Building a Bootstrapped Unicorn from India: Rajesh Jain, Founder of Netcore Cloud (Part 6)

Sramana Mitra: Can you double click down on your three acquisitions and talk a bit more about how you price these deals? If you’re using stock, then how do you price yourself and calculate how you price the valuations of these acquisitions? Talk about the philosophy and the mechanics of doing these deals as a bootstrapped company.

Rajesh Jain: All the three acquisitions were in cash. It’s very hard to put an external value on our stock. No one else would want our stock, because there was no validation of the stock price. So, we had to do these acquisitions in cash, and we had cash because of all the accumulated profits through the years.

The two acqui-hires were in the region of probably $3-$5 million. They had small revenue, but as they had investors and had raised capital, we had to make sure that investors also got an exit, otherwise the deal would not have happened. They got a little bit of an upside to what they had invested at.

In the case of Unboxed, it was a competitive bidding process, which was followed by Unboxed investors. Unboxed had raised about $25 million over the years, and the company had been around for eight to nine years. While their product was very good, their go-to-market strategy took a little bit of a hit during COVID because events were their primary acquisition method. For almost two years, they had a tough time getting the new customers coming in. The investors were also running out of time for their funds. So, they wanted an exit. And they also realized that Unboxed would need more capital and more heft to grow.

Sramana Mitra: Absolutely, $25 million have already gone into a company that has been around for eight to nine years and has gotten to $9 million in revenue. That is not growing at a venture pace. So, it will be hard to raise money for a company like that.

Rajesh Jain: In early 2022, when we did the deal, 10x or 11x forward multiples were the norm, and that is what we paid them. Of course, Unboxed had a couple of other offers at that time. What we liked was the complementarity of the product. Unboxed sold to merchandisers and product tech people. We were selling primarily to marketers, but we thought it could give us a good entry point in the US. We were willing to pay a little premium for that rather than trying to build from scratch.

We had also started building out personalization capabilities in our product in the marketing automation product. In fact, today, I would say that the only company other than Unboxed, which brings together the entire spectrum from the communication channels to automation to search and product discovery is Bloomreach in the US.

So the core thesis was with the ability to combine both customer data and the catalog data, you could then do better product recommendations on the website and on the app.

I think that sort of played out quite well for us. Unboxed is now helping widen the footprint globally. Unlike some of the other businesses in the MarTech space, which tend to get many competitors, search is fairly specialized. There are probably ten companies, but there are four or five selling to the large enterprises. Algolia, Bloomreach, Constructor, and Unboxed are the top four companies today in the space globally.

Sramana Mitra: What is really interesting in what you’re describing is an opportunity that I see, given what is going on in the market right now. Here’s how I see it.

You need to go from zero to $100 million to be a venture scale company or to be able to continue to raise money and reach that trajectory. Zero to $100M is a very fast growth trajectory, and very few companies actually succeed in achieving that, but at the end of 2023, there were 54,000 venture funded companies in the US.

Now, if you take the whole of the world, India has had a lot of venture funded companies. Europe has had a lot. Even Latin America has venture funded companies now. The global number is probably in the 75,000 kind of range, right?

Then you have 3,000 accelerators and 7,000 incubators. Each of them is doing 25 companies, and they’re feeding them with $15,000 to $150,000 in funding. All of these people are supposed to reach the same trajectory – zero to $100M in five to seven years. So a quarter million companies are trying to reach zero to $100M in five to seven years; there is no way this is feasible.

Then comes the interesting question that you are showing here in your case study. You are acquiring some of these companies that are no longer venture fundable, most likely, but they’re good companies with interesting products, definitely talented people, and have had some amount of money. In the case of Unboxed it was a lot of funding, but they are not going to be venture scale successes.

And you have a successful, bootstrapped company yourself with a lot of cash, and you are using that cash to acquire some of these venture funded companies that are not scaling at that pace.

This is a very, very powerful strategy.

For the people who are bootstrapping, so just to finish my train of thoughts, the companies out there that are bootstrapping companies can actually bootstrap unicorns with your strategy.

Rajesh Jain: You’re so right! There’s one more angle to this. In early 2022, there were a lot of companies which raised money at very high multiples. In SaaS, forward multiples of 25-30 were quite the norm in the startup space. Those multiples have now come down to five to ten at best. Growth has come down from the 50-100% to maybe 10-20%.

So these companies have also become zombie companies. It’s not a good word to use, but that’s the reality. They are there, but their existing investors will not back them by putting in more money. New investors will find it very hard to be brought in. Someone’s going to take a big haircut on the investment.

So I think the industry needs what I call MarCo, a MarTech consolidation, but it applies for every domain.

Sramana Mitra: Absolutely. Every Domain.

Rajesh Jain: Every domain and vertical. The challenge is that a lot of these companies have maybe $5-$20 million in revenues, but they don’t have growth.

Sramana Mitra: They have nowhere to go. They’re basically venture funded companies and they have to find an exit somehow to rationalize.

Rajesh Jain: We’ve never done a fundraise before, but maybe we should raise $50-$100 million to be able to acquire and consolidate.

Sramana Mitra: A lot of private equity companies will fund that kind of a roll up opportunity. For the stage that you are in right now. You already have unicorn valuation, right? You have $100 million plus revenue company, which even at a compressed market situation, will most likely still have a billion dollar valuation. I haven’t looked at all your numbers and all your churn data, but assuming that you have reasonable numbers throughout the balance sheet and P&L, you should be able to get to a unicorn valuation if you go with that thesis that you want to acquire a portfolio and build the full MarTech stack.

This segment is part 6 in the series : Building a Bootstrapped Unicorn from India: Rajesh Jain, Founder of Netcore Cloud
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