfix in three days from my first meeting, I wrote the check. Siddhartha we are probably amongst the more measured slow investors, we are blamed for it. Last year, we saw about 4000 deals, and bagged only eight companies last year. That’s all we did. I think the most important thing for founders in the current situation, in my opinion, is reduced burn, at the latest stages. The metric actually I worry about the most is net new ARR added, divided by the net burn in a quarter. And if that ratio is more than one, you’re healthy, if that ratio is less than one, you’re not so healthy.

 

I’m personally a big believer of backing new slash emerging categories than existing categories. 60-70 years of software can actually be compressed into four or five cycles. That’s it, actually, there is the mainframe era, there is the mini era, there is a client server era, then there is a three tier or the web, or the .com, whatever name we gave, and the cloud. And if you were to fast forward, even from now, let’s say 2003, to 2013, cloud was a completely different landscape, I think in 10 years, AI will be a completely completely different landscape, the amount of new software that is getting created or needs to be created, the pace of growth of that is far higher than the number of new software developers for that equation to add up. Software Productivity just has to go up. There is no other way. We will not have this on us.

 

Siddhartha 1:47

Hi, this is Siddhartha Ahluwalia. Welcome to the 100X Entrepreneur Podcast. Today I have with me a very dear friend and a person who I really aspires to be in investing, Alok Goyal, managing partner of Stellaris ventures. Alok, welcome to the podcast.

Alok 2:07

Thank you so much, you are putting me on a too high pedestal, I don’t think you want to be me. And it’s great to be back on this platform again.

Siddhartha 2:14

So we’re doing this with Alok after two and a half years. The one we did was like pre-COVID era and glad to be doing this. And we’re a very monumental moment, Alok you’re known among the top three or four people in SaaS investing in India.

 

Alok 2:30

Very kind of you to say that Siddhartha.

 

Siddhartha 2:33

And people like to have you on their cap table. Is that you have very few checks to write in a year. And some of the founders vouch that, they wish we could have Alok on their cap table. But coming to SaaS in India, what we’re going to discuss is how SaaS has changed in the last 10 years and what the next few years look like for Indian SaaS companies. For example, if you go back to 2010-11, the only SaaS companies in India were Zoho and FreshWorks. And they both had just , Zoho was like 10 plus years old, FreshWorks was two years old, and a term called SaaS unicorn didn’t exist. Back then, people never believed that Indian SaaS could even exist.

 

And today, we have a company which has achieved $1 billion in yearly revenue that’s Zoho FreshWorks has listed on NASDAQ becoming one of the first Indian SaaS companies to do that. And they are at 500 million ARR whatever people say about the valuation. Last year, they were at 370 mil. This year, they’re at 500 mil. I think soon, three years down the line, they might be touching the $1 billion ARR mark, like your dream come true for the Indian SaaS. And you have lived this dream for the last 10 years. You were the partner who was bought into Helion to look at Enterprise SaaS. Now you built Stellaris over the last five years. How has SaaS changed? You have observed this very closely. SaaS changed in India to global in the last 10 years.

 

Alok 3:56

So Siddhartha, quite a dramatic change. And if I may almost admit, far more than I had imagined it. When I came into Helion In fact, in January I complete my 10 years in this profession, hard to believe. SaaS was not something that was a desirable sector, if I may say, for most investors, there were literally three or four of us who had a bit of a tag of a SaaS on their head. I think it’s fair to say we were like an outcast in our industry at that point. Very few companies used to come out. I think when I started, you’re right that fresh work was probably just about crossing a million ARR. Accel had done the round and Tiger had already done the round there. But there weren’t that many examples to go by. You’re right Zoho was there. But Zoho was also treated separately because it was not built through venture capital.

 

So lots of questions even though it’s interesting that Helion had hired me to build the SaaS practice. But internally, you had to climb a mountain to get a deal through the IC because everything else was acceptable, but SaaS was very difficult at that point in time. So coming from a point where very few companies, pretty much no scale company, very little money, very few investors, very little ecosystem to talk of. So they weren’t successful SaaS founders, for example, we had ISPIRIT that had just started, Sharon had started that which was, I thought, a great initiative and the NASSCOM product Council. But we were sort of trying to find our identity within that place, you fast forward 10 years. My actual summary of this is that I think we found a product market fit. I think it’s for the venture as a whole. For SaaS in particular, I think that’s the case.

 

And while there will be skeptics for all these numbers, but the fact that we have created 15 to 20, unicorns, we did the first IPO in FreshWorks, Zoho crossing a billion dollars, just the number of companies that have crossed $100 million. I think, in many ways, I remember, when I joined McKinsey, we used to teach this, there used to be this cost curve that they used to show for manufacturing. And they used to call that the experience curve, saying that with every year of doing something, you get better incrementally by 10 to 15%. If you begin to compound that 10 to 15%, the result is actually pretty amazing. And I think if you look at 10 years, we have seen that compounding at a much higher rate than 10 to 15% that I would apply to it. So I don’t think there is a question mark on India’s ability to create large, successful global SaaS companies today.

 

Siddhartha 6:30

And you have a couple of them from your portfolio. Today, Whatfix

 

Alok 6:34

We have been very fortunate. So I was fortunate, first of all that even though from a bit of a distance, I could see the journeys of some of the companies we funded in Helion as well, like PubMatic, Gupshup. Thereafter, we had more engagement from Helion as well. And you’re right . In fact, I started my journey with Whatfix at Helion. And then that was the first company we backed out of Stellaris as well. And through them, I have learned a lot. There is also Axtria, which is a mixture of software and services that I was part of earlier. But then at Stellaris, we have had Signzy, Slintel, GTM buddy, live chat and many others that we have had a chance to be with.

