Decoding Cornerstone VC’s $200 Mn Investment Thesis For The B2B Tech Market

India is rapidly emerging as a global leader in the SaaS (software as a service) market, second only to the US in scale and maturity. According to a report by Bessemer Venture Partners, the Indian SaaS market is projected to reach $50 Bn of annual recurring revenue by 2030. However, the market may get bigger and better as tech enhancements and multiple integrations, including large-scale cloud adoption, GenAI incorporation and cybersecurity features, will propel the next phase of SaaS growth.

A March 2024 report by McKinsey and SaaSBoomi estimates that the industry landscape will quickly evolve from SaaS as we know it to AI.SaaS, is a transformational shift that will simplify workflows and help develop a wide range of integrated solutions and business models for industry niches. No doubt these trends will initially disrupt existing SaaS businesses before throwing open new market opportunities worth $150-200 Bn for SaaS companies building with AI.

Cornerstone Venture Partners, an early-and-growth-stage venture capital firm headquartered in Mumbai, was quick to spot this opportunity as early as 2019 when integrating GenAI with other tech segments for a never-before DevOps landscape was a distant dream. Set up by former Reliance executives Rajiv Vaishnav and Abhishek Prasad, CSVP invests in B2B tech startups, especially enterprise SaaS ventures, which are adept at building vertical SaaS and marketplace solutions for local and global companies.

The VC firm launched a $50 Mn Fund I in mid-2019 and has since backed 21 startups, including Tune AI (formerly NimbleBox.ai), CreditNirvana and UniAcco, among others. It is currently raising its Fund II worth $200 Mn.

Vaishnav and Prasad, two seasoned professionals, first met in 2015 during their stint at Reliance Industries. Prasad, an electronics engineer with an MBA from IIM-Bangalore, previously worked for Infosys, Unilever, IBM and others, where he specialised in investment, finance, portfolio management and global expansion.

Vaishnav was a driving force behind India’s startup movement as the cofounder and director of TiE and director at NASSCOM, where he was an integral part of the team that worked on 10K Startup program and established several 10K warehouses (incubators) in various states. He holds a degree in Science from Mumbai University and has mastered the art of building organisations and brands from the ground up.

“We primarily focus on enterprisetech, but we have also found some interesting core tech opportunities, which may or may not operate within SaaS modules but come under B2B play. For instance, we have invested in New Space Research and Technologies. It is not a typical SaaS startup but a dronetech business. Given this scope for expansion and growth, we have positioned ourselves as a B2B tech-focussed fund,” said cofounder Abhishek Prasad.

In an exclusive interaction with Cornerstone’s Abhishek Prasad, Inc42 delved deep into the investment thesis of its $200 Mn Fund II, India’s burgeoning vertical SaaS opportunity and the VC firm’s road ahead. Here are the edited excerpts.

Inc42: You had a cushy job with Reliance when you decided to launch a tech-focussed VC fund for B2B startups. What was the trigger?

Abhishek Prasad: Between 2005 and 2015, India emerged as a prime investment hub driven by its consumer-oriented economy, growing digitalisation and rising number of startups across different niches. Initially, investor interest was limited to overseas models of global companies entering India [Amazon, Uber and the rest]. Then, it shifted to their Indian replicas like Flipkart and Ola, among others.

With the entry of global VCs like SoftBank and Tiger Global, India saw the emergence of a few unicorns (10, as per Inc42 data) during this period. But the overall mortality rate of [B2C] Indian startups was high, pushing investors to look at the B2B space. This also prompted us to set up a B2B-focussed tech fund. The timing was suitable, too, as it was evident that the future of venture capital lay in B2B.

We left Reliance in mid-2018, obtained SEBI approvals and started fundraising the following year. By the middle of 2019, we started making investments from Cornerstone’s Fund I. Today, we have backed 21 companies, 15 of which received substantial funding of $2-3 Mn, and six represent emerging sectors, where we have allocated smaller amounts, around $500K.

Inc42: What are the most significant B2B opportunities today?

Abhishek Prasad: That’s precisely what we have been discussing for the past eight to 12 months – what is next in the B2B ecosystem? In 2018-19, the biggest inflexion point was the emergence of SaaS. The growth trajectory was promising, but after a year, it still left India under 5% of the global market. According to some reports, it was a $300 Bn market then [it’s probably around $500 Bn now]. So, a ballpark figure for Indian companies was $10-15 Bn in 2019-2020.

But that landscape is poised for a change. By 2030, most legacy systems are expected to disappear, and there will be widespread adoption of cloud-based solutions and SaaS. This will transform the global SaaS market into a trillion-dollar industry. India’s market share is also projected to surge from 5% to 25-30% and may reach $250 Bn.

