Upekkha Eyes Early-Stage AI Startups; Announces First Close Of $40 Mn SaaS Fund

The reality of the SaaS and enterprise tech sector has been upended in the past year, as generative AI and emerging technologies threw up new challenges for startups, and investors. And in 2024, many are revisiting their thesis to pare away from late-stage bets and look at early stage investments that have the biggest upside.

For Bengaluru-based Upekkha, this means deepening the focus on AI and Indian startups building B2B software products for the world. The SaaS fund and accelerator has announced the first close at $15 Mn of the larger $40 Mn Upekkha fund, its second such fund in two years.

While WestBridge Capital led the fundraise for Upekkha, the fund has also brought on Godard Abel, CEO of SaaS marketplace giant G2.com, as a limited partner.

Founded in 2017 and managed by Prasanna Krishnamoorthy, Shekar Nair, Thiyagarajan Maruthavanan and Gokul KS, Upekkha’s latest fund will look to invest in up to 70 startups per year with a fixed $125K pre-seed funding for 7% equity (similar to the older Y Combinator standard deal).

So far, the accelerator and incubator has 165+ startups in its portfolio and a network of 300+ SaaS founders that only play a role in mentoring the next gen startups, but have proven pivotal for Upekkha deal flow, managing partner Krishnamoorthy told Inc42.

Upekkha’s portfolio includes iMocha, Aarogram, Classpro, Almabase, Kloudle, Medpiper, NIrogGyan, Cloudbankin, API Platform, Gimlet.ai, Labellerr among hundreds of other startups. The incubator and accelerator claims that more than quarter of its portfolio is from Tier 2 cities such as Pune, Kochi, Bhopal, Chandigarh, Raipur and others.

In a press statement, Sumir Chadha, cofounder & managing partner at WestBridge Capital said, “WestBridge was started with the goal to help Indian startups go global. Prior to Upekkha, India did not have a robust ecosystem and platform that assisted early-stage SaaS entrepreneurs in building strong successful businesses. We continue to see Upekkha as a key partner bridging that gap and enabling founders to build global SaaS business from India.”

WestBridge had also invested $9 Mn in Upekkha’s UP Fund in 2022, but Krishnamoorthy told us Upekkha is shedding the branding UP Funds for its latest fund. The fund is currently in its 13th cohort and Krishnamoorthy added that Indian SaaS, now powered by AI, will grow fast and as a result attract greater investment due to the potential to create global products from India.

Upekkha Chases Early Stage Shine

While the enterprise tech sector has established itself as a core focus area for Indian VC funds and investors, startup funding has fallen from $7.7 Bn in 2021 and 2022 to $1.3 Bn in 2023 (a YoY decline of 68%).

According to Inc42’s Indian Tech Startup Funding Report 2023, the number of deals plummeted over 46% to 157 during the year from 292 in 2022, indicating  not just paucity of deals, but a drop in average ticket size of deals. Late-stage funding bore the brunt of this funding winter.

Clearly, Upekkha’s fundraising comes at a moment when larger investor sentiment is more cautious than maverick, and investors are only betting on truly promising ventures with a high degree of due diligence.

According to Krishnamoorthy, the years ahead will see returning focus on unit economics and capital efficiency, even though this is not always possible to evaluate at the seed stage where the fund invests.

Upekkha believes that the incubator model with a referral system is one of the competitive edges for the fund in a market where everyone is going for early stage deals. The firm is sticking to its large cohort size, which is in line with what the likes of Y Combinator do, and Krishnamoorthy believes that startups appreciate this approach because they know what they are getting — seed capital and a base of SaaS founders-turned-mentors.

“One way we have made our deal flow and pipeline more robust is the referral programme, where founders in the community bring in potential investments for us. This makes a very strong funnel for our deal flow, since SaaS founders know what kind of products will have the best impact and they often also know the founders running these startups since SaaS is a tight-knit community.”

According to Inc42 data, late-stage enterprise tech startups were the most impacted. The funding raised by these startups plunged 71% year-on-year (YoY) to $602 Mn, while the number of deals declined 50% YoY to 11. So the focus on early stage investing is expected to be a major trend for 2024.

The AI Reality For SaaS

Upekkha remains confident in its selection and mentoring of the best SaaS startups from India to beat global competition, especially because of the referral system that makes it easier for its internal analysts and fund managers to assess the founder and the founding team, but also the product-market fit which is ever evolving.

Data is yet another USP or competitive moat that investors are increasingly focussing on when it comes to the early stage, since this has long-term implications on the viability of the business.

For instance, given that AI and ML have added a new dimension to B2B software, most investors are bullish about SaaS models that deeply incorporate AI tools. But this is simply not going to have the outcome that the startup wants without the right data.

Krishnamoorthy pointed out that until a few years ago, everything was about the cloud. SaaS startups banked on cloud early to differentiate themselves, but now all SaaS is run on the cloud. AI will go through this shift in the next year or two.

He was of the opinion that things are still early and many of the AI-based features or optimisations are yet to be scaled up in a meaningful way.

“Some startups add features that are powered by AI, some of them leverage LLMs for operational efficiency and increasing margins. Every SaaS company has one on the other approach, but the ones who are able to get enough data and do things end-to-end with AI will see the biggest adoption.”

Upekkha is looking for startups that are doing much more with AI than what is possible ‘traditionally’, and for this, data will be a critical component.Getting there means Indian companies have to hurdle several data barriers. Finding the right data will be key to delivering the right services and that is a non-trivial challenge, Krishnamoorthy told us.

“We are not focussing on any particular functionality or vertical, but the idea is to find the startups that are doing 5X or 10X more with AI — whether that is in product development or business — than what is possible otherwise. The most critical piece within that is data, so you know how to differentiate the service or software you deliver” he added.

The Upekkha managing partner compares the current state of AI in SaaS to early mobile app development. While the big tech companies created the platforms for apps, the UI and UX for apps was made by startups. While the likes of Apple or Google were busy fleshing out pieces of their operating systems, independent developers and startups did the work that now everyone recognises as a mobile app.

SaaS will similarly change and narrow down into verticals as more and more data comes in, and as the foundational platforms improve. “They (app makers) had the data that showed what users were doing and built their apps and UX around that data. Now this has become the gold standard for all new apps. Healthcare is one area that has immense potential with AI due to the friction in service delivery, for instance, but the system differs from geography to geography.”

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