Published January 10-20, 2023
Winning in the US
SaaS (software as a service) is the future of how enterprises small and large will use software. SaaS – software delivered from the cloud and priced as a monthly utility – is the next horizon for Indian software companies, heralding the much-awaited shift from providing services to building products. Like in everything, the biggest prize is the US market. A few Indian companies like Freshworks and Zoho have found early success in the US. The key question then becomes: how can a larger pool of Indian SaaS companies get a right-to-win in the US?
I have been thinking and trying to solve the problem for Netcore in the past few years – with limited success. Having done exceedingly well in India and emerging markets (South-East Asia, Middle East, a few countries in Africa), we have been working to create a repeatable success model in the developed markets, of which US offers the largest opportunity. In some categories like email and martech, the size of the US market is 100 times that of the Indian market. Even though the transacting user base may be similar at 150-200 million, the spending capacity from both brands and consumers is very different; the US has 10 times more brands and consumers are spending 10 times more. This is evident in the sizes of the two economies: at $23 trillion, the US economy is more than 7 times that of India.
More than 25 years ago, I launched India’s first Internet portals under the “IndiaWorld” brand. In the early years, the focus was on Non-Resident Indians (NRIs). With the US offering one of the best Internet experiences and scale (over 2 million NRIs in the mid-1990s), the focus for IndiaWorld quickly shifted to the US. While the entire operation was run out of India with a 20-member team, most of the advertisers were US brands (telecom, travel) looking to target Indian Americans. I made frequent trips to the US to meet marketing agencies to convince them that IndiaWorld could deliver great results for them.
A similar challenge awaits Netcore but on the B2B side. Can we, a company with an Indian heart, make the pivot to targeting US enterprises, especially in the mid-market? Could a broader set of Indian companies do this? What could be a possible playbook? While there have been many efforts by VCs and organisations like SaaSBOOMi, the magical mark of $100 million ARR (annual recurring revenue) in the US has been crossed by very few companies. So, what would it take for Indian SaaS companies like Netcore to win big in the US and replicate the success of their IT services predecessors?
It is in this context that I came up with a possible playbook: LEMMMA, for land-expand-maximise-moat-monopoly-acquire. Admittedly, this is a theoretical construct built on some known ideas. But if executed well, it could give Indian SaaS companies a formula to win in the US – without going overboard on marketing spending or wasting time with repeated efforts to build local executive teams in the US. Done right, LEMMMA could be the key for Indian SaaS companies to unlock the US market.
Indian SaaS – 1
Manav Garg wrote in the preface to SaaSBOOMi’s “Shaping India’s SaaS Landscape” (August 2021): “Indian SaaS has the potential to become a $1-trillion value sector by 2030 with opportunity across the value chain from vertical SaaS to horizontal applications and system infrastructure software and developer tools. The report also highlights gaps that the industry must close. To reach the $1-trillion milestone, the Indian pure-play SaaS ecosystem may need to be six times larger than it is now. The report highlights five key areas where SaaS companies may need to improve to scale the industry. They may need a razor-sharp focus on underpenetrated target domains, more powerful go-to-market strategies, an engine that continuously identifies and scales new businesses, more product differentiation and velocity and, critically, a better and scaled-up talent pipeline.”
The report added:
Fast-growing tech-native, tech-first enterprises rely on software as a service, and the leaders in every major industry now see it as superior to on-premise products. The global SaaS market is expected to nearly double from $220B in 2020 to $540B by 2025 and could reach nearly $1 trillion by 2030.
Indian SaaS companies now generate $2-3 billion in revenues each year and have earned about 1% of the global market1. If they reach their full potential, they could generate annual revenues of $50-$70 billion by 2030 and win 4-6% of the global market – a value-creation opportunity of $500 billion to $1 trillion.
The industry in India has extraordinary competitive advantages, including privileged vertical domain expertise and an unmatched cost-effective ability to deliver a customer centric proposition. And in an increasingly virtual business world, physical proximity is no longer a requirement for sales or customer service.
However, historically the Indian SaaS ecosystem has systemically underinvested in growth compared to global peers. This is changing and the growth rate of Indian SaaS ecosystem could double with a rethink on the trade-off between profitability and growth.
