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Why B2B – Will Be Cool Again

Why B2B – Will Be Cool Again

There were some fantastic (short term) success stories – unicorns, amazing valuations, founders as celebrities – with media hype feeding the frenzy.

This craziness had to stop and it is happening. Now is a period of reckoning.

Of course, I am talking about the startup funding ecosystem in India.

After the Gold Rush

So, many were mesmerized; unserious, dilettantes became ‘entrepreneurs’; (some) investors went nuts funding startups with no credible plans or providing growth capital to companies with no real business models.

Some so-called unicorns have imploded or in the process of imploding.

The year 2016 is going to witness a much needed correction in valuations of unicorns or soon be ex-unicorns and startups down the chain at various stages will face the same music.

Founders are feeling the heat. Funding has become tight and many are struggling to raise money. Those who have raised money are downsizing seriously.

Rerun of the same movie (the U.S context)

Some of us who have been there or been tracking the U.S (venture-driven startup) scene have seen this movie several times.

When the bubble bursts predictably, pretend “entrepreneurs” and quick-win financiers leave the scene.  Me-too, copy-cat products with no differentiation die immediately.

Not everything left behind is a mess. Real entrepreneurs, long-time sophisticated investors, companies with differentiated products and entrepreneurs with great ideas not only power the turn-around but reap enormous rewards in the upswing.

In such up-down-up situations, one category of startups i.e. B2B remains relatively steady. Typically, they lead the charge in the turnaround.

Except few outliers, B2B startups mostly don’t achieve stratospheric valuations; nor do they crash & burn as often as B2C startups. There are several reasons for this.

  • Most B2B products have retained value that could generate returns even when the domain it operates in is out of fashion.
  • Successful B2B companies are forced to focus on customer retention, unit economics and recurring revenue growth which enable them to hunker down and wait for the market to rebound.
  • B2B outcomes consistently exceed B2C if one aggregates M&A and IPO exits in the U.S over a long period.

B2B in the Indian Context

It is naïve and probably dangerous to extrapolate lessons from a mature U.S market to a still nascent, emerging market such as in India. That said, there are several factors that should be relevant in the India context.

a) Corporate Transformation 

Almost every major corporation is under the threat of disruption and forced to innovate.  Digital transformation is the term used for such an exercise. This market for Corporate Innovation & Digital Transformation is estimated to be in the hundreds of billions globally. Startups with disruptive technologies & business models are well positioned to capture a good slice of this market. The trick is to partner with Open Innovation or Corporate Acceleration platform providers for the right access.

b) Consumerization of IT

Everyone knows the consumer technologies are leap years ahead of most enterprise technologies. Business users demand not just Apple-like usability but emerging personal experiences such as Virtual Reality in their corporate/professional lives as well. There will be a massive re-tooling of legacy applications and the need for “cool enterprise apps” will be high.

c) Cloud-based, SaaS Delivery model

This trend will continue to accelerate and should become the de-facto standard for enterprise apps. Indian entrepreneurs have a huge cost advantage while competing with their counterparts in N. America and Europe.

d) ASEAN & other markets 

While enterprise spend in India has increased, CIO’s in India are still risk-averse in terms of adopting startups & their technologies.  An India-only B2B play will have limited market potential. For reasons cited earlier, Indian startups should have a competitive advantage to target overseas markets. Overseas does not necessarily mean N America but markets in ASEAN, Middle East etc. Indian product startups based on their experience from India should have relatively less competition in capturing these markets.

Finally, in B2B the capital needed to develop the product and scale the business is significantly lower than B2C businesses. And there are more exit opportunities, mostly M&A, since unlike B2C this is not a winner take all market; meaningful exits are possible to even second & the third best players in a given category. In short, if one were to compute the capital deployed against successful outcomes, B2B startups are primed to outperform their B2C counterparts.

So, expect to see B2B becoming cool with more & more entrepreneurs & investors getting on board.

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