Indian SaaS Investment Space Comes of Age, Silently!

November 3, 2014

Amidst the headline grabbing investment rounds of some of the leading ecommerce and consumer internet companies in India, the silent rise of investor interest in Indian SaaS plays has attracted much less attention. Historically, India has been an IT Services led Technology industry, with globally relevant technology product companies in single digits till 2010. However, with SaaS models taking root globally, India has seen the emergence of several globally competitive SaaS players including the likes of Zoho, Freshdesk, Druva, Rategain, Pine Labs and Capillary Technologies to name a few. Key reason for this is that in SaaS geographical location becomes irrelevant (the product is delivered online) and in particular in the SME space there is increased acceptance of buying SaaS subscriptions online. This in turn is leading to a strong investor interest with larger check sizes at higher valuations becoming more common.

Let’s start off by looking at the overall picture over the last few years. We have focused here on investment quantum of US$ 1mn and above as a proxy for Series A and higher rounds.

India SaaS Blog Post_Chart 1

Source: VCCEdge and Signal Hill Capital estimates, Only Software investments >$1mn considered for analysis; YTD 2014 data as of 31 Aug, 2014

As can be seen from the above charts, SaaS deal volumes have increased sharply in 2014 compared to previous years with an even sharper jump visible when one looks at Deal Value. The fact that 2014 data is only till August 2014, makes the uptick even more impressive. This significantly increased deal activity is even more evident if one looks at a rolling 12 month investment activity, as depicted in the charts below.

India SaaS Blog Post.Chart 2

India SaaS Blog Post.Chart 3

But the most fascinating aspect of this heightened interest is the valuation multiple expansions that has been seen in 2014 compared to previous years.

India SaaS Blog Post.Chart 4

Do note that since we are dealing with private companies here, valuation details are available only for a subset of the investments. We have relied on VCCEdge data (and our specific market intelligence, where relevant) and eliminated outliers to make this data more accurate and representative.

As can be noticed, there is a sharp increase in average valuation multiples in 2014 compared to previous years. In fact, based on our tracking of US SaaS valuation multiples, we contend that 2014 vintage SaaS investments in India have in fact happened at a premium to the prevailing US valuation multiples in the same space. Now, this is quite significant given the general perception amongst entrepreneurs that price discovery for IP plays in India lags the Silicon Valley. While this assertion may have been true in the past, evidence is mounting that valuation discounts in India compared to the Silicon Valley have all but disappeared for the SaaS space.

So what’s really happening here? Why this sudden excitement in the investor community for India based SaaS offerings? What are the common threads between SaaS companies which have been able to breach $100mn valuation milestone? Let’s try and distil some common threads from the more successful SaaS players.

  1. Globally relevant players – Most of the larger SaaS companies in India are competing globally (and successfully) for clients, talent and product. Given that the top 2-3 players typically end up owning a disproportionate share of the global market opportunity (for that category) in SaaS, there is a strong investor appetite for these assets. As an example, Freshdesk competes head on with a Zendesk, Fusioncharts with a Highcharts and so on. Two factors are really fanning the strong tailwinds here – Global market access at low cost, and Availability of world-class engineering talent in India. Given most SaaS offerings actively target SMB and mid-sized enterprise customers as primary customer base, significant chunk of sales for SaaS players are increasingly conducted online, supported by phone/ chat based inside sales. Also, with world class product talent from either global product MNC’s (SAP, Intel, Cisco, Facebook, Google) that have large product development teams in India or US based Indian diaspora that want to return to India, India now has the talent ecosystem that has been so fundamental to the success of Silicon Valley.
  2. Attractive underlying metrics – Lifetime Value to Customer Acquisition cost (LTV:CAC), Billings Growth and Churn are the triumvirate that pretty much define how solid a given SaaS business really is. LTV:CAC is a measure of sales efficiency, and ultimately long term profitability potential of a business. Billings Growth (and not Revenue Growth) is the true measure of growth and momentum of a SaaS business. Finally, Churn (actually measured as Customer Churn or Revenue Churn) measures how well a business is retaining its customers (high churn = leaky bucket problem). Globally, an LTV:CAC of 3x is considered par value and 5+ is considered excellent. A QoQ Billings Growth of 7-8% is pretty much a par score and 12-13%+ ranks as best in class. Finally, a <10% revenue churn rate p.a. is in line with industry average and <5% is considered outstanding. We are now seeing several businesses reigning in the “excellent” bucket on at least 2 of the 3 metrics outlined above, and a number of them with all 3 metrics showing green. Needless to say, these are hotly pursued assets for the investor community.
  3. Compelling cash flow profile with scale – By definition, SaaS models front load customer acquisition cost with a long tail of recurring revenue. Combined with typical gross margins of ~80% and low capex spend, SaaS companies exhibit a hockey stick free cash flow curve and massively expanding operating margins as marketing spend as % of sales comes down with scale (because of decline in new sales as % of total sales). They key factor in all of this is, of course, scale. While most Indian SaaS companies are sub US$ 5 mn currently, we are seeing several SaaS players crossing the US$ 10 mn Revenue hump in just the last 12 months and expect at least 3-4 companies to cross the US$ 25 mn Revenue hump over the next 12 months.
  4. Exit potential – The scale threshold for listing SaaS companies is much lower than for several other segments. Additionally, it is easy to visualize strategic exits for these companies with the likes of Oracle, IBM, Salesforce amongst the traditional software companies and Vertical/ Horizontal SaaS leaders in respective segments being highly active acquirers.


