[CTQ Smartcast] Understand The Founder's Choice Architecture With The Value SaaS Expert, With Prasanna Krishnamoorthy
Prasanna Krishnamoorthy is a partner at Upekkha, an accelerated early-stage fund for SaaS start-ups. They help founders build a value SaaS which is a capital-efficient business that creates great outcomes for all stakeholders.
In this Smartcast, hosted by CTQ co-founder BV Harish Kumar, we have discussed in-depth about vanity and value SaaS, and what is a revenue flywheel. We also spoke about the founder's choice architecture and the different risks founders attract to mitigate through the lifecycle of the start-up.
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SOME OF THE THINGS WE SPOKE ABOUT
What is start-up BS detection?
Why is it important for founders to understand the underlying business dynamics of the company?
Innate qualities of a coachable founder
The selection process at Upekkha and the journey thereafter
Founders’ choice architecture
Why is it important for employees to know the founder’s thinking?
Different stages in a life cycle of a start-up
PLUS
Future relevance of traditional start-up centres, incubation centres and entrepreneurship courses.
AND
Future relevance of the Olympics
LINKS TO BOOKS AND PEOPLE MENTIONED IN THE SMARTCAST
BOOKS
The Goal by Eliyahu M. Goldratt
Selling The Wheel by Howard Stevens and Jeff Cox
Necessary But Not Sufficient by Eliyahu M. Goldratt
PEOPLE
Thiyagarajan Maruthavanan (Rajan) - Partner, Upekkha
OTHERS
If you enjoyed this Smartcast, you will also like 'A VC's Guide To Staying Future Relevant, With Amit Somani'
TRANSCRIPT OF THE EPISODE
00:00:00
Harish: Prasanna Krishnamoorthy is a partner at Upekkha, Value SaaS Accelerator. Upekkha is an accelerated early-stage fund for SaaS start-ups. They help founders build a value SaaS, that is a capital-efficient business that creates great outcomes for all stakeholders, as opposed to vanity SaaS, which is raising too much too early without solving unit economics. The value SaaS way helps founders build a revenue flywheel engine for capital-efficient growth, first. So, in this Smartcast, Prasanna has explained in detail about vanity and value SaaS, and what this revenue flywheel is all about. We also spoke about the founder's choice architecture and what are the implications of different options founders have at different stages. One big takeaway for me was how Prasanna explained the different risks founders attract to mitigate through the lifecycle of the start-up. If you are a SaaS founder, I will go to the extent to say that you must listen to this episode and share it with every founder you know and also strongly recommend this to you, if you are working in any start-up, whether SaaS or not or are considering joining one. By the way, this is the first CTQ Smartcast with an Olympic medallist, even if it is a self-styled medal at detecting start-up BS, so do check it out.
00:01:41
Harish: Hi Prasanna. Welcome to the CTQ Smartcast.
00:01:45
Prasanna: Hey Harish, thanks for having me.
00:01:47
Harish: So, we usually start with a curveball for all our guests. But I think this is right down your alley. I'm expecting you to dispatch this to the covers’ boundary, but what do you know about start-up BS detection that others don’t?
