Indus Khaitan, CEO and Co-Founder of Quolum, appeared as a guest on the “SaaS Scaled” podcast, hosted by Arman Eshraghi, CEO and Founder of Qrvey, provider of embedded analytics for SaaS applications. Indus and Arman discussed advice for founders on seeking investors, how investors are influencing the SaaS market, how the tech neighborhood became dirty, and more.
You can watch or listen to the podcast here and we’ve covered some highlights of their discussion below.
Acquire seed funding & move fast, versus grow slowly?
As an entrepreneur starting a business, at the top level you have to decide if you’ll bootstrap or if it’s a venture-ready business. I think that decision point is not easy, but could be made depending on who you are as a person. If you have money stocked away, you can bootstrap.
In venture-ready business, as a founder, I consider the product I’m building.
- Am I going into a commoditized market?
A great example is a CRM or marketing automation tool. When building in a commoditized market, many times we think we need a lot of money, and we’ll get bigger faster because there are hundreds of other players. In many cases, that becomes short-lived because customers already know the solution. You throw money at the problem to acquire them, and that rapid burning may not lead to a product/market fit.
If you’re building in a commoditized market you need to have that much capital, but still the trajectory is in question. You still have to have a niche – why customers will buy your product rather than a competitor’s.
2. Am I creating a new product category?
In one hundred percent of cases, with newer categories you cannot throw money at the problem. You must:
- Iterate
- Experiment
- Talk to customers
- Build it out
- Have a product/market fit
Only then are you ready to scale.
Conflating commoditized markets & new product categories
The problem that I see in venture capital business, both of these get conflated. Investors, depending on their agenda, will force you to go to market, raise money faster, do one round after the other without proving your thesis, irrespective of whether it’s commoditized markets or newer categories.
Once you reach a quarter million to half million in revenue, you can put in more money as jet fuel. This is where we see that some companies have not been built sustainably, and this is what’s happening today in the Valley. Companies have raised a lot of money in the last two years, and now they’re going to do a down round or layoffs, and it hurts the employees, the cap table, and the customers.
It’s not a sustainable way to build a business.
What advice would you give founders regarding seeking investors?
The first question I always ask is, What are you building? If you’re building something which is new, you have to nurture that experiment for at least a couple of years. You don’t know:
- Whether there are buyers of the product
- If buyers are ready to pay for it
- If they’ll pay enough to be profitable long term
The mistake founders make is exactly the opposite. They:
- Think their business is venture-ready
- Think they have product/market fit in month 3 or 4
- Have 10 customers who are friends & it’s a wrong product/market fit
- Raise money too quickly from series A or institutional investors
- Investors put the founder on a timeline to show revenue growth & traction
But behind the scenes, if the business is not ready to show traction and you don’t have product/market fit, you’re going to acquire “false” product/market fit. You may acquire customers through performance marketing, but it may be the wrong set and they will churn after six months.
So, the advice I would give founders is figure out what you’re building. Is it a better product in a commoditized market, or a new product category?
Second, don’t talk to just the 10 customers who are in your network. Do a LinkedIn outreach to second-degree connections, people who will give you the middle finger because they don’t know you. That is the feedback you’re looking for.
Is the SaaS market overly influenced by investors?
Yes, because in the last five years, people have become aware of how fast SaaS compounds. A dollar today can rapidly grow to one million then 70 million in revenue just by the laws of compounding. Hence SaaS has become a favorite destination for deploying capital, not just in private markets. If you look at the public market, the likes of Snowflake, Okta, Datadog, or Zoom have hundreds of billions of dollars in valuation because public market investors have also woken up.
Celebrating the wrong milestones
When we celebrate funding, I think we are celebrating the wrong metric. We are celebrating unicorn valuations as if the company has won the war, won customers, and distributed wealth to everybody who was involved, from investors to founders.
If we look back, it made sense to celebrate that there were companies with billion dollar valuations, because the craziness was not there. But what happened is the tech neighborhood became dirty. Everybody wanted a unicorn valuation, and all sorts of financial engineering is done to achieve that status.
If I am a customer, what does a unicorn status give me? Nothing.
As a kid growing up in India, I remember a neighborhood bridge was supposed to be built over a small river. One day, we found out the bridge would not get built because the person who took the debt from a local bank ran out of money. There was no celebration before, when he was first awarded the contract. The only celebration that was supposed to happen was when the bridge was opened for the public.
If you equate that to venture capital, I am borrowing money from someone to build a business. My job as an entrepreneur is to deliver that business to my customers, and hopefully in the process, return that investment in multiples back to the investors and participate in that win.