With Rs 1500 cr lined up, Basis Vectors eyes acquisition of firms with high client retention, decent financials

With M&A and restructuring experience, Basis Vectors, the Rs 1500 crore buyout vehicle co-founded by Upmanyu Misra, is on the lookout for smaller SaaS companies that have failed to scale. Misra says these companies are typically founded by subject matter experts with a great product, but gaps in company operations and strategic direction prevent it from growing. Armed with $50 million in cash and $150 million debt line from US-based debt funds, Misra says it has the wherewithal to carry out an operational turnaround once it acquires a company. Edited excerpts.

ET Digital (ET): How is SaaS transforming different types of businesses? How is B2B SaaS evolving?
Upmanyu Misra (UM):
SaaS (Software as a Service) is a well-differentiated model for providing technology products and services. SaaS is built with an ‘on-demand’ DNA, easily accessible platform (typically an Internet browser), and operates on the cloud. It has brought in the new crop of mega unicorns, such as Salesforce, Stripe, Fastly, Canva and Freshworks. B2B SaaS, in particular, has caught on immensely with SMBs and enterprises because of its flexible, scalable and bespoke characteristics.

In the past, large software players would create a piece of software under a vendor developer style contract with a corporate player. They would charge product development fee and ensuing maintenance fee. The same product will then be marketed to other corporates in similar sectors. These products, while acceptable in the past, have widely been labeled as hard to maneuver and expand upon. Delivered products are quite buggy and they take long to fix. Finally, their price model has never suited sub-corporate size businesses.

SaaS has turned this model on its head by designing products, services and pricing models geared towards specific sectors (also known as ‘Vertical SaaS’). It is, by far, the most sustainably growing theme within the technology space. Enterprise SaaS ARR crossed $100 billion in 2019 and is growing at CAGR of over 30%.

A single metric can gauge the omnipresence of SaaS, ‘by 2023, 86% of global businesses will run primarily on SaaS’.

In 2018, 89% of companies were using some form of cloud-based computing and 51% were running primarily on SaaS. I expect the latter number to grow to 86% in 2023. That is huge. It is worthy of being an industry of its own.

In fact, some major sectors have already shifted to SaaS. Leading the pack are HR, sales & customer management, IT and finance.

ET: What do these transitions mean for the future for businesses?
Lower COGS–Cloud is a ‘pay per use’ expense as opposed to fixed data center costs, which have increased gross margins by 10% to 25%. At Basis Vectors, we have some of the best cloud architects in the world who are able to either migrate our portfolio companies entirely to cloud, or create efficiencies in their existing cloud costs.

Nimble–SaaS makes it incredibly easy to add functionalities to a product suite based on a business requirement. Imagine a dentist using SaaS for CRM needs to add a module that reads in x-ray data and provides commentary on the result. This is a one week job! It would have taken months for a software developer to do this in the past.

Low maintenance–we are seeing maintenance costs, a mainstay of the erstwhile revenue model, diving every year. Since SaaS is ‘plug and play’, it is very API-based. APIs don’t bug out easily. Therefore, fewer things break.

Reduced Opex–Businesses need not hire an army of developers, architects and consultants. This reduces P&< pressure on businesses, especially small and medium-sized ones. Covid situation has brought this benefit to the fore. The 2020 revenue numbers are awaited, but I believe they will be surprisingly high.

ET: If SaaS is such a business enhancer, why are the SaaS businesses themselves getting acquired?
It is important to understand who (SaaSpreneurs) started these businesses. A typical SaaS product was created to solve an industry-specific problem observed by an industry player. For e.g. a telecom sales employee-turned-entrepreneur saw a lingering issue in the pricing department and got some technicians to develop a solution.

The ensuing piece of code solved the issue, and he could sell it within his network of telecom players (possibly his ex-employer). There is a plethora of these companies, and they are run as what I call ‘lifestyle businesses’, i.e. they are cash generating machines that support the founders’ lifestyle (pays a lot more than what they would earn in a job), with low working hour requirements (BD person sells locally, once installed and stabilized the business is on autopilot), and with low investment requirements (most of these companies do not spend heavily on R&D).

