My framework on how to evaluate & invest in B2B SaaS

1. SaaS Investing
Pallav Nadhani
Founder & ex-CEO
FusionCharts / Muze
Currently @ Seeders | Collabion

2. My background
• Built 5 startups in last 20+ years. 2 exits, 2 shut downs and 1 continuing.
• Started Seeders in 2010 during early days of angel investing in India. Put our money,
not OPM. Had different stages and thesis of investment across this timeline.
• Actively invested in 2010-15 across industries (26 deals). Slowed down in 2016-19
with primarily SaaS focus (8 deals). Since 2020 (75+ deals) active again with focus
on SaaS, mixed with some D2C, health-tech & fintech invested through syndicates.
• Varied cheque sizes from $10K-500K. Now do between $10-50K with follow-ons (for
the good ones).
• Have invested in 100+ companies till now, of which 16 have shut down. 8 have exited
(1 at ~75x, rest between 3x-15x). Some investments are looking great on paper
(100x+ returns). Expecting conservative IRR of 20%+ since first investment in 2011.
• Now look at it as an asset class, with ~10% of overall portfolio allocation. Some
allocation in funds / pre-IPO companies.

3. What is SaaS and evolution of business software?
• Software as a service. Essentially a method for delivery of software through Internet
(cloud) via a subscription model.
• Back in day, software was installed on local servers through client-server window. You
had to manage, install, upgrade software on local servers or computers. Earlier was
called Application Server Provider (ASP).
• Anything subscription is NOT SaaS. Has to be a software or tool, delivered as a web
interface or mobile app.
• 3 main categories of cloud computing: IaaS, PaaS, SaaS
• SalesForce is the one credited for leading the SaaS revolution.
• Valuations are 5-20x top-line revenue (in some cases even more).
(For ref: Restaurant is 1x, services 0.75-2x as most of them focus on EBITDA multiple)

4. Benefits of SaaS as a customer
• Opex vs capex.
• Time value of money. Better use of capital.
• Speed of deployment
• Lower risk of it not working (Onus of providing success shifts to vendor)
• Permissionless adoption - Bottom up adoption in many categories
• No headache of management of data centres, network/firewalls, servers/storage,
operating systems, security, developer tools and applications etc.
• Near zero IT overhead cost (apart from provisioning and governance)

5. Why is SaaS growing?
• High gross margins
• Subscription. Top-lien. Predictable revenue.
• Metered pricing. Expansion revenue.
• Global, automated, credit-card based
• Same code based served to all customers (multi-tenant).
Vendor hosts servers, provides security, scaling up/down.
“Software is eating the world" - Marc Andreessen.

6. Examples
Consumer SaaS:

7. Global SaaS Market Size
• Market size at ~$150 Billion in 2022 (Source: Gartner)
• Market size projected to reach ~$900 Billion by 2030, growing at a CAGR of 27.45%
from 2023 to 2030
• Total funding raised: $300B+ since 2015 (Source: Pitchbook)
• Notable public companies: Adobe (~$200B), Salesforce (~$180B), Intuit (~$130B),
ServiceNow (~$100B), Atlassian (~$70B), Snowflake (~$50B), Workday (~$42B),
Datadog (~$35B), Zoom (~$30B) etc.
• Notable exits: Slack ($27B), Nuance ($19B), Tableau ($16B), Mailchimp ($12B),
NetSuite ($9.3B), Concur ($8.3B), Qualtrics ($8B), GitHub ($7.5B), Marketo ($4.8B)

8. BVP Nasdaq Emerging Cloud Index
Source: https://cloudindex.bvp.com

9. SaaS in India and where they are
• Over 1000 SaaS companies in India across all stages,
with ~$50B in value today.
• ~$2.6B combined ARR of pure-play SaaS companies
from India. 30% CAGR since 2018. Could reach $50-
$70B by 2030.
• 16 SaaS Unicorns
• 150+ companies having >$1M in ARR
• $4B total VC money invested in Indian SaaS
companies in last 5 years
• 40K people employed
• Potential to create ~$1T in value and half a million jobs
by 2030, with 100+ SaaS Unicorns and 3,500+ SaaS
companies
Source: https://saasboomi.com/saas-landscape-report/
(and some more…)

10. Let’s move to the
evaluation part.

11. B2B vs B2C SaaS
• B2B SaaS solves an existing business problem. Existing JTBD.
• Comes in multiple avatars: Vertical vs horizontal, SMB/Mid-market/Enterprise
segments, Category creators vs Inspired, SoR (Systems of record) vs SoE
(Systems of Engagement) vs SoD (Systems of decision)
• Could be Mission critical to ops vs peripheral layers (e.g., productivity, silo
tools)
• Big space in devTools / System Infra / Data / API tools companies with India
advantage as 3M+ developers in India.
• Productivity tools (e.g., Notion, Zoom etc.)

