What's Pulling Investors To Enterprise Focused Startups
You're reading Entrepreneur India, an international franchise of Entrepreneur Media.
With consumer-focused startups losing their sheen to markdowns and numerous market copy-cats, investors are showing greater interest for enterprise-focused businesses. Industry experts believe that B2B startups are helping them fetch faster returns for their cash, at a time when VCs are craving for quicker returns on investments.
Encouraged by the success and evolution of cheer leaders like Freshdesk, entrepreneurs are also seen to be investing their time and talent into this space. The B2B space has drawn close to $217 million in funding this year. Moglix, an e-commerce company specialising in B2B procurement of industrial products, got funded by Ratan Tata, earlier this year.
What is really drawing VC money ?
According to industry experts, investors have always equally vested their interests in both, the B2B and B2C space. Consumer focused companies have been grappling with market share woes at the expense of investor money. However, with the recent series of markdowns and a galore of market copy-cats, the focus has shifted to business-focused companies. On the other hand, B2B firms have the benefit of not having to focus on customer retention, cash burn and steep discounts – three being the biggest concerns for B2C companies these days.
“Last couple of years has seen many B2C companies busy grabbing market share and in doing so they burnt heavily, making some of the business unviable without further funding,” Anil Joshi, Managing Partner at Unicorn India Ventures said.
Investors have become choosier about companies and are taking their bets based on business models and rate of return for their investments.
“Compared to B2C startups, B2B companies may have lower total customer acquisition costs. The unit customer acquisition cost may be higher, but the quantity of customers is lower, so the overall costs are lower, Brett Stevens, VP at Jaarvis Accelerator said.
Mohan Kumar, Partner at Norwest Venture Partners said, “B2B was not in favour with investors who were looking for hyper growth and quick increase in valuation in a short time.”
So what are investors actually looking for a B2B company?
Even though there is significant amount of demand for enterprise-focused businesses, not every startup out there is eligible to get the comfort of VC money. Expectation of a market ready product, higher margins and a product market fit are some of the key checks made by investors in this space.
“There’s a definitive trend of VCs heeding more attention to companies that are revenue generating from day one instead of focusing on companies that are more interested in customer acquisition,” Harshil Mathur, one of the co-founders of Razorpay said.
“Investors probably anticipate higher margins, through higher revenues and lower costs, for B2B businesses, and therefore higher valuations in the long term. For some products, every B2B transaction can be many times larger than B2C transactions, especially for enterprise solutions,” Brett Stevens of Jaarvis Accelerator said.
“A good B2B solution will identify and server a niche early on. A good B2B product grows with its customer base. It should spread within every company it touches, to the point where an employee from any of these companies would not think of working with any other product in their second company,” Shashank Kumar, co-founder of Razorpay said.