 

And I think the big change I’m seeing is that there was one single thesis of building a SaaS company from India. And that thesis was an existing category. Because in an existing category, you can use inbound channels like a Google search, content marketing, to be able to build up demand and engine, sell it to SMBs, low price point, you can put remote salespeople, so inside sales from India 1/10, the cost, and therefore the unit economics of selling works out. And that was a recipe that you could go with. Today, you don’t need a recipe from India, I don’t think there is a kind of company you can’t build from India today. You can build for the SMB, you can build for the enterprise, you can build classical sales lead, you can build product lead, you can build classical closed source, you can build open source. I don’t think SaaS can be put in a box today from India today, therefore,

 

Siddhartha 8:04

And when you look from the lens of Stellaris, what’s your aspiration for your companies to become?

 

Alok 8:09

Siddhartha, same as everybody else. We want to create global category leaders in the end.

 

Siddhartha 8:15

And what’s your definition of global category leader, is there a milestone?

 

Alok 8:19

In general, I don’t define category leader only as a revenue threshold. Because see, I think the beauty of b2b businesses in general is that there can be yet another company which can again have customers , this is not a Facebook where there are network effects and you cannot have another one. But even in SaaS, you will find that in every category. There is like a massive market leader, which will be the outlier 40-50-60% market share. There’ll be two or three others with anywhere between 10 to 20-30% of market share. And then there’s a long tail. And the market attributes a lot of premium and value to the market leader, maybe the two or three after that. But the long tail, even if they have revenue, actually doesn’t get the premium. So as an investor, it’s actually not worthwhile.

 

You can actually get to a company which has a 100 million outcome, but they may not actually get any premium for it. And therefore intent is to create market leaders ultimately. And that’s what we aspire for. I know that ours is a profession where we have a massive long list of mistakes, and very few things to show in the end. I just hope that by the time I call it quits. I have a few to show as well. But yeah, that’s the hope.

 

Nansi 9:31

Hi, everyone. Before we begin, I would like to share that this podcast is brought to you by Prime Venture partners, an early stage VC fund led by Amit Somani, Shripati Acharya and Sanjay Swami. Prime is often the first institutional investor in category defining tech startups in FinTech, SaaS healthcare and education, such as Markit Quizzes, Planet Spark, Bolt and Glip to know more about Prime visit https://primevp.in/

 

Siddhartha 10:02

And you already have, Whatfix is one of the poster child from India helping larger fortune 500 enterprises in the US with implementation of Salesforce. So is there a similar pattern that you’re imagining for your portfolio that they are known by this thing in the US market Like Whatfix is.

 

Alok 10:20

Two three comments on your questions Siddhartha, number one, I still continue to believe that there is no software company to be built, unless you can be successful in the US. And I hope I’ll be wrong soon. And I want to be wrong actually, genuinely on that. But not yet. I don’t think in 10 years, I’ve seen that ability to build a large successful SaaS company with India, Asia as a market. So I think you need to be successful there. Number one, and which has been, at least so far, a primary thesis element for us as we back SaaS companies, Whatfix in many ways has defied the patterns. And if I may confess, when I backed whatfix, my thesis was very different from whatfix has turned out to be. I should also confess that Whatfix was championed not by me, but initially by my analysts in Helion. I was not even prepared to see Whatfix in fact, I thought this doesn’t make any sense. And my analysts continued saying, Alok , can you just meet them once, and I declined that also, until one day, he gave me a demo himself, because I refused to even spend half an hour. He gave me a demo, I loved the demo so much, I said, I got to meet. And in my last 10 years, the fastest check I have written was what was fixed in three days from my first meeting. I wrote the check.

 

My thesis was that software is becoming complex enough that you need software to use software. But I thought that this is going to be SMB centric, they were selling for $1,000 price per customer. I thought inside sales motion, which is how Khadim and Vara started, that was my thesis, it actually tells you how not so smart we’re, as we back things, but they’ve defied that template today, they have 65, fortune 500 customers, They sell their landed revenue in enterprise accounts is not $100,000. So the go to market motion, which was my thesis, is actually not the way Whatfix is built today. And I’m just fortunate that I tagged along for the ride, and have learned from that process. But Whatfix is a great example of someone who still came from behind, there was Walkme in that segment. But today, Whatfix beats Walkme, just in every SaaS metric one can think of, in fact, recently, it’s one of those categories that nobody wanted to recognise, which is why there is no major Silicon Valley investor in this category.

 

The first major analyst is Forrester that came out with the full report in the sector. And that’s actually only a month back. Imagine, I’m now eight years into Whatfix that’s how long it has taken for it to be recognised as a category. And they put Whatfix as number one, and are suddenly very proud of what Khadim and Vara have done. But I also want to admit, it’s not the thesis I imagined. But now we have worked with many companies which are targeting the large global corporations, we have Signzy in our portfolio as well. They’re even a notch above Whatfix in terms of the kind of size of deals that they do. But we’ve also done the reverse side, which is like Slintel. They started with SMB as the attack point for themselves. But now as I said, it’s very hard to put a pattern to our thesis as well.

 

Siddhartha 13:23

And I think our last year would have been in the number of companies that you invested the largest number for your career in SaaS.

 

Alok 13:31

You know Siddhartha we are probably amongst the more measured slow investors. We are blamed for it. Last year, we saw about 4000 deals, and bagged only eight companies last year. That’s all we did. In fact, there were a few SaaS companies as well, each of us as investors I think, at best we do 1-3 companies in a year. And that’s what 2021 was like. 2022 is similar as well. I think I’ve done it this year, for example, but that’s the pace we maintain.

 

Siddhartha 14:02

And we have come a long way in 10 years in India SaaS till now, as you mentioned, Zoho FreshWorks and multiple other successful examples Dhruva, Darwinbox, Zenoti. How do you think the next three to four years will play? Especially seeing we have just started the talk about the Recession in the US already. I think around 100,000 jobs have been cut. SaaS valuations are as low as possible in a decade. Companies like FreshWorks were poster boys for India, growing very well. We just discussed how more than 25% they are valued like what 6x of their revenue. So starting right now we’re sitting at the end of 2002. How does 2023-24-25 look like for SaaS?