Motilal Oswal’s report on SaaS (March 2022) wrote:
Software as a Service (SaaS) has emerged as one of the biggest disruptors in the global technology industry over the last two decades. It continues to accelerate further as the world rapidly shifts to a Cloud-based environment. The COVID-19 outbreak exacerbated the push to SaaS, given greater flexibility, functionality, and better remote productivity.
Within the SaaS space, Indian companies are now distinguishing themselves, with a long list of firms joining the hallowed ‘Unicorn Club’ (valuation of over USD1b). While a majority of companies focus on Horizontal business software, Vertical solutions and innovative Infra SaaS plays are also scaling out of India.
With a global competitive product portfolio, the SaaS ecosystem is expected to grow rapidly in India and increase its share of global SaaS to 4-5% (from ~1% at present), translating into a massive USD50-70b revenue opportunity by CY30.
Unlike the Technology Services industry, SaaS companies are generating meaningful revenue from Indian companies (30% in CY20 as per Zinnov) and have a diverse business model targeting both enterprise and small and medium businesses.
Indian SaaS – 2
A report from Bank of America Securities (Sep 2021) laid out the advantages for Indian SaaS companies:
#1. The cost (hence price) advantage
In our view, the Indian SaaS companies seem to be following the playbook set by the IT services sector – leveraging the vast local IT talent pool that costs 60-80% less than markets like the US. This in turn is leveraged for market share gains using pricing as a strategy, especially for SMB customers and when offerings are comparable to established peers.
#2. Exports bigger than domestic market
In-sync with the India IT services sector, we find that India SaaS is largely an export-oriented sector with domestic business accounting for only about 20-25% of the exposure. This is driven by (1) typical characteristics of a global sector where US is the largest end-market of enterprise tech spends, and (2) domestic market, which is in the earlier stages of evolution with software usage and willingness to pay for it being lower.
#3. Higher focus on horizontal applications
Early stages have seen Indian industry over-indexed to horizontal application (ie, SaaS) tools usable across industries (74% of revenue vs. global average of 50%). We see this changing going forward and expect faster growth in (1) industry-specific SaaS (use cases and domain expertise already available from India IT services), and (2) infrastructure software.
#4. Scope to increase sales investments (and growth)
Being more recent participants vs. the US companies, industry observers we spoke to indicate there is scope for India SaaS to catch-up on the growth metric. We think potentially this could be enabled by increased sales/marketing spends, which are currently lower than global peers (25-30% of revenue vs. 40-60%). An increasing shift towards digital go-to-market, since the start of the pandemic, is also a benefit for the Indian industry, in our view.
A CII-EY report “India: The next global SaaS capital” (June 2022) wrote:
The Indian IT sector continues to charge ahead on its trajectory of growth and transformation, with SaaS setting the stage for the next wave of disruption. The confluence of pandemic-induced large scale digital adoption and the rise of ambitious, dynamic Indian entrepreneurs assures promising growth for Indian SaaS. In the past few years, Indian SaaS companies have not only caught up with their global counterparts but have also showcased the potential to surpass them and become trend-setters in this space.
Indian SaaS firms are building top-notch products in niche categories to emerge as global pioneers. In leveraging innovative business techniques such as digital sales, zero-cost marketing and brand building through industry alliances and channel partners, they are winning both domestic and international markets. A strong focus on key foundational aspects of business can further accelerate their journey to market leadership:
Product: Building a quality product to differentiate themselves in the market, ensure a strong product-market fit, and enable scalability in line with their business vision
Buyers: Drive customer-centricity in all processes by effectively engaging with customers and building strong customer relationships
People: Investing in their people to build the workforce of tomorrow and foster a culture of innovation and employee success
Operations: Identifying the right go-to-market strategy for their organization to deliver optimum business value
Zinnov and Chiratae Ventures published “India SaaS Report 2022 – Punching Through The Global Pecking Order” in April 2022. Here are a few slides from the report:
What is clear from all these reports is that this is an almost limitless opportunity for Indian SaaS companies. And yet, few are scaling Mount US. What are the challenges, and what can entrepreneurs do to conquer the US frontier?