These are exciting times for product companies out of India. Strong investor interest coupled with significantly improved valuation multiples, make it an ideal time for raising growth capital. Aside from Zoho, which if it were to list would already attract a multi-billion dollar market cap, we see a strong likelihood of several other Indian SaaS companies breaking the $1bn valuation barrier over the next couple of years. The silent ascent of Indian SaaS players will then be truly complete!

Themes from OASIS

March 13, 2014


Signal Hill recently had the pleasure of being a marquee sponsor of OASIS: The Montgomery Summit, an inaugural event that was held in Santa Monica, CA on March 5th and 6th. The event, a reincarnation of the former Montgomery Tech Conference, brought together approximately 150 technology companies with both national and international investors and corporate development executives. Each of the technology companies had the opportunity to present his/her company – to discuss capabilities, success stories and strategic growth plans. The event also showcased thought leaders such as Eric Schmidt and Jared Cohen of Google, Deepak Chopra and John Chen of Blackberry, among others.  Here are some of the themes that emerged from the conference:

Tech is Thriving.  The approximately 150 technology companies showcased at OASIS represented small subsets of an increasingly broad tech community – there were companies with capabilities in IT security, email marketing, mobility, data analytics and subscription-based consumer products, among many others. These companies were able to engage with investors and corporate development executives during one-on-one meetings, one of the key aspects of the conference. Investors are always looking for “next big thing” – the sheer number of meetings proved there is certainly no shortage of potential opportunities in the tech community.

Community Engagement is Key.  During many of the presentations, companies made clear that a growing customer base or email subscriber base doesn’t perfectly predict the success of a company – it’s the engagement with these customers that leads to success. For example, with Mashable, an OASIS presenter and leading source of news and information about digital innovation, its success has been dependent on social media sharing and customer engagement. Through engagement, Mashable is able to populate the most relevant content for the consumer, ultimately leading to more viewers. It’s the sharing and engagement that leads to real, growing and measurable success.

The Importance of Disengaging from Technology.  While the OASIS conference was all about technology and how it enables our lives, a key theme emerged from a presentation by Deepak Chopra: disengaging from technology is crucial to our health and well-being. He shared groundbreaking scientific findings – through meditation, mindfulness, exercise and nutrition we can actually stop our cellular aging process. As important as technology is to our businesses and our lives, equally, if not more important, is taking the time to disengage. It will make all of our interactions more productive and our lives more joyful and successful.

Projected Security & Risk Trends at the 2014 RSA Conference

February 25, 2014

The 2014 RSA conference for cyber security vendors and related service providers opens this week in San Francisco to the strongest security and risk market we’ve seen to date. Security publics, in particular recently IPO’ed companies like FireEye and Palo Alto, are riding a wave of investor enthusiasm. Sector M&A volume and multiples are approaching historical highs and VC/PE investment volume is also near its 2007 peak.

The good news is in the bad news, however. At this point, it’s common knowledge that security measures have failed to protect everything from credit cards and Facebook accounts, to websites and classified government data. Simply put, to keep up with breathtakingly rapid changes to our digital lives, the cyber security infrastructures in place today will need to be largely replaced in their entirety over the next five years — and the sooner the better. Security products purchased even two years ago often feel about as up-to-date as the Blackberry you keep in your junk drawer. But these days security is not a luxury, it literally is a matter of success or failure for businesses.  For individual consumers, according to a recent Pew study, security remains the primary driver of whether and how much a consumer will transact over the web.