 

Alok 14:45

So maybe I’ll give a slightly nuanced answer to this one. Siddhartha you can imagine this is something we worry about every single day. I think first there are two countervailing forces here. One is I think just the secular growth of India SaaS and the reason I say that is that even when you build a startup there is a product market fit phase and then there is a growth phase. I think we have been in our product market fit phase for the last decade and I would say maybe beginning 2021 We have started the growth phase and I think that should mean that a lot more new SaaS companies will get created from India, like to say that one Sachin Tendulkar creates inspires 1000 others to become a cricketer, they may not become necessarily that. And therefore, now we have a large number of great companies, beginning with, of course, Zoho, FreshWorks, BrowserStack, Whatfix and many others MindTickle, inspiring many, many new SaaS founders to come into the fray. I think that’s secular growth from a bottom up perspective. And I don’t think that that trend is actually happening anytime soon.

 

The countervailing force is clearly the down cycle that has begun. I don’t think we can now be dismissive about it. Clearly, in every down cycle, public markets are the ones that correct first. I was reading some stats, I think about a month, month and a half back that post. If you look at Q3 numbers in us, the public SaaS multiple is the median is 4.3x. Actually, and at least I believe that public markets always tend to overreact in both directions. And now they’re reacting on the downside. And I don’t think that’s the end of it yet. I think in every down cycle, initially, it’s the multiples that are correct. And then it’s the earnings that are correct. While the multiple stays the same. What that means is that we haven’t yet begun to see the revenue growth challenges for companies and profitability challenges for companies. And I think they’re I’m a bit of a I’m a bit on the bearish side, I think 2023 is going to be a very hard time. What that means is that as public comps, correct, or have corrected, I’m sorry, you will see the late stage funding is going to go for a toss totally.

 

And it’s going to create a bit of havoc because 2021 saw insane multiples, I’m sure we both know examples of companies raising at 50x or 100x. Imagine now the same company, which is facing a growth challenge on one side, they are running out of cash, they go back to market, now they need to raise, and even at 10x Multiple actually is a rich multiple at this point in time. Imagine what that does to your cap table, what it does to all the rights that investors have that begin to kick in, as you begin to do down rounds. So I think it’s going to be a bit of a havoc, I think it’s going to be a painful time for many founders. We just have to bear through that pain. But I think late stage founders, particularly will find themselves to be in a tough situation, unless they have taken massive corrections on their burn fund.

 

Early Stage is less so I think I’m at least finding that in the early stage, there is actually not much correction on valuations. If you remember at one point seed rounds used to be 500k, then they became a million, then they became 2 to 3 million. Now I’m often seeing 3 to 5 million seed rounds as well. I am not seeing any significant adjustment to the round sizes at the seed stage, what has gone up a selectivity, people are doing fewer, but the good founders in good new spaces, they’re actually still able to raise what they need to raise challenge start from the next round onwards that there was a time when you are 100k ARR. And you could raise at a 50 million pre. That doesn’t happen any longer. You just got to show more, even for series A today. And I think series A onwards rounds have become tougher.

 

So I think, to that extent, I guess to summarize on one hand, the growth of India, SaaS has attracted more capital. And therefore you will see a lot more people or companies getting created. But on the other hand, I think the environment is also going to put its own pressure. So there’ll be some casualties in the process as well.

 

Siddhartha 19:03

I’m more interested in this, people being able to raise a seed round up to five mil, and they’re able to build a product with it. What happens is, once they start scaling to the, hiring in the US is still tough. $200,000 with a salary of an EVP or VP minimum, is there. So that kind of round doesn’t surface for that kind of hiring. And if 10 million rounds have disappeared starting 2022, I think they will not come back till 2024. Where will the founders build their go to market engine in the US?

 

Alok 19:34

So Siddhartha first I’m of the same opinion as you. I don’t think seed rounds enable you to build a team in the US. And again, I’m making a generic statement there will be exceptions to it. But 80 to 90% companies cannot build a go to market engine in the US. However, I’m not that worried about it. And the reason is that if you look at the remote sales as a capability, initially, the conventional way was, you can sell anything for $1000 $2,000, not more than becames under $5,000, not more, then became $10,000, not more than 10 became 2020 became 3030 became 5050 has become 100 as well, I mean, you go and talk to Khadim and Vara, and they’ll tell you the $100,000 deals, they get completely into and executed out of India today.

 

And therefore, I guess we have a difference of opinion that you don’t need to build a physical US go to market from the get go. I also think that the acceptability of remote go to market has gone up substantially during COVID as well, particularly for target segments, which are younger and I put younger as sort of below 40 years of age, and in the more forward looking industries.

 

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Alok 21:23

So for a minute, let’s keep out things like manufacturing. But if it’s services sector software, and many other spaces like FinTech, in those cases, the buyers are very astute, they’re very comfortable with remote go to market. And I think good founders from India, will be able to use remote go to market to their advantage without actually having a US presence. And I don’t think therefore, they should even attempt to be my In fact, I would argue that if they try to attempt and build a US go to market team with US people, that is a very high risk strategy. It can work but I think it’s too risky a strategy in my opinion. Once you raise a Series A, I think that’s a better time to put people there. But again, you need to make a judgment call. Does your go to market motion require you to have a US team or it doesn’t require you to be. I don’t think every company needs to, you can probably go much further in your scale up before you need that kind of a team.

 

And the last part is that in 2021, you needed to hire somebody in the US, you needed to pay $300,000 for $400,000. Look at the number of layoffs that have happened to us as well. So there is a correction there too. I think it’s become a buyers market and a seller’s market, in the recruitment process as well. So that should help. In fact, I think the reverse is true, if you have cash in your bank today, and you need it to build your years, go to market. Today is the best time to hire some great people in the US. And that’s what we are trying to do in some of our companies that have raised capital, we are aggressively actually trying to get some high quality talent, which would have been much harder to get six months back also.

 

Siddhartha 23:00

And are you worried about valuation corrections in your portfolio as well? Because companies in order to raise like our 50-100 mil round, we’ll need to grow at such a pace, which is much more than during any one. For example, let’s say three to four next year on year still now. And above 20-30 mil ARR.