A few months ago, I was talking to a large global investor. He made a few very pertinent points: US enterprise companies prefer to buy from US-based software companies (very different from their approach to IT services which can be outsourced); building an organic business in the US in SaaS takes a long time; for Indian companies to build executive teams to win in the US is very difficult and expensive, especially given the working relationship with the home office across time zones and culture; brand building and marketing in the US are very expensive requiring tens of millions of dollars of sustained spending; to achieve scale, Indian companies will need a product that sells itself and for which US companies will be willing to pay an MRR (monthly recurring revenue) of thousands of dollars else there will be a need for thousands of companies if sold at an MRR of tens or hundreds of dollars.
In Netcore, we have lived through each of these challenges over the past few years. Deepening our presence in the US was one of the reasons for the acquisition of Unbxd. The next challenge for us is how to do the next 10X jump – grow from $10 million to $100 million in the US rapidly?
In an interview with SaaSBOOMi, I outlined the three keys to unlock the US market:
- Top leaders of the company have to relocate and be hands-on with understanding customers, identifying verticals, finding product-market fit, and building a team in the new market.
- Sufficient capital for hiring the right people, fine-tuning the GTM strategy, and allowing for downturn effects and iterations.
- Deep product innovation for developed markets like the US, where competitors abound in every vertical, and not just pricing innovation.
A few points I made in the interview:
One of the lessons Netcore learnt while testing the US waters earlier was the importance of product innovation. “I thought initially that the same product at a cheaper price point could do well. But people are not that interested in the little extra savings,” says Jain. “At the SMB or mid-market enterprise level, they want to see how your product can do things 5x or 10x better than the competition.”
“The US market is 50 to 100 times deeper than in India. So there are lots of companies in each vertical. You need to figure out which vertical you will go deep into, instead of spreading yourself too thin. That means the product-market fit will be different… And finding all this out takes time,” says Jain.
… One constraint of being bootstrapped is that it can be harder to build for the US market from the outset, because of the amount of capital needed for a sales-led model. “If you’re bootstrapped and want to target the US market from an early stage, you need a product that you can sell from India without hiring in the US. Because you can’t hire just one person in the US; you need a team of at least three or four which is expensive. So you need a product-led growth model targeting the SMB market because it may not work so well in the enterprise market,” explains Jain.
A few Indian SaaS companies have succeeded and scaled up in the US, but they are more the exception than the norm. I know Netcore can grow 20-25% consistently in India and emerging markets, but if we have to get to higher growth rates (40-50%), we need to win in the US. This has been the question I have been thinking about for some time. LEMMMA is one possible answer: land, expand, maximise, moat, monopoly, acquire.
Land and Expand – 1
The ideal approach for winning in SaaS is to have an exceptional product and GTM (go-to-market) with a combination of growth marketing and sales: content to generate inbound interest and leads, inside sales via sales development representatives, and account executives to close the deals. For the SMB (small and medium businesses) sector, the product needs to be self-service. For the discussion going forward, I will focus more on sales to mid-sized US enterprises where the MRR can be an average of $10,000. To build a $10 million MRR business ($120 million ARR) will therefore need 1,000-odd enterprise customers.
A key challenge for any sale is that the buyer needs to change some well-established habits. This leads to switching costs. So, the ability of the product to deliver a significantly better experience and outcome is important. One approach is to offer an equivalent or better product at a cheaper price. Switching will then depend on the criticality of the product and the friction involved in migrating. The tighter the integration a product has, the higher will be the bar for switching – in which case the RoI has to be significantly greater. In SaaS, product is the key. So, a challenger SaaS company needs to come up with a much better product to even get the conversation started.
The typical sales strategy is land and expand: get into the buyer with a product and then work to expand the revenue either with more seats (end users) or more independently priced features.
Asavin Wattanajantra writes: “If you’re involved in an early stage software as a service (SaaS) business, having a great product that addresses a need is essential. But it’s not enough. You need to build relationships with customers who are willing to pay you money for your product. You need to use land and expand strategies. But your product is unknown, and it’s highly unlikely that the significant majority of prospective customers will be willing to ‘take a chance on you’. So, you need to start small. You need to show what your product can do, winning a company’s business through excellent service and meeting its needs better than any other competing software. From there, you can earn more business across the organisation and get bigger deals – you have landed, and are in the process of expanding. And that’s what a land and expand strategy is, and how it works.”