These companies may not have ripping growth stories, and the founders may have hit a ceiling when it comes to applying new strategies (most are not savvy about raising capital, transferring services offshore, or going public). But they do have high client retention and decent financials, thereby making them great acquisition targets. An efficient operator, such as Basis Vectors, will always generate significant value from these transactions.

ET: How does Basis Vectors target its acquisitions?
We are well plugged into the VC and tech network across North America. Our target pipeline has been growing as more SaaSpreneurs found out about us and our model.

Any business that has a proven product-market fit and has retained over 80% of their customers is a worthy target for us. We can solve everything else.

ET: How does Basis Vectors shape the future of the businesses it acquires?
Today, the company of the size and calibre of Zoho or Freshworks has access to the most efficient capital, capable workforce, and receptive client base. The smaller SaaS players only dream of such things. We acquire these companies and apply the best in class industry practices. We are able to do that because we can spread our costs over various portfolio companies. Note that we do not follow a pure shared services model. Our model is unique and hybrid.

We use four pillars (‘vectors’) of operating divisions, namely, engineering, sales & support, finance, and marketing. We move over non client facing and non mission critical work offshore (primarily to Gurgaon, but also Ukraine and Philippines). We dedicate the majority of offshore employees to one or two portfolio companies.

Soon enough, products expanded, better talent is hired, and after-sales support is brought to international standards. Even the frontline sales guys receive hot leads from the origination team (which is non existent for small SaaS companies).

ET: What geographical synergies between the US and India do Basis Vectors bring to its acquisitions, and how does it benefit India?
Lately, there has been a lot of news around visas and work permits for Indian technicians going to the US for short-term work. There is also a narrative of sub-standard customer support provided from India. BPO businesses have been slammed.

Imagine if we could run an entire organization from India (remotely) catering products and services to US customers. Truly a high price, low-cost model. Today, we can build and sell software from Chennai into Chicago. Development, maintenance, training, contract negotiations, account management and support can all be managed from India. A small subset of customer sales and strategy management is all that is required to be in the US.

Basis Vectors is a major disruption to the myopic ‘back office’ model that is being used and has frankly begun to crumble under socioeconomic and political pressures.

India is at the forefront to benefit. Deserving talent will receive apt remuneration (as opposed to the low paying, high pressure work they have dealt with). It also gives the Indian talent, whether it’s a young developer or a mid-level account manager, to contribute above and beyond a spec sheet received from the client. This is possible because accountability shifts to India, or at the very least gets balanced between India and the US.

ET: Every company is looking at the SMB sector for business as the pandemic has accelerated the process of digital adoption. What do you see at Basis Vectors?
While we welcome any business, SMBs are not our prime targets. Over 80% of our portfolio companies’ revenue is derived for large corporates and blue chip companies. I am averse to pure SMB vendors as customer retention, revenue stickiness and cross sell is harder. The sales cycle is shorter, but that is less of an issue for us as we are acquiring post product-market fitment.

ET: Why do SaaS solutions make sense for SMBs to adopt in the digital journey?
It’s bespoke and cost effective. SMBs have a fluid P&<, and there is usually a lot on the plate of the management. Pay-per-use cost eases a significant amount of pressure, while flexibility to add modules allows them to be constantly competitive in the market.

ET: What are your plans for the future?
We have made two acquisitions (one each in the US and Canada) as transaction cycles have been longer this year. We will make about 12-15 acquisitions to reach cumulative ARR of $150 million to $200 million, with an average net margin of over 30%, and then go public on NASDAQ in 2023.

With Rs 1500 cr lined up, Basis Vectors eyes acquisition of firms with high client retention, decent financials With Rs 1500 cr lined up, Basis Vectors eyes acquisition of firms with high client retention, decent financials Reviewed by TechCO on 11/12/2020 Rating: 5

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