00:02:03
Prasanna: So, I think the easiest person to bullshit is yourself. So, I think I did that for a fair bit of time for myself and told myself a lot of bullshit in the first couple of start-ups that I was in. And I also realised that there were a lot of advisors who were giving us very good advice, but in many cases, they would couch the advice. They would say it in a way that was very nice. And, as people in start-ups, we are very thick-skinned. And so, if somebody says something that's couched or said gently and nicely, it doesn't sink it, right? And if somebody says something that is 25% nice and actually 75%, they're trying to give you bad feedback, you only hear the 25%. You don't hear the 75%. So, I realise that, while a lot of people had given us good advice, the way they had said it was also in a way that didn't sink in for us and for me. So, I realised that it's easy to fool yourself. It's easy to bullshit yourself and to get through that is not easy. So, as founders, you have to believe that there's going to be a future, which is rosy while walking on a bed of thorns. That means that you have to believe your own bullshit for a little while, otherwise, you're going to be like, man, my feet are bleeding, let me get off this bed of thorns. So, that is the hardest bit. So, once I realised that I have to be able to detect my own bullshit, when am I selling bullshit to myself, then I realise that I'm also getting better at detecting other people's bullshit. And many times, it happens that many people have told them that. But again, many people have told them that in a nice, polished way. And the founder is like, oh yeah, well, what you are saying sounds great, it looks like you like what I'm doing, let me continue. While the feedback is exactly the opposite. So, I decided that I have to be very blunt. And so, I actually, one of the things that I want, lots of founders and I started talking is, I don't know if somebody wants to do it, but I'm very blunt because that's the only way to get through that thick skin and break that bullshit. So, that's why I gave myself an Olympic medal in bullshit detection because it helps the founders. I truly do it because it helps the founders. I think, in our ecosystem, in our culture, we misunderstand being nice and being kind, right? So, I want to be kind, I don't want to be nice. And so, for me being kind means that if I have to be a mirror and reflect something to a founder which is not pretty, I will rather do that, than apply a Zoom filter where they look nice in the mirror, but that's not being kind in the long-term.
00:05:01
Harish: Yeah, very interesting. Because just yesterday evening I was having a discussion with my co-founder, and we were talking about our clients who are founders, typically having this reality distortion field and it is needed for them to go ahead. In fact, I was joking, that there are five chairs here and the founder is going to believe that there are 15 chairs, and he is going to make that happen. He might get close to 12, but after a point of time, they need to also start accepting reality, right? And that doesn't mean toning down their aspirations, but just starting to think more about systems, processes, understanding their own negatives, if you may want to call it or areas of improvement. And that's where usually this challenge comes and there's this tension that you're sucking the soul out of my start-up and so on. So how has this bluntness of yours been taken by people that you interact with?
00:06:05
Prasanna: So, I realised that when I want people that I'm being blunt, it works much better. And today, the good thing is in the B2B SaaS ecosystem people are sent to Upekkha saying that they will tell you as it is. So, people come in for one that, okay, this is not going to be pretty. So, that helps prepare folks that, okay, this is not going to be like where everybody else is trying to sugar coat. So, I think that has helped a lot. But there are many cases where we've literally brought founders to a realisation that they should probably move on from this start-up. And that has happened. That is something that we've done quite a lot of times where, I'm not saying, hey, you should shut down or something like that, but we provide them comparisons. We have them talk to different people, tell them these folks are in these kinds of places and therefore, what are you telling yourself? So, one of the tools that work in this area, and I literally was talking to a founder yesterday or the day before where I was saying this is that a lot of our founders in the B2B context, become code sevaks. So, they want to do seva to others. They end up doing code to do seva. In many cases they're not getting paid enough, right, so they don't have unit economics. So, if you don't have unit economics in a B2B, essentially, you're doing seva. And you should do seva for somebody who is poor or is in an orphanage or whatever like that. But you are trying to run a profitable business, is my assumption, then why are you doing seva to a business. The customers’ goal is to make a profit. Your goal is to make profits, how does it make sense to do seva for someone else in the form of code? And that hurts a lot of tech founders. And then the concept that we are trying to drive is, every line of code that you write, how profitable is that for you? It's not just about, okay, X number of people are using it and/or whatever. You might've sold it, but actually, in most cases, 90% of the code is not even used because they built so many features which are not being used at all. And the founders don't want to accept that. So, that is the bullshit that we're talking about. So, I built a product nobody is using, in the extreme case. I built a product, 90% of it is not being used. I'm building several new features, thinking that it will get me more revenue, but in fact, out of my previous N features, N-1 features are not used, only one feature is being used. Now, why do I think that, if I doubled the number of features, double a line of code, suddenly revenue will also increase? It is not going to happen. But founders are so attached, and they bullshit themselves saying, this customer uses this feature. But have you gone and actually checked? And one of the things that we make people do, for example, instrument your code and tell me which feature is being used and how much. And they don't want to do it because they know what it is, they know the answer, right? So, they don't want to because then they'll have to face this feature, which they spent 18 months building and only one customer out of 40 customers is using. And you spent probably anywhere between a hundred thousand dollars to half a million dollars to build that feature, only one customer is using it and no customer is buying. And now you're telling me that you have another list of 10 more features like this, which are going to get you more sales. Then I don't have to ask anything beyond that, right? The founder looks at it and he or she is like, okay, I see what you're saying. But getting them to see that is not easy.