 

Alok 23:19

The short answer is yes. We are worried. I think the most important thing for founders in the current situation, in my opinion, is to reduce burn. If you look at , yesterday, I was with one of the largest global bankers, I think they’re amongst the top three bankers globally. And they were showing me data on multiples in the US market, as you’d imagine that the biggest driver of multiples is your growth. But guess what, that’s not the case today. The biggest driver of multiples today is whether you’re profitable, or you’re not profitable. So sentiment has changed. And we can argue whether it’s rational, not rational, doesn’t matter. But that’s how markets react. And can it change back in one or two years, I think it can change back also. But given the sentiment of the market, the most important thing is to reduce burn.

 

And I think that, especially if you’re slightly late, I don’t think this is going to apply at an early stage. At the later stages. The metric actually I worry about the most is net new ARR added divided by the net burn in a quarter. And if that ratio is more than one, you are healthy, if that ratio is less than one, you’re not so healthy. By the way, even half is considered good. But I think today are times where I think I would prefer to be above one on that metric. But I think if you’re at that level, that stretches your capital substantially and extends your runway. I think it is an important goal that founders should have and is a tricky balance. You can’t forego growth also, because then also you’re not relevant. So it’s gonna be a minefield to traverse in the next year or two.

 

Siddhartha 24:50

Right now India would have approximately 10 companies above 100 million ARR. Do you see that number growing significantly like India being able to add like 10 to 15 companies every year above 100 mil ARR every year?

 

Alok 25:05

Without a doubt Siddhartha without a doubt, I think that boundary is getting breached so rapidly. It is way beyond my imagination. And there will also go back to the fact that the early market leaders, if you look at someone like a FreshWorks, and I’m going to pick them out, and maybe Zoho, they had nobody to borrow a template from, they had no advisors to go to, they broke these barriers, the very hard way. And as more and more companies are getting created, and they’re getting scaled, we’re seeing talent actually come into the ecosystem.

 

So for example, it took us a while to figure out how to do this zero to one journey, then it took us a while to figure out the one to 10 journey. Few companies have, as you said, have done the 10 to 100 journey as well. So there is a talent available that knows how to do that 10 200 as well. We used to struggle with that a lot in the past. And frankly, even while building Whatfix. I remember that when we were in the 10-15-20 million ARR range. Also, we used to wonder about that look, guys, we just don’t have the expertise on how to sort of go to that 50 to 100. But that has changed. I see. Therefore, I think of this as an exponential curve. So that is not a linear curve. You build one today, you build three tomorrow, you build nine the year after and then 27 thereafter. So I think of it as an exponential journey and not a linear journey.

 

Siddhartha 26:31

In the distant future, you imagine that India would produce in a single year, like 50 to 100, New 100 million dollar companies.

 

Alok 26:38

Why not? I don’t think we produce that many yet. But if we get to it, I have no doubt. I can’t comment on the timeframe, but I’m sure we will.

 

Siddhartha 26:45

But what are the advantages India had like FreshWorks and Zoho, they have the advantage of building an inbound marketing engine with extremely low cost built out of Chennai, Built out of remote parts of India, and that’s how they scale and they did it with multiple products. So they were good at creating zero to 10 playbooks with multiple products simultaneously. Now companies have like a single product which they are going from zero to 100 mil ARR journey, the valleys have become more expensive. So the India US divide is becoming a key from the developer side, the divide is less and less every year.

 

Alok 27:16

And Siddhartha, I’ll be a little bit contrarian. I actually think that the reason we are successful in SaaS from India is not because of any inherent India advantage. I personally don’t even believe in the cost advantage. I don’t think great SaaS companies are built, because you have lower cost, at least the lower end of the market. If you think of companies as a pyramid, and you look at the lower end of the pyramid, that could not be tackled with a US go to market. Therefore, we could build companies from India scale if we had the time. Today, actually, the speed with which new companies come into space is just scary. I mean, initially, it’s a race to build the best products. And building the best products requires the best talent. And that best talent doesn’t come cheap, whether in India or in the US. Even for the great talent, I understand that there is gonna be slightly lower costs in India compared to us. But is that the reason for us to build great companies? I actually don’t think so.

 

Similarly, on the go to market, let’s look at very many different kinds of go to market. If it’s product led growth, that product led growth is being baked into the product. I don’t think there’s any inherent Indian advantage in plg in my opinion. Similarly, if you go to the Enterprise Centre, go to the market which is Phaeton straight there, again, you have to build it in the regions, there is no advantage in India as well, yes, there is a bracket in between where there is an advantage. But to your point earlier, compensation in India has actually gone up as well. And I don’t think that that alone is going to be sufficient, you will have to build strong product differentiation. And you will also have to build a very strong distribution engine to be successful. So don’t get me wrong, I still think just because of increasing talent, increasing understanding of the US market, finding some early customers even in India who face the same problem as global customers face, we will see a lot more successful companies being created. But I don’t think it’s because of the cost.

 

Siddhartha 29:14

Then what is the advantage that let’s say India has over a long period of time than other markets in creating more number of successful SaaS companies.

 

Alok 29:21

In my opinion, actually, the advantage is the ecosystem at one point in time. I tried starting a company back in 1994 and clearly, I was going to use the word naive, but then I think I was an idiot, I think to put it simply. But I would also like to believe that if there was a good ecosystem in India, maybe I would have carried that journey further along than I did. Today just the experience. Again, I go back to my experience curve, sort of phrase that I talked about in the beginning. Why is it that Israel continuously creates security companies again, and again, maybe there was a historical reason because of defense sort of proximity. But today, they build an ecosystem and security. And they are just able to continuously churn out.

 

I think we’ve built an ecosystem today. And that ecosystem includes not just the founders, as you found us too, because they have gone through a skill startup journey in the past. It includes early customers, it includes angels, it includes advisors, it includes capital. And it also includes foreign capital, which is now so keen to come to India and look at the number of US funds that now want to put money into Indian SaaS companies as well. That engine actually that has been created is a reason that’s going to drive success, not again, I emphasize an inherent cost advantage. And not because we have 4 million developers, etc. Because I would argue, in those 4 million developers, it’s only that very thin slice at the top is actually what matters to these product companies.