Norma Makarem adds: “The land-and-expand strategy, also known as “seed and grow”, is when you start with a small deal and use the agreement to form a strong relationship with the company through exceptional service. Then, you continue to sell to the business across different projects and expand your services and profit margins over time. This model allows you to maintain a positive return on investment while growing your business. Over time, you can attract more deals with that client as they require more services and come to rely on your company for its stellar offerings. You leverage your initial sale to highlight your uniqueness, integrity, and proficiency in what you specialize in.”
Rathna Kumar has two very helpful graphics:
Land and Expand – 2
In the Netcore case, we need to begin with “land” before we can “expand”. One of the ideas I have been thinking about is to create a set of products which can attract inbound interest without extensive spending on brand building and marketing. Hubspot did this amazingly well with its Website Grader tool: a free utility which attracts the right target audience and gets a potential buyer’s email address to then follow-up on. Netcore has Grade My Email to do something similar.
While the focus for “land” is to get a small paid pilot or actual revenues, I think Indian SaaS companies will be better served by creating a “workbench” of tools which can offer utility. Spending on brand building is expensive and content marketing takes time. While both have to be done over the long-term, an easier approach could be to offer a toolbox with useful free services. The product must sell itself – “product-led growth”. It needs to be of repeat value so a relationship gets established. The “land” and “expand” approaches can thus be different products: “land” is about building the relationship, and “expand” can be about doing the real sale which will mean an elaborate engagement for the enterprise to make the switch.
To take Netcore’s example, the ideal outcome is for an enterprise to switch 100% of their email traffic to Netcore. But that has a lot of friction associated with it: lists, segments, creatives, journeys, historical data – all have to be migrated. An enterprise will not undertake that exercise unless it is absolutely convinced that there is big RoI to be gained from the transition. So, a landing approach could focus on three stages: show value with the email program without making a switch (what I call the 0% solution), then get some emails sent via Netcore (1-30% solution), and finally a pathway for the full switch (31-100% solution).
In the 0% solution, we can offer utilities focused on Email 2.0 and Loyalty 2.0 (AMP and Atomic Rewards) to get the relationship going. In the 1-30% phase, we can create multiple moments for which AMP emails can be sent without disrupting the existing ESP (email service provider) relationship and increasing the engagement with the developers and marketers. Once the uplift has been seen, then the complete switch can be done as part of the 31-100% phase.
The 0% phase needs to have product-led growth (PLG). A developer or marketer must be able to use the utility without much friction – and the resulting RoI must be big enough that there is word-of-mouth spread to help drive growth.
Indian SaaS companies can use a similar approach to make early inroads into their TAL (target account list) without having to burn cash and build US-based executive teams – both of which are expensive propositions. A smartly crafted land and expand strategy is the answer. Both can be accomplished without extensive selling: the land phase needs a very good product and smart persuasion, while the expand stage needs a mix of account executives and an onboarding team, both of which can be done from a base in India rather than an onsite presence in the US.
Also called “Explode”, this phase of the LEMMMA playbook is about maximising revenue from an account. This will include a mix of upsell and cross-sell. It is much easier than a first-time sale because the brand awareness is now there in the enterprise, thanks to the success of the land and expand strategy. “Maximise” can be thought of along two dimensions: maximising the revenue generation, and maximising the utility of the product. For a product based on per-seat pricing, the focus needs to be on getting utilisation going in multiple departments. For maximising product utility, the SaaS company needs to have a good customer success team which is tasked with ensuring that more and more features of the product are used.
Rajesh Ram has an excellent success story on the land-expand-explode approach to winning. Here is an excerpt from a talk given at SaaStr in 2019, related to Egnyte. “Egnyte is the only secure content platform built specifically for business. With thousands of customers worldwide, in a variety of different vertical markets, Egnyte delivers secure content collaboration, compliant data protection, and simple infrastructure modernization; all through a single SaaS platform.” Here is the strategy for “Explode”:
Continued education. If you can’t show your customer where they are able to grow their business in unique ways, then I think you’re just being a technology provider. You’re really not being a partner. Do you have unique insights into their industry? For example, if you’re serving financial services, are there some new regulatory needs that are coming out in the market that you can help them achieve two years ahead of their competitors?