With security on the forefront of everyone’s mind, the eye-popping investment, trading and acquisition multiples that have become commonplace over the last two years make sense, especially when considering the refresh/replace cycle underway in security and risk spending.  

Although it is not always clear which vendors will benefit most from the current security wave, one can be sure that many of them will be at the RSA conference this week. RSA remains the premier event for showcasing what is new and innovative in the security and risk industry. RSA events have consistently spotlighted smaller, private security companies that were subsequently snapped up by larger ones. It’s this fact that makes RSA a trendsetter for what is important, as well as hotbed of transactional activity.

So, what are 2014’s trends to notice? Based on research and anecdotal evidence, we think they’re Security Intelligence Platforms (SIPS), Identity Management, Anti-Malware, and Managed and Cloud-Based Security (all detailed below).

Security Intelligence Platforms (SIPs). Gartner Research recently published a report highlighting the mega trend of SIPs. As in business and war, those who know the most the fastest win. Basically, networks, applications and data each require a set of integrated security applications to cover the Prevention, Detection, Defense and Response cycle on a continual basis. Rapidly morphing threats and organizations need a Big Data driven all-seeing eye (viewer) and remediator (doer). Easier said than done…remember the self-defending network? The SIP concept, which consists of many companies each tackling a piece of the challenge, is already used by such stalwarts as IBM, HP and Splunk on the backs of their SIEMs. It’s sure to be a topic of conversation at RSA.

Identity Management. This is not traditional authentication and access, but clever and advanced ways to see and control who does what. It includes exciting new business and consumer authentication approaches. It also relates to fraud detection, which relies on determining identity and associated rights. Finally, identity management touches upon tracking user activity to baseline — this ties into the all-encompassing SIP and is called Identity Access Intelligence.

Anti-Malware. This space remains highly profitable for the big antivirus vendors and is overdue for reformulation. APT technologies are an important aspect of this, as are whitelisting, new behavioral detection and other technologies that improve the ability to recognize morphing and multi-stage threats, to quarantine and block them, and to discover them more quickly after-the-fact. This remains an area rife with innovation.

Managed and Cloud-Based Security. This area is an expansive opportunity. As more organizations move IT to the cloud, they want to do the same with security and analytics, hence the rapidly growing demand for security in the sky.

RSA has always been both a platform for large companies marketing their newest messages, and a coming-out ball for the newest vendors. This year, more than ever, it is also a barometer of how well the industry will do in the coming year to prevent more jaw dropping thefts, attacks and compromises that directly threaten our virtual well-beings.

Written by:

Don More

Managing Director, Security & Risk Investment Banking – Signal Hill

Follow Don More on Twitter: @SecurityBanker

Signal Hill Publishes Q4 2013 Market Snapshots

February 6, 2014

Signal Hill is pleased to announce that is has published its Q4 2013 Quarterly Market Snapshots for the following sectors:

Mandiant Acquisition a Bargain for FireEye

January 21, 2014

ImageFireEye’s recently announced acquisition of Mandiant highlights ongoing heat in the IT security sector, particularly in advanced threat protection and remediation. While at $1B (roughly 10 times Mandiant’s 2013 revenues), a sizeable transaction for FireEye, the deal was cheap — even a steal — for the buyer.

The purchase price, which was financed primarily with FireEye stock, represents a big discount to FireEye’s revenue trading multiple. It is also lower than Mandiant’s estimated 40-50% 2013 sales growth would imply, based on regression analysis of historical security acquisitions. In addition, Mandiant was a viable IPO candidate, which empirically tends to drive up a target’s asking price.

Strategically, the buy is a slam-dunk for FireEye. The Mandiant acquisition expands FireEye’s addressable market considerably by completing advanced threat detection with the addition of remediation, thereby differentiating FireEye’s solution in a market that has become increasingly competitive. As important, Mandiant gives FireEye intelligence from millions of endpoints and provides FireEye much improved presence with the Fortune 500 and U.S. government. Mandiant’s added scale and the complementary customer base provides impressive cross- and up-sell opportunities, considerably shortening FireEye’s path to profitability.

Impressively, FireEye had an inside track on the acquisition by virtue of a partnership signed with Mandiant a year ago, which effectively gave FireEye a year to conduct due diligence on its target. This also greatly reduced integration risk and time. Hats off to Messrs DeWalt and Gonzalez.