 

Siddhartha 30:50

Does India have a product advantage all over us SaaS market, yet

 

Alok 30:54

I can’t think of it. I can’t think of it. And the reason is that, unless it’s a problem that is very unique to India, or emerging markets, I think there will be an advantage because of your proximity to that market. But I’m not a believer of that market to begin with. So at least I don’t believe in that advantage, I think at a point when our own market becomes so large. And also there are very unique problems to be solved just for our market. I think that advantage will be there in the product. But in my opinion, not until then.

 

Siddhartha 31:27

So Stellaris has been investing in the south for the last five years, six years. How has your thesis changed every year, What have your learnings been And what are the factors that contributed to that learning every year?

 

Alok 31:39

Great question. Let me first talk about what has stayed similar, because then I’ll talk about what elements of change as well. I’m personally a big believer of backing new slash emerging categories than existing categories. Not that you cannot build in an existing category. But I think the bar to be successful both on product and go to market is so high, that there are very few entrepreneurs who I think can scale that kind of mountain. I think what Girish did is not an easily replicable recipe, in my opinion, I’m more a believer of new and emerging categories, because there is a space to find room for yourself in those kinds of markets. And that part has remained constant.

 

The other thing that has remained constant, even though I keep revisiting my thesis every year or every two years, is the fact that you need to be relevant, or you need to be able to win the US that’s important. I think where it has changed, the hearth is on a few of the sub bullets beneath this. Number one is that earlier, I would not back a company unless they have customers in the US. There I have changed. And that is because I find that there is now a segment of customers in India, whose pain points are very reflective of similar companies in the US as well. And for the sake of argument, let’s take an example where you’re building a product for Saas companies . And you are able to get a charge B or a capillary or a Whatfix, more engage, etc as customers. I think the chances that your product market fit is going to translate to yours product market fit I would say is very, very high. These companies think and behave the same way as their US counterparts.

 

So that zero to one journey where I used to have a lot of hesitation and backing companies, unless they have US customers. That part has gone away from my head. So I of course look for what kinds of companies are buying your product. If let’s say an Indian manufacturer were buying a product, I would be very hesitant because then I would rather want a US manufacturer to buy something from you. But in certain categories, or segments, I don’t hesitate. So I think that’s one sort of major deviation for me. Second deviation is that I think we have become a bit bolder in what we underwrite. When we are putting capital in. We are underwriting a certain outcome at which this outcome is going to make sense to us. And I think if Khadhim and Vara listen to this, they’re going to laugh at me. But when I bagged Whatfix from Helion, I bagged with the assumption that in my dream scenario, this company will become 100 million valuation. And that’s I’m going back to the end of 2014.

 

Siddhartha 34:18

What was the valuation when you bagged?

 

Alok 34:21

It’s not a public figure, but we don’t see those kinds of seed valuations today. It was very small. But that was the norm of the day when we started even a few years later at Stellaris. That changed, I remember, I’ll continue with the Whatfix example, because that’s the easiest, sort of to take a journey with I bagged, I still have that spreadsheet that my dream scenario is that it will reach a valuation of five to $600 million. today actually. I’m comfortable. Even making a multi multi billion dollar assumption. In fact, I’ve started believing that if you look at it in SaaS, mostly. Actually there is no upper cap to what you can be, unless it’s a very niche vertical market that I’m talking of. There isn’t really a cap there. The question is, how long can you run and how fast can you run? And do the founders still have the imagination and the strength to run that long? That is actually more a challenge, as opposed to the exit size as a criteria.

 

But what that means is that I’m prepared to take slightly bolder bets coming in, like most of the people, we have been able to raise the bar on valuations in the amount that we expose. At this stage, I’m also becoming a lot more comfortable in, I think earlier, my sweet spot, used to be very early, but you still have 4,5,6 customers, maybe early customers, very low revenue, but you have a product you have some. Most bets I take today are a team with an idea. That’s actually what I do. So I think there again, I have changed the orientation a little bit. And now we have backed, as I said, large enterprise plg, SMB centric, open source.

 

Actually, the other big, sorry, change in dimension is that I used to believe that most companies from India that can be successful will likely be application companies and not infrastructure companies. And the reason is that infrastructure actually requires a much deeper tech talent. And it’s not that India doesn’t have a deeper tech talent, but the density and volume of the tech talent in India that can create dominating infra companies, at least I used to believe was much lower than

 

Siddhartha 36:35

So Postman hasura, Lambda, Browserstack

 

Alok 36:40

These are massive exceptions. See again, everything I’m saying will have counterexamples to it , because my thesis was wrong Siddhartha, which is why I left postman. In fact, if I may admit, I couldn’t even understand what they did. At that point in time. I looked at it the same time as others did at seed stage. One of my colleagues was very keen, actually, that we do it but I couldn’t even understand the business. And plus that overhang on my head, that infra companies, great infra companies are not going to build out of India. As investors, we get humbled all the time. And this is yet another dimension of humbling ourselves. But we are far more comfortable in backing in front developer oriented companies today than we were

 

Siddhartha 37:20

And what has given us a certain comfort in the last couple of years. The talent density obviously has improved.

 

Alok 37:26

I think two things, number one, are some of the successes that you mentioned. Even as investors, clearly there are some with the foresight, who can predict far ahead of the market. Clearly, I was not one of those. But seeing the success of Browserstack, Lambda, Hasura, Postman, and several others, has also given me the confidence that yes, we can create. Second is also just a number of companies that are coming up in those spaces. And I would say at least for me, something has flipped, beginning 2021. If I look at our own diligences, in, in front dev versus apps, I think it’s roughly now 50-50, which was practically zero, or 10%, at best in the past. So good founders solving good problems, just seeing a lot more of those. And that’s the reason why we have developed more confidence in backing such companies

 

Siddhartha 38:19

And AI and SaaS has been a big thesis for you. Why is that and how do you see it play out in the next few years When open source AI becomes so commonplace that anybody can incorporate it into their SaaS product?