00:10:19
Harish: Yeah. One thing that stood out for me was that people are being sent to you to get the blunt news. So, they are probably self-selected then. They know that I'm here forewarned that Prasanna is going to blow me into smithereens and I need to be ready for it. So, how do you deal with somebody who's not ready for this?
00:10:50
Prasanna: It's the same. I just tell them I'm going to be blunt. I'm going to tell you this. If they don't know me from before they get a shocker. I've had cases where one of the founders still tells people that I spoke to Prasanna in 2015 and he told me certain things, which I didn't understand. And then two years later I realised that we had just committed a lot of mistakes that he said we should not do. But only after I committed these mistakes, did I realise that that's what he was trying to warn me about. So, I have quite a few cases of people remembering that. I have quite a few cases where people said, thank you for saying that because we've spoken to lots of people, but nobody has actually said it clearly. It's not like people were not telling them, but nobody told them in a blunt and transparent way. Some people get pissed off saying, what do you know about this? And I'm like, sure man, it's your business. You run it the way you want to. I have seen a lot of B2B businesses. If you're a B2C business, I'm not even going to comment on your business, right? I have lots of people asking me for feedback on their B2C businesses and I say, I don't know enough. I have no clue. I don't want to know more about B2C business. But if it's B2B, then I have seen, literally spoken to probably 1000-2000 founders in B2B. I've seen various SaaS models. So, I can bucket you into, where you are compared to other founders who are trying to be on the same journey. We have some very good mental models for B2B and SaaS. So, when I put your start-up into that mental model, I get some conclusions fairly quickly, which may be difficult for you to understand. But I usually try to explain the framework. We've written about a lot of those frameworks and referred them to see a particular video, then you might get what I'm saying. So, we are able to jump to that kind of a potential set of issues that people come into quickly. So, most people take it well and I try not to comment on areas, which I have no clue about.
00:13:21
Harish: So, one thing that I've noticed is, usually founders at least start with the assumption that whatever they're doing is unique. It's the first in the world that's happening, but other times the articulation of the product or solution might be very unique, but the underlying core business metrics usually are similar, if not the same, right? So how difficult is it for these engineers or tech founders, to build that appreciation for the underlying business dynamics of the company?