Unsurprisingly, public investors drove FireEye’s stock up 33% on January 3, the day of announcement, from which it has continued to rise, as of this writing. This raises the question — could Mandiant have held out for more?  And also: Who’s next? Carbon Black and Countertack are a few names that come to mind.


Written by:

Don More

Managing Director, Security & Risk Investment Banking – Signal Hill

Follow Don More on Twitter: @SecurityBanker

How Best to Position Your Company for a Strategic Exit: Insights from IMPACT 2012

November 14, 2012

The IMPACT 2012 Conference was held last week in Philadephia, PA.  The conference, organized by PACT, the Greater Philadelphia Alliance for Capital and Technologies, brought together a group of venture investors, private equity sponsors, CEOs of small technology businesses as well as advisors to these three groups.  Signal Hill co-sponsored a Corporate Development Panel along with Silicon Valley Bank; Signal Hill Chairman & CEO Scott Wieler moderated the event.  Panelists included Rob Thomas, VP of Business Development at IBM, Cherie Whitney, Senior Director of Corporate Development at EMC and Bob Pick, Senior VP of Corporate Development at Comcast.  While many important themes and insights resulted from the panel, we thought it would be valuable to aggregate recommendations for companies looking to make a strategic exit.

ImageNon-Deal Roadshows.  When preparing for a strategic exit, relationships are the stepping stones to getting deals done; they lead the way into a company’s portfolio.  Non-deal roadshows, which are basically introductions of your management team to the acquirer’s management team and/or relevant business unit heads, are most effective if started as early as 18 months to 2 years before you plan to exit; while you’re sowing the seeds for partnership and potential acquisition, you also make your company available for funding from the VC/strategic investment arms of the strategic acquirer.

Market Your Company to the Business Unit.  Catching the eye of the corporate development division at a strategic acquirer is key since it is often the gatekeeper, but that’s just the first step.  When feasible, it’s important to market your company to the operating group or business division that will be sponsoring or “championing” the acquisition; the group that will ultimately be managing the day-to-day operations of your business.  Business unit buy-in is integral to moving a deal forward.  Of potential deals with business unit buy-in, it is roughly estimated that only 10 to 15 percent get done, meaning that without buy-in, the chances of closing your deal dwindle drastically.

Make the Case for Cross-Selling.  Strategic acquirers are always looking for synergy between businesses – that synergy isn’t limited to offering a complementary product or service.  It’s important to make the case that your product will sell to their customers and that their product will sell to your customers.  The opportunity to cross-sell makes your company a good fit, an essential part of the greater business.

Make Your Passion Palpable. Most strategic acquirers claim they can tell within the first 30 minutes of a management presentation how excited you are about your business and your people, versus just being in it for the money.  Dedication level and passion for your business is often easy to gauge, especially for large companies who see management presentations every week.  If you genuinely want to stay with your business, see it grow and become an integral part of a greater entity, conveying passion is fundamental (and should be easy).

Continued M&A Activity in the Medical Transcription Space

July 9, 2012

  The medical transcription and speech recognition market just got even more interesting.  Following on the heels of Nuance Communications’ acquisition of Transcend Services for $302 million in March at a 2.5x revenue multiple, One Equity Partners (the private equity arm of JPMorgan Chase with $11 billion under management) last week announced plans to acquire M*Modal, Nuance / Transcend’s leading competitor in clinical transcription services and speech recognition solutions.  One Equity is paying $1.1 billion for M*Modal, or $14.00 per share, an 8.3% premium over the closing price prior to the deal’s announcement.  This valuation represents approximately 2.5x M*Modal’s trailing revenue.

Having recently released its next generation of healthcare speech recognition solutions, M*Modal will be able to advance its leadership position in the transcription industry even faster with One Equity’s sponsorship.  In particular, we believe that M*Modal is likely to consider acquiring one or more transcription services vendors, in the same manner that Nuance acquired Transcend.  Transcription services vendors enable speech recognition providers with a means to better disseminate their technology solutions and develop closer, continuing client relationships.  In addition, One Equity Partners has a history of growing its portfolio companies through acquisitions, and has a demonstrated understanding of the healthcare landscape through its other investments in Wright Medical Group and Apollo Health Street.

Bottom line: One Equity Partners’ acquisition of M*Modal reaffirms Signal Hill’s outlook that consolidation is in the near-term forecast for transcription service vendors.


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