12. Broad evaluation criteria for B2B SaaS
• Why now: What has changed? Behaviour, technology, societal, regulatory shifts.
• TAM: Is the opportunity size leading to $100M ARR? ($1B+ markets)?
• Differentiation: What's unique about the product?
• Competitive landscape: How is it positioned compared to others?
• Team: Why is this the best team to do this?
• GTM: What's the sales strategy and sales cycle?
• Moats: How is the business defensible?
• Traction: What's the evidence that the idea is working?
• Unit economics: What's the business model & LTV/CAC?

13. What stage are you investing in and what to
look at in each one?
3 journeys:
0-1 stage:
Pre-PMF
(idea/early
product/some
initial customers)
1-10 stage:
PMF achieved
and figuring
GTM channels
that scale
10-100 stage:
Growth

14. Pre-PMF (0-1 stage) -
What are you evaluating? [1/2]
● Why now, what’s different (cheaper/ better/faster), what are you replacing. “Why now?”
question and explains why it’s a fresh opportunity that should be tried. [If your new startup
could have been built 15 years ago, perhaps the idea’s already been tried and just isn’t
that good] What behaviour / technology / regulatory / societal shift are you banking on?
● Urgent + important problem to be solved. Even better, if in the line of money.
● Why is this founder suitable for this business?
● Is there an unfair advantage? (India delivery, CS, some secret sauce etc.)
● What company, department, budget is the company selling to? Is it a SoR, SoE, SoD?
● What GTM model is required? Does it align with the core strengths of founder. Broad idea
of what channels may work.

15. • Market size. Products don’t matter, markets do. Can this become a $100M ARR
company
• Category / Competitive landscape and differentiator + Multiples / investors
• Past exit multiples, if available, for comparison.
• What does graveyard look like? And what has changed since then?
• Problem value / frequency of usage
• Onboarding / aha moment
Pre-PMF (0-1 stage) -
What are you evaluating? [2/2]

16. Examples of successful companies
amplified by technology or behaviour shift

17. Try to find a small market that’s growing quickly,
enabled by a technology or behavior shift

19. PMF stage [1-10] –
What are you evaluating?
• Early Metrics (Product engagement, GTM) and North Star definition.
• ICP / JTBD well defined
• Unit economics: LTV/CAC
• Cohort charts
• Distribution: how to how many? Right channels found?
• Pricing iterations and alignment with value.
• Sales motions: PLG, Inside sales led, Outbound / ABM, Feet on the
street, Partnerships driven
• Who’ll fund next?

21. Growth Stage -
what are you evaluating?
• Repeatable phases in GTM (sales velocity). What’s the distribution mix, blended
CAC/LTV, effective channels/campaigns?
• Further metrics e.g., Burn multiple
• Category leadership plan (how to be in top 3)
• Team / org building capabilities. Hiring for scale.
• OKRs / KPIs or some org alignment framework
• NRR / NDR
• Churn
• Partnerships / piggybacking
• What moats would work? Network, data, business model, distribution, what?
• Where will growth capital come from?

22. Diligence
• Angel DD is very light, most decisions are made within 1
to 3 meetings with founder. Unlike institutional money,
which requires diligence.
• Lead vs syndicate. Lead needs legal.
Others can follow, as long as it’s same agreement.

23. Common early stage valuation frameworks:
• Ownership – focus on owning at least X% of the business for $Y
• Discounted Cash Flow analysis – extremely unreliable with hyper growth startups given
the unknowns of input variables
• Multiple – e.g. 10x Forward ARR, 25x ebitda
• Precedent transactions or comparables
• Scenario analysis: considers plausible scenarios that could take place and the likelihood
of those outcomes coming to pass. It is a way of thinking in probabilities. Bessemer
releases this publicly for its portfolio companies e.g., https://www.bvp.com/memos/
pinterest
• Could this be the next SalesForce / Atlassian? If so, pay anything
• Finger in the air

24. Valuation drivers
• Valuation is part art + part science. It’s a collective lie the ecosystem
tells to each other :)
• Early stage is more qualitative than quantitative. But a benchmark to
use is existing ARR multiple for funding rounds that has happened in
similar categories. Premium for 2nd time founders (with past success)
+ high growth categories.
• High growth public software companies are valued based on forward
revenue multiples.
[Side note: Currently, it’s net income. Inflation and Fed Funds rates
expectations have influenced these preferences. As interest rates
increase, investors discount the large future revenue & profit streams
of high growth companies more heavily. They are valued on a
combination of: Growth %, Net income, Sales efficiency, Gross
Margin, Cash Flow, Category leadership premium]

25. Deal sourcing: Identifying, Validation,
Enabling.
• Your direct network. Colleagues / workers starting a company.
• Online platforms / Syndicates (AngelList, LetsVenture etc.)
• Investor networks (Indian angel, Mumbai angels etc)
• Incubators, Accelerators, Funds
• Ecosystem activities (SaaSBoomi, NASSCOM, TiE etc.)
• Friends of Founders who you’ve already invested in
• Get listed on list of angel investors (UnicornBaba, Media publications etc.)
• Informal meet-ups/parties/industry round tables
• Cold reach out