 

Alok 38:31

Actually, there are two questions and I’ll answer both of them. So either I’ll turn out to be the biggest fool or a very smart guy in hindsight. But I genuinely think that the entire software landscape, as we know, will be recreated. And as I’ve often said, the last 60-70 years of software can actually be compressed into four or five cycles. That’s it, actually, there is the mainframe era, there is the mini era, there is a client server era, then there is a three tier or the web, or the .com, whatever name you gave, it was created and the cloud. In fact, I was also amongst those who thought that mobile will be a new era and didn’t turn out to be that way. But I think that AI is going to reimagine, rethink and reinvent all of software as we know it. Why do I believe that way, is because ever since mainframe to almost today, all the software is about automating what we do. You do debits credits and accounting this way, guess what SAP and Oracle etc got created.

 

In a call center, when a call comes needs to be routed, needs to be logged, blah, blah, blah Siebel of the world, Vantage, they got created, I think and I fear also is that for the first time we are seeing smart, intelligent software that doesn’t just automate that either augments. And if I may say so, it replaces humans. Let’s take a simple example. And there are probably 1000s of these already today. I have sold a lot of CRM, my career. So that when I was at Siebel, and also at SAP, we saw call centers transformed to email base support, email base support transformed into chat based support. And we have seen large players come in each of these categories. But what if now the chat agent has completely changed my machine, And what I’m talking about is, by the way, yesterday’s concept, not tomorrow’s concept already. We are now in one such company, the Automate already 70% of the conversations.

 

Siddhartha 40:42

You’re talking about live chat?

 

Alok 40:43

I’m talking about live chat. And I think that we are barely scratching the surface, You look at the advancements that are happening in NLP. And I’ll throw out buzzwords as everybody does, which is look at what GPT three is doing. And since you and I are now in another company together, that is breaking the barrier to a different level on what you can do, I think the Art of Possibility is getting stretched every week, almost to a scary point, actually. So I think that humans will have to rethink what they do pretty soon. And I also believe that with every new generation of software, while we always worry about competition, we always believe that oh, this Salesforce can do it. Well, if Salesforce could do it could do everything, there wouldn’t be a sales stack today, there wouldn’t be a Martech stack today, Look at the number of unicorns that are created in those stacks.

 

And frankly, I think of those as small deviations from what they did already. And same for my past employer SAP, They were the only ones in applications at one point in time. In fact, if they got their act together, they won’t be any Salesforce today, either. So I think we sometimes overestimate what existing players can do. I don’t think AI is a feature. AI is a different way of thinking, the architecture of software, and the capability of software. So everything from product management, to engineering, the cycles of releases, is going to be completely different. Some incumbents will get their act together, bulk of the incumbents will not get their act together. And I therefore feel that way, 10 years, much as a data point, which I’ve mentioned in many forums, but I used to be with Siebel in 2003. And I heard of Salesforce for the first time. And Tom Siebel was a founder. He used to make fun of Oracle a lot, but he started making fun of Salesforce also. And we used to believe that look, this cloud thing, frankly, this tiny, small shed in the corner, it doesn’t matter.

 

I remember we were closing $10 million plus deals. Salesforce was selling to three users for five users. And we used to say that look, that is not how a software company is built. But then Tom Siebel said, guess what, maybe to hedge my bet I’ll also have Siebel on demand. And that will kill Salesforce anyway. And the reality is that our bread and butter was not coming from there. That’s not the only thing we woke up to and slept to. Whereas Salesforce was, they innovated in so many different ways. And if you were to fast forward, even from now, let’s say 2003 to 2013, clouds were a completely different landscape.

 

I think in 10 years, AI will be a completely different landscape. And I even shudder to think what that will look like. But I also feel very excited as an investor that whenever there is a massive disruption, lots of new companies will get created. And I know we claim to be very smart, but in some sense, we are also like dark throwers. And we just hope that something sticks somewhere. But if there are a lot of those companies getting created, hopefully one of our darts will stick as well in that process. So I’m very excited about that change.

 

Siddhartha 43:54

What are the other categories that excite you besides AI?

 

Alok 43:57

I think the other category that excites me is and it’s a very broad canvas, I’m going to paint here. Siddhartha, is everything to do with developer centric software. And I think in very simple ways on this, but my thesis is that the amount of new software that is getting created or needs to be created, the pace of growth of that is far higher than the number of new software developers for that equation to add up, Software Productivity just has to go up there is no other way or we will not have the software. So the demand exists, supply doesn’t exist. And so the supply has to scale faster. And the only way supply will scale faster is when developer productivity goes up. And all the tool sets for developers, therefore, I think is going to be a massive area of value creation as well. It can be simple things like things that help you in your DevOps, things that help you in automatic code generation, things that actually help you in testing things that help you in reading your code and figuring out where the gotchas might lie and privacy issues might lie.

 

There just if you look at the entire life cycle, yesterday, I met someone who is now thinking about what kind of tooling do you need to continuously retrain models, imagine Spotify, And I was giving an example to a colleague of mine in the morning, I listened to old Hindi songs from the 50s and 60s, Whereas my daughters are trying to get me into western music, which I’ve never really heard. But some old songs in English have also begun to be listened to. Imagine now, Spotify is giving me recommendations. There’s a model behind me. What if I start listening to a song from Simon and Garfunkel and Billy Joel? Now, does the model need to return itself in the next minute? Next hour, the next day,next week, and what data points from my past versus today. Does it capture the retraining of the model and the workbenches that you require? All those are about developer productivity as well. So I’m very bullish on that broad space. I’m not a developer as much as to be able to dissect with sort of more nuance at this stage. But I’m very, very bullish about that area.

 

Siddhartha 46:18

And what are the things that you think are outdated that you will not touch?

 

Alok 46:23

Great question. I think largely, Process Automation. Not that I will not back. But I’m going to ask myself, probably five times as many questions as I did in the past. I am also of the view that most software will become invisible in the future. In the sense that the historical model is I go to a software, the new model is software that comes to you, it comes where you are, whether you’re in Slack, whether you are in your email, wherever it is, it just comes to you. And if somebody builds a software where as a user, I have to go. Again, I think about it differently. I’m also of the belief that there was a time where you could push software purely top down, you go to a CIO and say, you need this. And users guess what you need to use it. You may not think as a user, it’s beneficial to me, but guess what, you have to use it.