00:13:59
Prasanna: Yeah. So, the internal company metrics for a B2B company are mostly similar, but at the stage at which we are typically working with founders, the internal metrics don't matter. There's nothing. So, what matters is the external things, and the external things typically are much more qualitative than quantitative. And so, most of the time, what we are trying to do is help founders get into the customers' and the prospects' heads and figure out which customer has problems that are worth solving. So, we don't think about it as unique. That's not what we're trying to address at all. I don't care. What we care about are B2B SaaS businesses, B2B businesses and most B2B businesses are very boring. They're not exciting. Trying to help somebody, who's a manager or an employee in another company, do their job better. So, it is not rocket science. So, you're trying to figure out, who are these people, what problems do they have, do enough of them have problems that are worth solving because those problems are urgent, those problems are high value, those problems are repetitive, and it's a problem that you can solve. If these things are covered and you're solving the problem with the software, you can get a recurring payment for it, whether it's monthly or annual. Given the Indian DNA and Indian cost structure, you can make a lot of money. That's the maths. It's not rocket science. Now the challenge comes when founders are not looking at one unified customer persona and they are trying to build something for five different customer personas or you think it's the same customer persona, but actually, customers of type A and type B and type C are very different, even though they might be in the same industry. That's something else that is differentiating. So, for us, it's not about the metrics. It's about the key concept that we try to get founders to understand is problem value. Are you solving a valuable problem? If you're solving a valuable problem for people anywhere in the world today, the internet helps you have your website as a salesperson and sell to anybody anywhere in the world, 24x7 and make money while you're sleeping. But figuring out how much is the problem value? Is it high? Is it low? Can I quantify it? Can I not quantify it? Is it repetitive? It's urgent, it's not? Who is it urgent for? Who is it repetitive for? Who is it high value for? That is the struggle for most founders that I've seen. What you're saying from a metrics perspective is more about org scaling, where founders might be generalists or founders might be specialists and they don't have enough of an understanding of the entire system, to put a system and a process into place. So typically, we see that stage after the half-million or a million in revenue where they need to transition, and we do something for them in that stage. But again, it's not about the metrics. It's about what you said a little earlier which is, what is it, the founder and their team good at? What are they not good at? When they look at an org structure 12 months or 24 months down, what does that org need to look for this business to be 3X or 4X of where it is and therefore, can you structure that org with what skills are missing, what gaps do you need to fill and how do you scale that? That's how we think about it. The metrics are more of something that you use to track whether you are on the right path. But in an early-stage start-up, the metrics can't be what keeps you going. They are sparse, all over and don't really add up.
00:17:52
Harish: Yeah. It always has to be the story backed with the metrics, it has to be a judicious combination of both, right? It can be either/or. At that stage, it's very tricky to take that stance. So, coming back to the founders. When you start working with founders, what are the innate things that you are looking for? What gives you this confidence that they are coachable, and they are going to understand this? Like we discussed earlier, they are always thick-skinned and there is already a reality distortion field, which gets them going to start with, but they also need to be coachable, right? They need to start seeing things as they are as well. So, what are the innate things that you see and what are the things that you feel people can learn as they go ahead in this journey?
00:18:47
Prasanna: Yeah. So, my personal philosophy is that anybody can learn anything to varying degrees of success. But most of the traits, most of the things that you need for succeeding in a B2B business, you can be whatever kind of person and you can succeed. The trick is to make sure that you as a founding team have sufficient complementary skills so that you are rounded. But I don't think a single person has to be of a certain kind to be able to succeed. So, the most important aspect in that context is, does a person feel that they can grow, whatever they need to learn because they can't get somebody else to do it. Are they able to learn? Are they able to see reality as is without too much of a rosy tint? And are they ready to listen to peers and listen to others who have been on that journey before and not be defensive and not say I know everything, right? So, that's basically what we look for in founders. So, humility, ability to listen, ability to see the world as it is. If these are there, then I think, and the ability to learn from others. If these are there, I think folks can build a great B2B SaaS business by filling up the team with folks who do well. The challenge comes where some founders who are like, those are the experiences from a coaching perspective, they don’t work out well. So, the founder comes to ask you something, as soon as you ask some more questions and then they answer and then you give some suggestions and they will immediately say, yeah, I have done that, or I was thinking about doing it. If you were thinking about doing it or you were going to do it, then why come to me? Number one. Number two. Go ahead and do it, but there's a lot of defensiveness. I tried but that didn't work and you know that it can't be true because you asked some questions and if they had tried it, then this is not where they would be. So, that defensiveness and caginess of everything that you ask get back some answers and nobody has answers to all questions. So, that becomes more of a ‘Hey, I know what I'm doing’ - what the founder wants to protect, versus ‘This is where it is, how can I get some help?’. And being able to take help from unlikely people and taking lessons from unlikely people is something that's very important because you never know who will be giving you a lesson that you need. And so, a lot of these kinds of founders, they're not able to take lessons from others. They have some mental image that the only person who can help them is maybe a Jobs or a Bezos. So, that becomes a little bit of a challenge. But we have a filter for that. So, we make sure that founders of the second type don't even get into the program, or in most cases, we are not in conversations with them. So, it works out well for us because then the peer group is able to help them a lot more because then they're honest with their problems. In the past, we've had issues where people are not honest with their problems. So, everybody ends up trying to solve something else. That's not your problem, but you wouldn't say this was your problem. You said this is your problem. Then we'll try to solve this together. But if you say, this is my problem, then we’re going to try to solve that together. So that I think is very critical. And so now we kind of create psychological safety within the founders. Between these founders, you should tell the truth. You have to be able to be open, whatever your problems are you going to have to say? Because all the other founders here also have the same problems. Nobody here is without problems, but if you share, then you might get a good answer. If you're defensive, then you're not going to get a good answer.
