How Cactus Partners' Growth Playbook Drives Valuations and Success for its Portfolio The modus operandi of Cactus is helping companies put the governance systems in place with required boards and committees, preferably at the series A stage or beyond.

Establishing an internal growth-acceleration-playbook (GAP) as referred to by Rajeev Kalambi, general partner at Cactus Partners, has helped the firm assist its portfolio companies in bridging the gap between the promised potential and the actual performance during their investment period.

"There are different aspects to this like tech-based scaling, effective branding and marketing, organization design, and finding the right people for the right job. We find the right people for them to fill gaps in their organizational structure. And related to that, we help them with their systems, processes, policies, and governance. Governance is very critical for us," Kalambi explained in a conversation with Entrepreneur India.

Kalambi also recalled the over-valuation frenzy of the early 2020s with subsequent governance issues and said that the "dust has now settled." The modus operandi of Cactus is helping companies put the governance systems in place with required boards and committees, preferably at the series A stage or beyond.

"And finally, the fourth aspect is international expansion. We use our international expertise and networks to help our portfolio companies that need to grow outside of India," said Kalambi.

Market valuations for sectors such as software-as-a-service (SaaS) recorded 25 times the revenue until 2022 and have fallen close to 5-6 times in the current period according to Kalambi and he believes that as a firm, they are "stickler" for the right valuation. He added that entering at the right valuation is reasonable for both the investor and the founder.

"Founders will always try to get as much as possible but the market is not what it was two years ago. So you can't expect to get 10 or 15 times your revenues when the market multiples are at 5-6 times. And if we sense that they are not willing to budge, we are happy to walk away."

"Because getting into a great company at a significantly overpriced entry is worse than. getting into a good company at a very good valuation," said Kalambi.

Kalambi touched on the reasons why Cactus prefers to invest in B2B companies, despite having successful B2C companies in the portfolio such as AMPM and Auric. The firm's investment thesis revolves around entering post the 'product-market-fit' (PMF) stage and according to the partner, assessing the PMF becomes easier in B2B business.

"First thing, the company's revenue should be at a reasonable scale. It doesn't have to be very large. Secondly, the growth pace. Thirdly, because these are B2Bs, we look at contract structures and renewal rates. So if we see at least two cycles of renewal, it means that the customer likes the product and is willing to pay for it," said Kalambi.

Product pricing determines gross margins with SaaS companies recording 80-85 per cent according to Kalambi who said Cactus likes to work with companies with very high margins.

"Even if it is manufacturing, we want to look at companies that have very high gross margins. It could be more than 60 or even 40 per cent range. Because only if you have very high gross margins, can you gradually move towards becoming EBITDA positive," said Kalambi.

When companies price their product, there's value creation from the product's perspective and the value that the product is conveying to the consumer is the price they are willing to pay, according to Kalambi.

"If the customer is not paying it, it means that the customer does not see value in that product. So, which is why we've picked these two metrics. One is the scaling, and two is the customer retention rate, and hopefully, their attrition rates are low. We are also very focused on founders who are not valuation obsessed," said Kalambi.