1Mby1M Virtual Accelerator Investor Forum: With Yash Hemaraj of Arka Venture Labs (Part 5)

Sramana Mitra: In the last 30 days, we’ve done story after story analyzing what’s happening on the acquisition side of B2B SaaS. I think one of the things that’s very attractive about Arka is that you’re not chasing unicorns and I’ll let you elaborate on that.

Yash Hemaraj: You’re right on the point that a lot of companies, especially in the B2B side, get acquired for anywhere from $50 million to $100 million according to some statistics published very recently. That’s the opportunity where if you’ve taken in $50 million into your company, there’s no way you can sell the company for $50 million and everybody is happy about it.

On the other hand, when you have taken less than $4-$5 million to build a good revenue-based company, you have multiple options. If you’re capital efficient, there’s always profitability as an option and continuing to use the customer revenues to build the business. There’s always that option on the table.

The second option is M&A where you see a strategic fit into a slightly larger organization so that you have much better operations or a much better value proposition for your target customers. Finally, you can raise other venture capital if you see the right metrics like what Freshworks has now done. Once they figure out their product market fit at scale, they were able to raise additional amount and go after, probably, even larger markets and larger segments. There’s always multiple options on the table. It’s extremely important.

Sramana Mitra: Out the Freshworks hat on, that company has raised a huge amount of money – several hundred million dollars. They also need to expand that product portfolio. They started as Freshdesk which was a help desk SAP software. The reason they changed the name of the company to Freshworks is to expand the product portfolio.

They have done that expansion of product portfolio by acquiring companies. When you look at why they’re acquiring and what they’re acquiring, they’re trying to acquire companies that will expand their product footprint and give them access to different expertise. In some cases, they’re acquiring the companies that bring in hires of certain types of skill sets and certain types of expertise.

In all these cases though, the capital efficiency of the companies that they’re acquiring is something to note. Look at other peer groups of Freshworks for example. We did stories on Atlassian. Atlassian’s a very successful bootstrapped Australian company that went public in the US market. They’ve been following the same strategy of acquiring capital-efficient startups. Smartsheet is another bootstrapped company.

Atlassian, Smartsheet, and Freshworks are all bootstrapped. They’ve now raised huge amounts of money. Atlassian and Smartsheet have already gone public. But if you look at their acquisition strategies, they’re acquiring companies that have that capital efficiency built in. It’s a lot cheaper for these companies to acquire companies that have not taken huge amounts of funding. That is far more attractive. For example, where this failed on the buy side.

I’ll give you an example. Apttus is a great story. Actually, Apttus bootstrapped to $5 million to build their entire contract management software product on top of the Salesforce platform. Then they started raising money. They ended up raising lots of money. They continued to build on the Salesforce platform. But at some point they had raised so much money that when Salesforce was looking to acquire a contract management software company, they did not acquire Apttus.

They acquired a small company that was very capital efficient and they brought that one in. That puts Apptus in a bind because now, Salesforce was supposed to be their biggest champion and biggest lead generator. That exit path got blocked. That company recently got sold to private equity and that company could have been a gigantic success.

They did a lot of things right but then they’ve raised too much money. This is something that you have to be aware of because there is a lot of money floating in the system. In fact, there’s too much money chasing too few deals.

This segment is part 5 in the series : 1Mby1M Virtual Accelerator Investor Forum: With Yash Hemaraj of Arka Venture Labs
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