We are investing from Fund I to align with this mammoth shift. It’s a jump from a market size of $10-15 Bn to $200-250 Bn. As we transition towards Fund II, we think we are at a juncture where a few other inflexion points will converge to accelerate SaaS/cloud adoption and the subsequent growth. This also makes us feel confident about our investment outcomes.

Inc42: How would you assess the ongoing shift from horizontal to vertical SaaS?

Abhishek Prasad: In horizontal SaaS, you will find global competition from Day 1. Take Zoom, a Silicon Valley-based video-conferencing solution accessible worldwide with minimal effort and low subscription costs. Competing with established players like Zoom, Google Meet or Microsoft Teams from the outset poses significant challenges, given the nature of horizontal SaaS, where offerings often have similar features.

In contrast, vertical SaaS has two primary forms – industry/domain-specific platforms catering to multiple stakeholders within a particular domain (think Shopify or Toast) and marketplace-oriented play (Mystifly, Blubirch and more) tailored for specific industries.

Initially, Indian companies leaned towards horizontal SaaS as local businesses had limited access to such solutions and kept looking for those. However, when global companies like ServiceNow, UiPath and Salesforce forayed into the Indian market with their horizontal SaaS offerings, competition became daunting. Consequently, a shift towards vertical SaaS ensued.

Inc42: Does Cornerstone also focus on vertical SaaS?

Abhishek Prasad: Yes, I would say so. We primarily focus on vertical opportunities, which target/cater to large enterprises for sustained growth. Of course, acquiring those accounts may take many months, but the payoff is significant (example -$100K to $200K per account). In contrast, horizontal SaaS yields numerous customers quickly. But the payment is much smaller (example -around $100 per customer). Consequently, horizontal ventures incur substantial cash burn and marketing expenses.

Vertical SaaS emphasises sales-driven growth, leading to profitability at the account level and fostering more impactful and enduring business models. We have invested in a few horizontal ventures, but our primary focus is vertical SaaS.

Currently, 70% of our portfolio comprises software platforms developed in India for global markets, especially for retail/ecommerce, financial services, distribution & logistics and healthcare. We have also allocated 30% of our portfolio to marketplaces tailored for India.

Inc42: What are the key opportunities in Cornerstone’s focus areas?

Abhishek Prasad: I am very bullish on logistics and distribution. There is a lot of headroom here to create efficiencies while organising a primarily unorganised sector.

Again, healthcare is a crucial and complex area, particularly in India, where we must deal with issues of awareness, access and affordability. The entire space is fragmented and we have a massive opportunity to address a multifaceted and difficult problem. But no single platform can provide a magic wand to fix everything in one go.

VCs also target financial services. But finding new opportunities in this sector is becoming increasingly challenging due to significant advancements already made in the ecosystem. Even revenue generation heavily relies on the basis points of transaction value. So, unless they have a massive share of the transaction value, startups won’t be able to create very large companies. It seems like an overconcentrated space, but obviously, innovation and changes in infrastructure will create new opportunities here.

In retail and ecommerce, we have seen huge spending on marketing enablement, giving rise to a large number of companies. But this space has now witnessed the advent of Web3, which will create new investment opportunities.

Inc42: Enterprises today seek full-stack SaaS models for operational ease. Will it lead to more consolidations in the SaaS segment?

Abhishek Prasad: Absolutely. With Fund II, we are betting on several key trends shaping the current landscape. This is a critical business approach as we see the convergence of major trends in India.

For instance, second-generation or third-generation young entrepreneurs are now leading Indian enterprises. They drive the country’s GDP per capita growth and are open to new technologies. These fast-evolving enterprises are lucrative bets for enterprisetech startups in terms of pricing and technology adoption. The shift from ‘big’ to ‘good’ [a vast market now offering a better price] is a significant macro trend that SaaS startups can leverage.

We also see a transition from subscription-based models to value-sharing formats. Instead of the typical per-user, per-month payment model, enterprises today assess the value brought by a SaaS solution, say, a 3-10% revenue increase in a financial year. This new-age pricing strategy has unlocked substantial value for SaaS companies and counters commoditisation by aligning revenue with the value chain.

Again, GenAI is maturing into foundational models and developing practical use cases at the enterprise level. This helps SaaS companies enhance their value propositions [and revenue] significantly.

Finally, the shift from Web2 to Web3 is gaining momentum, driven by the desire to reduce reliance on major tech players like Google, Meta or Apple. In a Web3 environment, enterprises can directly interact with consumers, bypassing intermediaries and earning more revenue. This shift underscores the importance of preparing for a Web3 future, as applications in this space are now coming to fruition.

Inc42: That’s interesting. But how does venture capital benefit from the Indian market?