00:22:50
Harish: So, any quick tests that you can share about how you filter?
00:22:55
Prasanna: So, one is, it's driven a lot by referrals. Two is, we put this person out that we are very blunt. So, there are some folks who come to test that. They just don't want to be part of this, but they just want to see how it is. But for the most part, we have a filter process in the interview process where we just check, what have they done before, how did they respond to feedback, do they ask for feedback, those kinds of things. And it's pretty standard stuff, just applied more rigorously. And if somebody fails that, if there is even a hint of a red flag, that this person is not taking feedback and stuff like that, then we drop.
00:23:46
Harish: Yeah. And if you can quickly talk about the cohort, what happens when someone joins?
00:23:54
Prasanna: Sure. So, the newest cohort started this week on Tuesday. So, we actually start very differently from most accelerators. We actually start with cognitive biases and how to make decisions. So, that's really the first working session where we ask folks to think about what the last decision is, a big decision that they made. What is the last big wrong decision that they made, wrong is obvious in hindsight? Then I actually do an exercise of how cognitive biases shape their decision-making and how as founders, what are some cognitive biases that impact them? So, one is of course a positivity bias, right? So, you get feedback from customers, 10% is positive, 70% is neutral and 30% is negative. You only listen to the 10% and you say, wow, amazing feedback. And then you forget about the 90% which was either negative or neutral. So, that is something that in the early stage hurts a lot because you went to a customer, and you only listened to what they said that it's good to reject what doesn't fit your worldview. Then you walk away thinking I can work with this customer. In fact, the customer was saying, I can't work with you. So, those are the kinds of biases that hit founders. And we try to help them understand the set of biases and how they impact them. And you can't get away from these biases, you can’t overcome these biases, these biases are there in your brain, they are hardwired. So, you can't do anything. So essentially, we're trying to help founders get ways to avoid getting into situations where these biases will have effects. Plan your day better, have meetings when you have more energy, manage your energy, not your time, all of those kinds of things. So, that's how we start the program. And then we have a concept called the value SaaS flywheel. And we believe that if any founders are able to build a revenue flywheel, then they become very capital efficient and they're growing and they're able to take it to a significant scale, at which point they can choose to raise capital, not choose to raise capital, they can choose to scale. So, we are essentially trying to give founders tools for them to manage their biases better, and be better at decision making. Because founders’ number one job is actually decision making but unfortunately, most founders actually don't understand that. And they ended up doing all kinds of things, sometimes avoiding decision-making, sometimes making decisions in a way which is very poor, from a process perspective. So, unless you improve the process of decision-making, you're not going to make better decisions. The number one job is owners to make decisions, everything else, either somebody else can do, or you can do after you make the decision. But a lot of founders postpone decisions, analysis paralysis, and so many other issues out there. We try to help them do that. So that's literally the first week. We don't do anything, B2B or anything SaaS. Then we move on to the frameworks we have from a B2B perspective. Number one is the flywheel. So, we believe that a B2B business is about generating revenue flywheels. So, if you're able to build that revenue flywheel, then you can be very capital efficient. Then you can choose to be a founder