Stellaris’ Alok Goyal On How SaaS Bets Are Evolving In The AI Boom

In the past three years what we have come to realise is that AI is set to bring in sweeping changes across industries, and naturally, the horizon for SaaS and software investors has also widened. Stellaris Venture Partners, known for its SaaS bets, including Whatfix (which is IPO bound), Revenuehero, GTM Buddy, and Slintel believes that with the AI boom, SaaS is being put through the churner as well.

Perhaps as a result of this churn, Stellaris is shifting its investment focus from horizontal to vertical SaaS and also keeping an eye on AI-powered productisation of the services economy. And finally, there’s consumer-focussed AI applications, which have gained more prominence in the fund’s thesis since the end of 2024, particularly for fintech, edtech, and healthcare. 

In November 2024, Stellaris closed its third fund at $300 Mn (about INR 2,534 Cr) from which it plans to back 25-30 startups over the next three years with a ticket size maximum of $10 Mn. A major part of the corpus is for new deals, while there will be a few follow-on rounds.

Speaking to Inc42 for our Moneyball series, Alok Goyal, partner at Stellaris, said he believes that AI has upended the notion of sector agnostic funds as well. Stellaris continues to remain sector agnostic, but AI is a persistent and strong theme in the deal flow and for nearly half of its existing portfolio. In many cases, not using AI can be an existential crisis. 

The challenge for Stellaris and plenty of other funds is to stay steadfast to the thesis even as AI disrupts the world of SaaS and sweeps up consumer software along the way. “We don’t want to build a fund where 70% is Fintech or 80% is SaaS. And there is a reason,” Goyal claimed.

Edited excerpts from the conversation

Inc42: Stellaris VP has been around for the last eight years and now you have launched your third fund. Give us an idea of how the investment thesis has evolved in the firm.

Alok Goyal: Our core thesis, call it boring, hasn’t changed much from the time we started. Our first fund was a $90 Mn fund, the second was a $225 Mn fund in 2021, and all across, our strategy has been consistent – our entry is always in the early stage, from seed and Series A. But we follow on in future rounds in these companies. 

Besides, there are a few other aspects that have remained constant for Stellaris.

Backing Only Tech & Tech-Enabled Businesses: We only back companies that are either creating technology and selling them (like software products), or are using technology to sell other products and services. The second category could be online brands, like fintech and healthtech. 

Indian Origin Is A Must: We are fishing in the India pond only, which means that one of the significant founders has to be based in India. We are not fishing in a Singapore pond, or the Middle East, or the Silicon Valley. These startups can target the Indian market or any other global market, but they need to come out of India. 

Less But More: Within the spectrum of funds, we like to be more concentrated as an entity and hence, make fewer investments. However, we go deeper into those investments and take larger ownerships from time to time.

LP Structure: We have 20 primary investors in this fund. These are all large global institutions across the US and Europe, a few in Hong Kong and Singapore as well. Most of these investors have been common across all the funds. 

Besides, in every fund that we have raised, we have always collaborated with a handful of well-known founders in both the Indian startup ecosystem and in the US to be individual LPs in these funds. We call them the Stellaris Founder Network. This group of people are also very strategic to us across the venture lifecycle in generating deal flow, doing diligence on deals, recommending their angel portfolio to us, and more. We have always kept this group of people intact.

Internal Structure: While we are agnostic within tech, as individuals, we are very sector-focused in the investment team. We don’t allow people to be generalists within Stellaris – you choose your sectors for the long haul. I have been, for example, doing software as an investor for the last 12 years, but I’ve been looking into it over the last 32 years as an operator or an investor. And that will be the DNA of most people. We have also anchored very heavily on investors with entrepreneurial backgrounds. There are five ex-entrepreneurs in our team.

Inc42: How have you adjusted to the AI wave? Have you changed your priority matrix for investments in software and even traditional sectors?

Alok Goyal: Yes some changes are happening in the way we perceive the sectors now. I’ll take it at two different levels of abstraction. 

In terms of broad sectors that we look at, like SaaS, Fintech, or consumer tech brands, again, nothing has changed. Sometimes the relative emphasis may change. 

For instance, the kind of SaaS companies that we would be funding from our first fund, versus the kinds of companies or teams that we are chasing in the third fund, are different. Historically, we were slightly more bullish on horizontal SaaS because of the growth outcome they had and the return they generated. With AI coming into the picture, we see that changing. Unlike before, the bulk of our bets today are more vertical than horizontal in nature.

Take the example of our investment in CARPL, which is in the radiology AI space. If a hospital has a single X-ray machine, there is a need for different algorithms to study different health issues in each kind of X-ray, be it chest, head, wrist, or any other organs. So, these hospitals need an integration hub that actually connects with scan-generating machines and scan-viewing machines with these AI algorithms. That’s what CARPL does. This shows the huge opportunity in the vertical SaaS market.

In general, if I look at AI as a theme over the last five years, its intensity has actually grown substantially. From our first fund, we had two native AI companies – MFine and Signzy.

When we moved to Stellaris fund two, we began to see a lot of AI natives emerging. We also built a thesis at the end of 2020 and published it with the World Bank that said AI was not just going to remain a feature to be added to existing software. We believed that it would allow companies to completely rethink the applications or the underlying processes themselves. We backed CARPL and OrbitShift based on that thesis.