Abhishek Prasad: Well, there’s the valuation edge. Currently, Indian SaaS is more cost-effective than its global counterparts, with valuations ranging from 5-7x recurring revenue, significantly lower than the multiple of 12-15x seen in the US.

This practical approach to valuation makes India an appealing destination for investments in enterprisetech, especially for a growth-stage VC like Cornerstone. Our funds align with this trend, capitalising on the convergence of practical valuations, ambitious ventures and the evolving SaaS ecosystem to identify new investment opportunities.

Inc42: Did your investment criteria change after Fund I?

Abhishek Prasad: Fund I had a $50 Mn corpus, and our average ticket size for Series A and B funding was $2-3 Mn. However, as lead investors, our involvement typically required $5-7 Mn, which meant additional investors for the cap table. We maintained a hands-on approach, providing governance, actively managing portfolio companies and dedicating efforts during the initial 36 months of engagement.

From now on, we will focus on Series A and B funding with bigger cheques [contributing $5-7 Mn on our own]. It will reflect our increasing commitment and involvement. We also encourage founders to consider us as their extended leadership team. We help them leverage our network and expertise for new customers and revenue streams. Fund II will have $200 Mn to support this strategy.

In Fund I, nearly 80% of our capital came from domestic family offices, HNIs and institutional LPs. In Fund II, we expect institutional participation to move up to 60-70%. Of course, 30% will be our existing HNI investors, doubling down on the second fund. New family offices will also contribute here.

Like Fund I, about 40% of our companies will receive follow-on investments as winners emerge over time. We aim to maintain a portfolio size of 15-20 companies, focussing on Series A and B deals and some provisions for late-stage investments.

Inc42: What are the critical metrics for picking a portfolio company?

Abhishek Prasad: We look for companies with annual revenues between $2 Mn and $5 Mn and assess their scalability, commercial validation, customer base (especially large enterprises) and YoY growth. However, our primary focus is account-level profitability. We prioritise companies that consistently generate profit from each customer account, emphasising the importance of long-term sustainability.

Demonstrating profitability across individual accounts over six to 12 months is particularly appealing to us, and we are enthusiastic about supporting such companies.

Inc42: What gaps and challenges do you find in the current ecosystem?

Abhishek Prasad: We have observed a notable shift since 2018-19 – a decline in leadership quality among founders. This is similar to what occurred in B2C during the Covid era when entrepreneurship became a trend.

We are disappointed when we meet founders who attempt to revolutionise industry segments without the requisite domain expertise. Understanding the domain and its challenges is crucial, especially in vertical SaaS. So, we strongly advocate a more mature approach. This will enable investors to focus on the SaaS ecosystem as a whole rather than on specific verticals and their nitty-gritty.

However, Cornerstone is optimistic about the evolving SaaS landscape in India. The price differential between the US and India is narrowing, indicating growing industry maturity. Additionally, India’s wealth of tech talent, developed through decades of IT services leadership, uniquely positions the country for a significant market share in SaaS development.

In essence, India’s potential in the SaaS domain is underscored by its rich talent pool and increasing alignment with global standards.

Inc42: What’s the next opportunity in India for SaaS startups?

Abhishek Prasad: The obsession with going West and going global was relevant in 2010. It was the time for horizontal SaaS.

Fifteen years later, a significant trend is emerging in India. We now see an increasing demand for specialised solutions tailored for SME verticals. Just as Zoho and Freshworks paved the path globally by providing accessible, high-quality and cost-effective horizontal solutions, up-and-coming SaaS startups from India are now poised to cater to our SMEs.

The big opportunity for Indian SaaS founders lies in developing innovative vertical SaaS solutions at 1/10th of the global cost and offering these locally to Indian SMEs. This significant cost advantage, coupled with the ease of implementation and the added GenAI capabilities, could make them [enterprisetech startups] 3x smarter and solidify their position in the Indian market.

These opportunities are waiting to be unlocked. Also, when verticals are democratised, there will be no cost constraints and solutions can be provided to the smallest customers. India has the biggest number of SMEs, nearly 50 Mn or so. Therefore, building a bridge between vertical SaaS and the SME ecosystem can be a massive growth opportunity.

Inc42: What are your plans for FY25?

Abhishek Prasad: We anticipate the first close of Fund II by June 2024 and plan to raise 20-30% of the corpus by then. We also want to kickstart investments from the new fund and raise 80% of our target by year-end. If we can meet that target, we will raise the entire corpus by March 2025. This may extend by a quarter or two because global institutions have longer processes and take more time.

We had one exit from Fund I [Shiprocket acquired Wigzo Technologies] and expect a few more this year. This will help us gain more confidence and have better conviction in our thesis. So, it’s going to be an exciting year for us.

[Edited by Sanghamitra Mandal]