forever, or you can choose to raise capital and hyper-scale or you can exit. And now we have start-ups that are doing all three. We have four exits. We have one or two start-ups that have raised a 10 million-plus valuation. And we have start-ups where the founders are basically going to run it forever. They're very profitable. They're making a couple of million dollars of profit a year. They own 100% of the company, Upekkha holds a small stake, but other than that, they own the entire equity and they're very happy. So, the inner flywheel part is a qualitative part. Which geography you are going to, which ICPI you're targeting, within those who have a problem? What kind of problem do they have? How do you do the positioning for them? How do you do the pricing for them? What gameplay do you have for them? These are all qualitative choices and that takes about three months to go to. And then there is the outer flywheel which is more quantitative. It's just, how do I get my leads? Where do I get my leads? How do I convert them? What kind of model is it? Is it land and expansion? Is it freemium? Is it a free trial? Is that free forever, those kinds of things, right? And then get them to become a customer, get them to pay you more and more over time and then get referrals from them. So, this is all stuff that is much more qualitative. This is usually the business of business. So, what we found from a B2B SaaS perspective is, most of the mistakes are in the inner flywheel, the qualitative part. And the symptoms are in the outer flywheel part. I'm not getting enough leads, I'm not converting enough, my customers are churning, all of that stuff. So, what we find is founders come to us with the symptoms and we're helping them identify the root cause, which is typically much harder. And so, we are helping founders fix the root cause from the basics. And then the outside stuff takes care of itself to a large degree. And the outside stuff becomes execution, and you can always hire somebody to execute that, but you can't hire anybody to fix the inner flywheel, you have to do it as founders. So that's the staging of the program. And once these two things are fixed, then it still takes some time for the flywheel to build up momentum and the community is there to help. We are there to help. So, it might take six months. It might take 12 months, 18 months, but we have companies, essentially growing faster now than they were growing five years ago. And they're now doubling, they're doing 2.5X of growth with no capital, at one mil plus range, versus, when they were at $10,000 a month, they were struggling to get to $11,000 a month or $12,000 a month. So, that's the change that we've seen by applying and making sure that the fundamentals work. It's slow, it's not fast. And so, we do it for B2B SaaS founders, B2B founders, but the good part is most B2B founders are okay with that because your sales cycle is also three months, six months, nine months. So, that nothing will happen fast. So, in that way, it's well-aligned. But once you build this flywheel and once you start building momentum around it, it's crazy. We have companies that are at like $4 million in annual revenue, ARR, which are probably doing 2 million in cash profits.
00:30:37
Harish: Yeah. So, let me interrupt you here, Prasanna. So, you spoke about different kinds of companies and founders, from exits to people who are running these things. This is where I wanted to bring that founder choice architecture that we wanted to talk about. So, usually, the standard division that people see is, oh, am I the bootstrapped or raising VC money, right? But clearly, there are smaller segments that you can look at in terms of this universe. And that is the kind of distinction that you are making and getting people to understand and appreciate. And that's how they're taking these different paths. So, if you can just talk about these different choices that founders have, and is it right or wrong, or is it more about making a choice and then understanding the trade-offs?