 

I think that era is going to become much harder, you need to have a value proposition at the level of a user, and not just their managers, or managers or managers or the leadership. And again, every sentence I’m making, there’ll be exceptions to it too. Ours is a business of exceptions in the end. But in these categories, I’ll actually think a lot harder.

 

Siddhartha 47:44

And there are some categories like marketing automation, sales for automation, DevOps, and companies building SaaS for SaaS. These are categories, which are highly populated 50-100 players in each category.

 

Alok 47:59

My view is that those entire stacks are going to be reimagined. So I understand that both the marketing stack and the sales stack have become very crowded, and are things that investors don’t want to touch. But, as I said earlier, I think you will find that a very different category of companies are gonna be created through the use of AI today, and that will reimagine those spaces too. I mean, frankly, in our portfolio, we have a GTM buddy, for example. They’re just rethinking how sales enablement should be thought about using AI. And I don’t think that the Sysmex in the high spots of the world are going to get there. I know that’s a very strong statement to make. But I just don’t think they will. And like that lots of new companies will get created all over again in the same stack that existed.

 

Siddhartha 48:50

Alok, you also mentioned earlier in the podcast that now you are very comfortable backing founders at the idea stage where everything is changeable. What gives you so much comfort to back there now? Are you able to spend a lot of time with the founders to know them deeply and know what their motivations are And why are they excited about a particular space?

 

Alok 49:11

I think it’s more my own learning Siddhartha, more than anything else right now. My journey at SAP India itself, not the US part of it, but just in India, sort of traversed from the $100 million to the $500 million. That’s the part I was comfortable with. That’s what I understood. And Khadima always used to give me this feedback that Alok, you just don’t understand at an early stage. And that’s the truth. I didn’t. And I’m realizing that as I’m spending more time in venture, I’m just becoming more and more comfortable going more early stage than I was. So I think a lot of what I said is more because of my own comfort now than because of anything else. I think it’s partly also because there was very little proof of success in the ecosystem. You find it hard to underwrite with nothing. You need to see something to be able to make a projection.

 

Now that there are a lot more successes, we just need less data ourselves to underwrite things. And therefore, again, I become comfortable at the idea stage itself. And the last part is that I’ve just begun to enjoy that very early stage now, just a lot more. When you’re still trying to figure out which problem to solve, what product to solve it with. What do I say to the customer, when I knock on the door, and frankly, which customer’s door should I knock in the first place? That period of confusion, ambiguity, is actually where I’ve started to enjoy a lot.

 

Siddhartha 50:36

And just going back to that thought, where you’re backing founders at the idea stage, what are the things in your checklist as an investor, you definitely have a checklist that a founder must have When you take them to your IC?

 

Alok 50:51

This is a question I wish I had an answer to actually, not just for you. But even for my colleagues at Stellaris. Again, these are very cliche statements, but when we are backing someone, we do recognise that whoever we’re going to back is going to iterate on the product, and will take some time to figure out the exact problem and the solution. But there is a broad space that we still need a conviction with. And we do spend a lot of time in both formulating conviction on the broad space, we need to believe that this is a muscle problem. And we are also looking for some unique insights that the founder provides in that space. And again, I’m going to take the example of GTM Buddy, but the way it started was that if you know Anish Reddy, Anish has been both a friend and a mentor, frankly, in the SaaS journey, at least for me. And he introduced me to Shridhar. In fact, that introduction was not even an investment. It was just to have a chat. He said that look, you have done sales in your past life, Shridhar is thinking of sales enablement as a space. And why don’t you guys have a chat?

 

Shridhar has never done sales in his life, by the way. But he has his uncanny ability to go to like a fourth fifth layer of depth in a conversation that most human beings are not able to. And I was surprised that I’m a career sales guy. She has never done anything but engineering and product, but the insightfulness with which he could go into the pain points a day in the life of what will make a difference to that. Actually, I am totally missing vocabulary in English, but I was gonna use the word spellbound but yeah, I was quite amazed, blown away. Thank you, thank you, blown away by, we are also looking for some unique insights.

 

We do, by the way, have a checklist. We have a fairly detailed founder framework that we go with. That framework is more to make sure that we are exploring different sides of the personality and the skill sets of the founder. But the core of what we’re trying to achieve in that diligence, is whether there is a spike in this founder or not. At least we believe that there is no perfect founder, there is no perfect human being actually. And people succeed, despite their flaws, people succeed, because there is some spike that they have, that actually covers all their flaws.

 

So our focus while evaluation is less on what they are not good at. But more about is there something where they truly excel. And that something is what is going to enable them to pull through in a clutter of companies and founders. And therefore, as you can imagine, it’s a bit of an amorphous exercise. And that framework I talked about is more to explore different sides of the personality so that you’re able to figure that gem in their personality. But that’s the broad framework that we use.

 

Siddhartha 54:03

But is that a general framework Or is it only for SaaS founders?

 

Alok 54:07

No, that’s a general framework.

 

Siddhartha 54:08

You find that people who are also inexperienced with SaaS, if they match your framework, they are very highly likely to create exceptional companies.

 

Alok 54:16

They can and, it’s interesting, you say that, and I’ve spent a lot of time talking about Shridhar. At the same time, I bet on limechat. Now, they couldn’t be pulled apart. Limechat is founded by two founders and you get a nickel, both IIT Delhi grads, computer science, very young guys. Just exceptionally brilliant. I mean, you have a chat with them. You just get blown away with these folks. In fact, when I spoke to them the first time, I was trying to learn about ML ops as a space and it was more of a knowledge gaining exercise on my part. And I remember we hung up on that call, and two other colleagues with me And I said, Man, these guys are so brilliant. We just got to be working with them.