Industry alignment. We started to set up industry groups and forums; bringing like-minded CEOs together from the same industry and they would feed off of each other. Obviously, it helped us a lot in terms of our roadmap, but more importantly, it gave these buyers a sense of confidence that they were investing together in this company called Egnyte. At some level we were helping mitigate the risk to the buyer because there was a sense of community in the way that they were investing in this technology.
Executive alignment: Mr. Ram ended this topic with the construction company’s Explode phase. He said, “Corporate was starting to take notice; we decided to grab the bull by its horns and approach the CIO. I said, ‘Look, you’ve got 12 -13 projects running this, it makes no sense for you to have these multiple solutions. Ultimately [they] ended up deploying Egnyte company-wide. We got 100% penetration of the use cases as well as the addressable market within the company, which was 3000 employees at the time.”
For Indian SaaS companies, this phase is the real test of US market success. It is what creates the lock-in and paves the way for building the moat and crafting a monopoly. In Netcore’s case, success in the maximise phase would mean getting the enterprise to go beyond just the use of email to the complete martech stack.
Moat and Monopoly – 1
For a SaaS business to achieve greatness, it needs to do two more things: build a moat and create a monopoly. Moat is about ensuring that a competitor cannot replace it in the enterprise it has won. Monopoly is about dominating the revenues (and profits) in the vertical in which the SaaS company operates. These are critical for ensuring exponential, forever, profitable growth.
While a SaaS company works to chip away at switching costs to enter an enterprise, it also needs to ensure that it creates enough friction to lock-in the customer for the future. So, it needs to constantly think about how to build a moat for its own protection. Jason Lemkin suggests 10 ways SaaS companies can build a moat:
Brand. Brand can be a big moat in SaaS. Most customers just want to pick the app they’ve used and heard of. We all underestimated this in the earlier days of SaaS. There may be 100+ CRMs today, but most of us just want to pick the one we know.
Data. Data lock is real. LinkedIn owns the human record.
Structured Data. Even if data resides in many silos, structuring makes it unique. Exporting your Customer records from Salesforce is a huge task.
Partners + Ecosystem. The top partners in the Salesforce, Shopify, etc. ecosystems do get most of the leads. And this compounds over time. The AEs, the biz dev folks, tend to send deals to the partner everyone trusts and knows.
Integrations. Most vendors only integrate one third party in each category, maybe two. Zapier is integrated everywhere. Maybe 10x more than anyone else … So also, build more of them. Before someone else does.
Agencies and Implementation Partners. Third parties want to specialize in helping customers deploy just a handful of leading apps. This is a big part of Hubspot’s GTM, and of many in the Shopify ecosystem. Own the agency relationships, and it’s really tough for others to break in, absent strong organic customer demand. No one ever got fired here for deploying a market leader …
Long-Term Contracts. Yes, we hate this. But getting customers to sign 3+ year contracts does work. Not perfect. You can buy out these contracts, and break them. But 3-year contracts are a partial moat.
Using Massive Amounts of Capital To Play In Every Segment. Dominant-dominant strategy is tough to play well, but being in every single segment when the competition can’t afford to be is a form of moat.
“Most Enterprise” Vendor. If you are the most secured, most trusted, most 2FA, most HIPAA, most SOC-2, most everything vendor … you will win where that matters. And it matters a lot in the enterprise.
No Contract At All. Yes, a long-term contract is a “stick” moat. But there’s a “carrot” flip-side: making it 10x easier to onboard than the competition does.
Soumya Mohan writes about three moats: switching costs, network effects and economies of scale:
Switching costs: The loss customers will incur by switching to an alternative. These are very common with most B2B businesses as there is generally some costs involved in switching providers.
Network effects: When each additional customer makes the solution more valuable to the whole customer base.
Economies of Scale: Cost benefits the company is able to have when they have a huge customer base — software generally has low marginal costs so these can be huge. They can use this for further investments to increase their moat or pass on the cost benefits to the customer to price out competitors.
