Kissflow's Suresh Sambandam: SaaS products at threat; firms must innovate

Excerpts from the interview:

MudhalVC takes a sector-agnostic approach, investing in areas like food, influencer marketing, and edtech. Why did you adopt this approach, and what specific qualities do you look for in a start-up before deciding to invest?

MudhalVC is a geo-focused venture capital firm dedicated to Tamil Nadu. While the state may not be large, we have a clearly defined target audience and niche. Unlike typical VC firms, MudhalVC operates more like Y Combinator in the US, supporting idea-stage companies. Many of our entrepreneurs come to us with just an idea, which has led to us being funnily dubbed a "namestage" company. We've even played a role in naming some of the start-ups we've invested in, like ‘Bad Boy’, ‘Amura’, and ‘Mushroom Mama’, ensuring that their names resonate with the problems they aim to solve. This unique approach sets us apart—not just in India, but globally. We're committed to fostering innovation from the ground up, shaping businesses that are closely tied to the local context and community.

You’ve mentioned wanting to be the Y Combinator of Tamil Nadu, which is quite ambitious. Looking at YC’s investment data, around 30-40 per cent of its investments are in software, with 25-30 per cent concentrated in e-commerce and fintech. Do you have specific preferences or focus areas in your investment strategy at MudhalVC?

We primarily focus on B2B software, particularly in Artificial Intelligence (AI) and SaaS, as that aligns with my background. Aravind Suresh, our managing partner, has a strong background in food, so he’ll concentrate on that sector. D2C ventures are also a natural fit for us. Additionally, we’re open to innovative projects like Trashbotics, which tackles waste segregation—a crucial issue for the climate. While we don't have strict rules, we do have preferences, and we're always eager to invest in start-ups that have the right idea.

How much money would you be looking to deploy? Are there plans to raise third party funds?

We plan to invest ₹25 crore in the initial phase, followed by an additional ₹100 crore in phase II. Over a four-year timeframe, we aim to deploy a total of ₹125 crore.

When examining the start-up ecosystem, it's evident that Bengaluru-based start-ups have secured about 50 per cent of total funding, with Delhi NCR and Mumbai following closely behind. Why do you think Chennai hasn't achieved similar levels of start-up funding and growth?

Since the new government took office in 2021, we've seen significant developments in Chennai's start-up ecosystem. While I don't want to place blame on any specific party, it's clear that there was a lack of focus on start-ups over the past decade, particularly from 2010 to 2020. This was a crucial period for the growth of product companies, and we've now fallen behind compared to other states that have advanced significantly. While it's unfortunate, rather than dwelling on the past, we need to concentrate on bridging these gaps and working to catch up.

With global venture capital funding declining 30 per cent in the first quarter of 2024, some say the VC party is coming to an end. Bootstrapping is seen as a better alternative where the climb might be slow but still sustainable and reliable. Interestingly, you have also been able to successfully run a bootstrapped SaaS firm Kissflow. What’s your take on this bootstrapped vs VC debate?

Honestly, it's not a useful debate. We need to recognise that some firms are like rockets, requiring VC funding, while others operate more like steam engines, thriving on traditional resources. For instance, with Kissflow, we didn’t anticipate it becoming a billion-dollar company until the advent of Gen AI, which transformed our scalability challenges. Initially, reaching business users was difficult, but with Gen AI's LLM-based approach, it became much easier. As we seek funding now, our mindset isn’t fixed on either bootstrapping or VC funding; we’re focused on choosing the approach that best fits the company's needs. There’s no preset notion guiding us in this regard.

The debate around bootstrapping versus VC funding often arises from start-ups struggling to achieve profitability. For instance, Paytm has faced challenges in this area despite significant funding, while Zomato is only now finding its footing post-IPO. In contrast, bootstrapped companies like Zerodha and Zoho, your competitor, have successfully navigated this landscape and achieved profitability.

Zoho isn’t a direct competitor for us; they compete with major players like Microsoft and Google due to their diverse product suite. There’s often confusion around the path to profitability. For instance, if a company is growing at 60-70 per cent year-over-year but incurs a 20 per cent loss, that’s still acceptable. Not every company needs to be profitable right away. However, if growth is only 20 per cent with a 20 per cent loss, that’s concerning. Investors typically look for a "rule of 40," meaning that if a company is growing at 100 per cent, it can sustain a loss of 40 per cent or even 60 per cent. The real issue arises when a company stagnates and fails to grow. Unfortunately, the media tends to simplify this discussion, focusing on headlines about profitability without grasping the nuances involved.

We’re here at CTOtalk where India’s top engineers are brainstorming about AI. While we continue to hear digital solutions being AI powered, tell us how is AI enhancing the value of SaaS-based products?

There’s a significant threat facing SaaS products today. Many of them, including CRM systems like Salesforce, often boil down to glorified data entry applications. Users are stuck navigating multiple screens to input data, analyse it, and generate reports. This workflow is being increasingly challenged. Simply adding AI to existing SaaS products isn’t a sustainable solution; there needs to be a fundamental rethinking of how these products operate. If companies don’t innovate and refine their offerings, they risk falling behind in a rapidly evolving market.

Are you saying Tamil Nadu should be prepared for layoffs, considering the significant number of engineers employed in SaaS companies?

Yes, there will definitely be challenges. While I can’t say for sure if there will be layoffs, I do think we’ll see gradual changes. New companies might emerge, but the real concern lies with investors and employers who have made significant investments. Employees, on the other hand, can usually find new opportunities more easily.

In your interview with Forbes, you talk about plans to reach $100 million in revenue within the next two to three years. Given that you currently have 1,500 paying customers and a substantial number using your legacy free plan, how close are you to this target? What strategies are you implementing to build and diversify your revenue streams?

We’re focusing on leveraging Gen AI to accelerate our growth. Our goal is to use it as a key driver to help us reach $100 million. That’s about all I can share for now.