 

And I had never backed founders that young in SaaS, I always used to believe that in b2b businesses, you need to have a certain level of experience. But I think there is no template for a great founder, there is no recipe. In fact, the reason they’re successful is because they don’t adhere to a template in the first place, like Limechat founders, they’re like sponges, they’re learning agility is so scary. And their energy levels are off the charts and their ambitions are sky high that I think they will build something great no matter whether they have experience or they have no experience.

 

Siddhartha 55:40

And in SaaS, the other customer is the consumer, so you can get a knack of what the consumer wants and don’t try to do the end customer in most cases, enterprises who have a lot of money, and they think and you have been the other end of the buyer. They think in a certain way, they operate in a certain way, they have a three to six months buying period, how do founders traverse this when you are evaluating them Whether they will be able to traverse these enterprises or not whether they will be able to navigate these complex organisms.

 

Alok 56:11

So Siddhartha I have become a lot more comfortable in not even having an answer to some of those questions at the very early stage. And the reason is that, see, I feel that, as an investor, there are some things you can test for, there’s some things you can’t test for. It’s like beginning with our businesses about meeting a two year old and trying to figure out whether that kid is going to become a Tendulkar or not. But if you try to get too detailed, whether they can hit a square drive, like Tendulkar or not, I think that data points just don’t exist. So I am trying to even figure out how to judge it. I’m actually going down a path, which is not even a possibility actually in the first place. So I think certain risks we take come with the stage, some will cross that boundary, some will not cross that boundary. And therefore there is going to be some failure, some successes, and I think I’ve become comfortable with that idea.

 

In fact, I’ll argue the reverse. Because I came from a Google Market background. I think I was trying to put too high a benchmark on at least the go to market capability of founders. And it’s not even funny how many times I’ve been wrong, Siddhartha, I wish I’d taken many of those bets. And the reality is, I think we need to judge people for their learning capability, not their prior knowledge of the problems and the solutions to those problems. And if they have not encountered those solutions, they actually cannot even have a good framework, a framework of thinking actually about those problems. So I can’t judge them.

 

So let’s take a very crude example. Should you have an inbound demand engine or an outbound demand engine? And guess what? The founders have not even built a product. They don’t even know whether they’ll find product market fit with the larger enterprises or with the SMBs. How can I judge? Or how can they judge rather, whether it’ll be inbound or outbound one doesn’t know. Also, if they come from purely engineering backgrounds, they don’t even have a muscle of thinking about it in the past. So there is no framework. So if I tried to judge those things, I think I’m more likely to decline because of reasons that I should not be judging on. So I now judge very few things also, when I’m actually backing people.

 

Siddhartha 58:33

And if you have to reiterate what those few things are, one you mentioned is learning agility.

 

Alok 58:38

I would say learning agility, and insightfulness are probably the top of the stack for me.

 

Siddhartha 58:43

And if I have to, summarize your experience as an investor in the last 10 years, you completed a decade, what has worked for Alok and why?

 

Alok 58:50

I used to be a consultant for six years, initially at McKinsey and Frankel, McKenna group in the Bay Area. And I had a partner called Pam Kline. And Pam Kline, by the way is now an advisor to Whatfix, but one of those people that I put at a very high pedestal, and as I was getting into my sales role in consulting, she used to tell me, Alok, there is no recipe to be a good salesperson. Figure out what works for you, figure out what advantages you can draw from yourself. And don’t worry about the rest. And I think investing is very similar. I don’t think there is any unique background you need or any unique trait you need. For example, I derive energy from meeting people, I’m not the guy who is best at thinking alone. I actually enjoy thinking on a whiteboard with two other colleagues saying a statement negating myself just two minutes later iterating on it, but you just say Alok, think about this for an hour and come back. I’ll still have a blank sheet and not much to show for it.

 

So because I derived Energy from meeting people, at least, what I have done consistently over the last 10 years, I just meet a lot of founders, a lot of people in general in the ecosystem, trying to learn what has worked for them, what has not worked for them as well. And hopefully just improving my own thinking basis that. And I think the second thing, which is always important in our profession to realize is that as investors, sometimes we give ourselves way too much credit than we deserve. We are actually just a conduit for the money supply chain, it’s somebody else’s money goes to somebody else. We just happen to put our signatures on the check book, we think we change the world, we don’t. It’s clearly the entrepreneurs who changed the world.

 

And not over and forcing ourselves in the company that we are part of, I think is just very important. If Whatfix had listened to most things I had said, I think they would have been dead five years back. The reason they’re successful is because they apply their own judgment. And I’m not saying that everything I’ve said was wrong. But we sit at a distance, ultimately they are the ones who are close. And we need to recognise our own place, which is we are sounding boards. We are well wishers, our incentives are aligned to theirs. But the day we start believing that we know the answers and we know the truth. I think the recipe for disaster has already started cooking itself by that time.

 

Siddhartha 1:01:28

Alok imagine you have to pass over the baton. And Stellaris would be a 500 million to $1 billion fund in the next five to 10 years, you have to pass over the baton to a colleague. And you would look for some similarities, Not a completely different one, what would those be?

 

Alok 1:01:44

I’m not sure they were looking to turn my back on investing just yet until I learned that I can’t invest. But I certainly will not look for any similarities with me. I just think that every investment in fact, in many ways, I would much rather prefer people who think very differently than I do. See, even in our partnership. Now we are an investment team of 10 people. But even the three partners who started I think they are poles apart in the way we think and in the way we evaluate. And that gives you a richness of conversations and different ways of looking at the same thing that would not have come had we all thought the same way. So I don’t know the answer to your questions but the one answer I do know is that it better be someone who is certainly not like me.

 

Siddhartha 1:02:29

Thank you so much. I really enjoyed the conversation. I learned a lot from this conversation. And I hope my audience was able to take away the nuggets which I took away from this conversation. And this helps like 1000s of SaaS entrepreneurs, at least the word, a few mistakes that you have seen in the last decade and you were able to convey through this conversation.

 

Alok 1:02:51

No thank you Siddhartha I have enjoyed it as well. This is the second time I’ve been on this platform. I really enjoyed our first conversation and this one even more because you always force us to introspect about ourselves, which is a very useful process for us as well. Thank you so much.

 

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