Moat and Monopoly – 2
Jasper Han writes: “Network effect, brand, and replacement costs are moats…[Also], for SaaS organizations, data is a critical way of increasing the replacement cost. Customers’ data created by your SaaS offerings is a valuable asset. Increase replacement costs by making good use of these data to provide greater value to customers… User behaviors are an unnoticed way for replacement prices to rise.”
Austin Yang discusses an ecosystem moat: “An ecosystem in SaaS is a group of related apps, 3rd party components, and content that seamlessly work together to solve user pain points. Ecosystems allow companies to better satisfy user needs and improve user experience. An ecosystem moat is a barrier that protects your product from the competition. It makes it more difficult for other companies to achieve product parity. Common levers used to build ecosystems include user-generated templates, experts, and plug-ins.”
Peter Thiel argues that a business must focus on building monopoly. He wrote in Wall Street Journal in 2014:
“Perfect competition” is considered both the ideal and the default state in Economics 101. So-called perfectly competitive markets achieve equilibrium when producer supply meets consumer demand. Every firm in a competitive market is undifferentiated and sells the same homogeneous products. Since no firm has any market power, they must all sell at whatever price the market determines. If there is money to be made, new firms will enter the market, increase supply, drive prices down and thereby eliminate the profits that attracted them in the first place. If too many firms enter the market, they’ll suffer losses, some will fold, and prices will rise back to sustainable levels. Under perfect competition, in the long run no company makes an economic profit.
The opposite of perfect competition is monopoly. Whereas a competitive firm must sell at the market price, a monopoly owns its market, so it can set its own prices. Since it has no competition, it produces at the quantity and price combination that maximizes its profits.
…In the real world outside economic theory, every business is successful exactly to the extent that it does something others cannot. Monopoly is therefore not a pathology or an exception. Monopoly is the condition of every successful business.
Tolstoy famously opens “Anna Karenina” by observing: “All happy families are alike; each unhappy family is unhappy in its own way.” Business is the opposite. All happy companies are different: Each one earns a monopoly by solving a unique problem. All failed companies are the same: They failed to escape competition.
For Indian SaaS companies, moat and monopoly need to be the twin endgames to establish domination. Each company needs to find its own path. Netcore needs to consider a B2B loyalty program crafted around Mu (Atomic Rewards) to build the moat and monopoly.
Every SaaS vertical has eventual limits which put an overall cap on a company’s growth. This is where successful SaaS companies need to focus on using acquisitions to increase TAM (total addressable market). It is what Netcore has done with its three recent acquisitions: Boxx to enhance its personalisation offering, Hansel to add contextual walkthroughs and nudges, and Unbxd to add search and also expand in the US market. Building organically in the US would have taken Netcore a long time and hence the decision to shorten time-to-market by adding a complementary and customers to whom Netcore’s products could be sold.
Acquisitions have long been a preferred way of growth for many SaaS companies. Indian companies also need to use the playbook much more aggressively – but only after they have got a strong foundation and free cash generation from their existing products. This is what can then create the growth flywheel. For a brief period spanning 2020 and 2021, many SaaS companies (including some Indian ones) went on a hiring and spending spree in the race for customer acquisition and growth at all costs. The assumption was that valuations would stay high and cash was always available easily. This situation changed in 2022. Multiples shrank as did availability of capital. Investors now want to see clear paths to profitability. Here are a few charts from SEG (Q3 2022 update) which provide an aggregate analysis of public SaaS companies and how marketing sentiment has changed.
Jamin Ball’s Clouded Judgement newsletter (16 December 2022) shows the change through the past four years:
The fall in public market multiples will make its way to the private markets also. In 2023, profitable (and funded) SaaS companies will have very good opportunities to expand their TAM with acquisitions. For Indian SaaS companies, acquisition can be a very good way to accelerate US expansion – as an alternative to organic growth.
India’s SaaS story is still in its infancy. The US market is a very good hunting ground for both customers and other SaaS companies. The “product” gap can be bridged through SaaS – to complement India’s historical IT Services strength. Indian companies need to build scale – from $10 million ARR to $100 million and then onward to $1B and more. LEMMMA can offer a winning framework for Indians SaaS companies to conquer new frontiers in the US, the largest market and biggest prize.