26. Structures & Logistics
SAFE notes /
convertibles
Priced
rounds
India vs US/Singapore:
Overseas structuring
& flips
LRS
limits

27. What value add can you bring for the
founder to take money from you?
• Industry knowhow / domain knowledge
• Play books that you have applied in a similar setup (sales, marketing, product)
• Network access (customers, hiring, investors)
• Be a customer yourself
• Help with downstream funding
• Cheerleading the company & products

28. Red Flags to look for
• Solving a problem that doesn’t exist.
• Bloated / wrong revenue recognition (booked, billed, accrued). ARR???
• Very small market size: as an investor, you’re looking for exit. So next round,
M&A, IPO etc.
• Non revenue/north-star metrics being highlighted. Chasing vanity metrics.
• Extremely high burn multiple
• High Churn (prevalent in SMB markets)
• No land & expand opportunities
• No clear ICP. "The world is my market"
• Product selling only to other startups.
• High distribution costs, low pricing.
• Signaling problems if institutions come in angel and don’t follow on.
• Too much dilution at early stage.
• Personal opinion: Avoid SaaS purely focussed for Indian markets. Markets
are not deep enough.

29. Your portfolio construction [1/2]
• While B2B is more stable than B2C, if you invest in early stages, power law
distribution still applies.
• Highly illiquid asset class. With extremely high risk.
• Money that you can afford to lose. Know what % of your financial portfolio you are
going to invest in angel
• Don’t invest in the first company you see
• Isn’t about investing in what’s hot today. Is about figuring what will be interesting 3-5
years down the line. The current hot companies are already VC funded, so you have
missed the bus; unless you see a niche or a fundamentally good opportunity
• Don’t do all investments in one year itself. As sectors change with herd mentality.
Also you need to think of recycling of money, seasonality of valuations, and building
your own framework/thesis. e.g., missed out India consumption story 2011-2014 and
have an anti-portfolio of a lot of very good companies.

30. • Spread your bets (10 or more). Small cheques multiple
companies.
• Then do pro rata follow ons. Do at least 10
investments, ideally 25+ for predictable returns.
• Focus on fundamentals - team, market, timing
Your portfolio construction [2/2]

31. Exit strategy
• Know your exit - value driven (2-10x), Asymmetric risk-reward ratio (0 or 100)
• How do you get exits?
○ M&A: different kinds of buyers (financial, rollup, strategic)
○ Secondary (VC, other investors). Typically during series B/C, sometimes at a
discount. Though, not a well defined market for secondary in India, unlike US.
○ IPO: $100M ARR required
• Do partial exits for recycling.
• Pitfalls:
○ Not all acquisitions actually return money to investors. Acqui-hires are also
marketed as acquisitions.
○ Don’t rely on buybacks as an exit mechanism
○ Dividend payout isn’t a strategy. That is more like a debt instrument. Plus you
need high ownership.

32. The fun parts:
• Vicariously enjoying the journey of that company, without being in
driver’s seats
• Learning so many different aspects at different scales and setups
• Amazing founders to talk to, and hang out with
• Learning about newer areas of innovation happening in the world
• The financial outcome

33. The non fun parts:
• You don’t own any KPI and you’re not involved in execution role.
• Your advice to founders may or may not be followed. And the founders
aren’t obliged to.
• It’s slow. It’s like watching a cactus grow.
• Each round of fund raise means note documents to review, to protect
your rights
• When things don’t go well (and most likely it won’t). Co-founder issues,
fund issues, competition etc.
• When you start, you won’t get the cream deal flow, as now that’s mostly
oversubscribed

34. Closing comments:
• Being in angel investment or venture capital is about being in the “exceptions” business.
But, SaaS is not a winner take all market. 20% market share of leader in most SaaS
segments globally.
• Much bigger element of “luck” than people choose to believe.
• Truly a global opportunity for Indian companies. Digital GTM, post-sale CSM, domain
expertise etc.
• It takes time for big exits. 2 of my biggest returns are from vintage of 2011.
• Rules are made to be broken and ‘non-consensus’ business models are constantly
challenging the status quo. You could argue that this is where true investor ‘alpha’ is
made, but being non-consensus has its challenges, including finding investor support.
• Startups typically don’t fail because of technology issues, given open source, AWS, lots
of collaboration tools, a network of smart people, etc. This used to be the case decades
ago, but these days, startups fail because they don’t get traction in the market.

35. Q & A

36. Let’s do an exercise
Would you have invested in
early days of say Canva, Notion,
Zoom, Slack, Freshworks?
Let’s pick 2 companies and do
an evaluation on the parameters
we talked about.

37. Thank you
Connect with me on Twitter @pallavn

38. Know why you are doing it.
• Start-ups is a conviction game. Not a speculative game.
• Passionate about a company / space
• Want to learn vicariously
• Treating it as an asset class in your financial portfolio
• Want to be a fund manager sometime in future and this is
your proof of pudding
• Bragging rights