Now, it’s evolving further.

Inc42: How would you encapsulate your current AI investment thesis?

Alok Goyal: Broadly there are three things in AI on the enterprise side that we are bullish on.

Enterprise Applications: We believe this domain will be reimagined and rethought almost across the board. And unlike what the popular narrative is, we believe that startups are going to lead the way here, not the existing larger software companies. Larger companies will build incremental features but they will not fundamentally re-imagine the process. More likely than not they are going to be vertical applications because they need to be narrow to guarantee the kind of accuracy that enterprises are looking for.

Developer Tools: We believe that the world of software development itself is changing with AI. The whole software life cycle – from when you create your requirements, build the front end, do coding, write the test cases and run them, deploy the software, and continuously monitor right through observability – will change substantially. The world today has 30 Mn developers. Tomorrow, the world will have a billion developers, people like you and I will be able to build applications. Therefore, we are very bullish on the AI tools that are used in the software development process. Kombai from our portfolio is one such example. 

AI Product-Led Services: Historically, we have divided the world of software from the world of services. A software company doesn’t like to do services, they find them to be scalability inhibitors and margin reducers. Whereas services companies also work in a set model of delivering services on demand. The interesting thing with AI software is that despite all the goodness of AI, it will always have errors and will hallucinate. So, we believe that if one can combine the AI software with accompanying services that guarantee the accuracy of the outcome that the software is creating, that’s very powerful. Not a whole lot, but since the beginning of last year, we have been evaluating a bunch of companies and keeping an eye on them.

The deal flow on the consumer side of AI has taken more time than AI on the enterprise side, but good consumer applications are coming up today. We see a lot happening on the content generation front with GenAI. Interesting applications coming up in edtech, fintech, healthtech.

Meanwhile, an interesting stat, if you look at our overall deal flow as a firm, these 40 to 50% of our portfolio companies will not even exist without a very deep use of AI in the product or service that they are providing. 

Inc42: Does that mean Stellaris is putting more focus on AI? and increasing allocation for the sector?

Alok Goyal: We are not. We don’t reallocate money to any sector. 

We have adopted two principles here. One, we want to be bottom-up and want our capital to go to the best teams where the sector doesn’t matter.

There is only one expectation of that, which is rule two, we do not want our portfolio to get overly skewed in one particular space. We don’t want to build a fund where 70% is Fintech or 80% is SaaS. And there is a reason.

Our industry goes through hype cycles for different sectors all the time. There are troughs as well for every sector. If our portfolio gets overly skewed in a single space, there will be an undue risk to the portfolio.

To give an instance from our first fund, when COVID-19 happened there was a massive hit in all our mobility and logistics companies whereas our healthcare companies saw an upshot. We always take these macroeconomic scenarios, headwinds and tailwinds into consideration.

Inc42: Besides AI, do you see room for investments in deeptech verticals – robotics, semiconductor, spacetech, biotech, etc?

Alok Goyal: Are we looking at some of these sectors for investments? Yes, we have also probably met most of the companies. However, we have found that there are a few different factors which make these bets risky.

• Long gestation period, which means longer to get to a real product and generate revenue
• Besides, the hardware ecosystem in India is actually not as well defined, and that is reflected in the quality of talent, availability of parts and manufacturing expertise.

Now, it’s not about liking or disliking a sector. We underwrite the risk and the reward and try to see if the equation makes sense for us or not.

Despite the risk of a long gestation period, if we find a team and a market where the reward makes sense in the end, we will evaluate.

Inc42: And what does due diligence look like at this stage?

Alok Goyal: As an early-stage investor, we look at both the founding team and the market opportunity or the problem that they are solving. Hence, we ask two broad questions: is this a problem worth solving? And is this the best team to solve that problem?

Now, if it’s a seed-stage startup, we are more focussed on the founding team. With Series A, we look more into the problem that they’re solving and their execution track record. 

We are famous in our industry for very deep diligence. Since we also do very few investments, we are very selective. We don’t believe that conviction comes out of thin air. Hence, we spend time talking to their customers, prospects, and experts. We do an insane number of reference checks on the founders and spend time just to know them. We believe it’s a marriage and not a transaction.

It takes us anywhere from two to four weeks to do due diligence on a company.

Inc42: How do you see 2025 shaping up for the PE and VC ecosystem?

Alok Goyal: It’s been a more positive environment for India driven by multiple factors. One is that I think India today stands out as very few countries that haven’t had a misstep, which has attracted more capital. It has also been aided by the fact that a lot of capital has been pulled out of China.

Earlier, everybody used to also complain that India has not shown exits. But we have now generated a lot of liquidity as an ecosystem over the last few years, which has been very positive for India.

In the last six months, early-stage investments have gotten much better in terms of deal flow and the quality and quantity of deals. The late stage has started opening up but not as much.

Certain themes tend to take primacy in every cycle. In 2025, AI will be a very large one. And as I said, there will be one shift from last year where we do expect a lot more AI in consumer tech than we have seen in the past.

[Edited by Nikhil Subramaniam]