00:31:34
Prasanna: Yeah. So, one of my friends heard from his mentor that there are three jobs for a CEO. One is, to keep money in the bank. Two is, to make sure that the entire team is aligned and everybody's growing in the same direction. The third is, always have options. So, the third, always having options is called optionality. So, you want optionality, you want to be able to make choices. So, the problem is a lot of founders, box themselves into a place where they have no choice. There's only one path, so you don't have a choice. It's no longer you driving, right? You're being driven by your previous choices. That's it. And so, what we find is that founders lock themselves into such a path too early. One is by falsely thinking that I have to be bootstrapped or I have to be VC funded. That's a false choice. There's no choice like that in the universe. And by locking themselves into that, actually, they don't have choices anywhere. Their universe of choices has dramatically shrunk. What we're saying is if you are capital-efficient, then your optionality is higher in the future, than if you are capital inefficient, right? Because if your balance sheet is red, then you are dependent on capital providers. And the golden rule, if you've heard about it, is that he who has the gold makes the rules. So, if you need gold to run your business because it's in the red, then whatever rules the capital provider makes, are the rules you have to live by. But if your balance sheet is black and you're profitable and you are capital-efficient, then the capital provider typically is after you take the capital, and in that case, you make the rules and therefore your choices stay open. To us, that is the fundamental dichotomy, not bootstrapping versus VC, but are you in control of the journey by being capital efficient, by being profitable, by being cashflow positive rather than being at the mercy of someone else, because you are not cash flow positive, you are, as Paul Graham says default debt, right? And then you are at the mercy of the capital provider. Today, the capital is flowing like, I won't say like water because we have water scarcity, but the capital is flowing like polluted air in Bangalore. But that's not always going to be the case. And when the tide turns, everybody comes back to basics and fundamentals and asks questions about unit economics and cash flow and stuff like that. So, for us, once founders make a choice saying I want to be capital efficient and make that choice, then until they hit the initial scale and figured out this flywheel, right? If they're capital inefficient at this stage, then it's a problem in the future because they would have burnt too much equity to figure this out. If they have burnt too much equity to figure this out, the investors are looking for a 10X or a 100X return and then you're set on that path. But if you've been capital efficient and you've taken only angel investors, small rounds of capital, etc., then once you hit a million dollars or $5 million in revenue, then you can now take a fresh look. And what we found when a lot of founders cross a million is they look at it and say, look, this is not a great market. Maybe I can get to 3 million, 5 million, 7 million. I don't think I can get to a hundred. And so maybe I want to sell this and build another business. So, now if you have raised, if you're at a million-dollar revenue, you've already raised 10 million, that sale is not going to do anything for you or your employees, right? There's going to be no good output for you or your employees in that sale. But if you raise only 200k and you're at a million and you can sell this business for 10 million or even 5 million, then your investors who invested 200k are probably going to get a 7X, 10X or even a 5X return. You are going to make money; your employees are going to make money. Now you have enough money to bat again. The third thing that happens is you've seen founders who look at it and say, now at a million, I can get to 5 or 10. I don't need to spend a lot. I don't even need a lot of capital because I'm generating it. And of course, today there is revenue-based financing that is non-dilutive. I just need a little bit of capital, or I need no capital and I can get to 5-10 million. I don't know if I can get to a hundred, but I love this space. I have some folks who are in the security space. They don't want to do anything else. They are like, I am in security, I'll be in security space for the rest of my natural life. And so, they are like, what else would I do if I sell this. So, I'm just going to build this. I'm growing 40, 50%, 60% year on year. No outside capital, very profitable, I'll be the founder forever, and we are happy with that. And the third is they look at it and say, look, I'm at a million now and I can see how we get to 30 and maybe from 30, we can get 100. The market is there. I'm actually winning some great deals, right? I don't see any bottlenecks to getting to 30. Of course, I need a better org, a better team. I need more capital to do those things, but the path is there. I can see it as a founder. When that happens, then you go for hyper-scale. Raise capital. Be judicious still. It's not that you're going to just burn money because the good part is by the time the DNA of the org will be capital efficient. And so then therefore they raise capital and iMocha is a recent example. There is only about a 100K that got to 700K, then raised 700K got to, upwards of 3 million and now raised a larger round, because, from 3 million, they can see how to get to 30 and 50. There are no unknowns in the thirties journey other than the team. And that's a fantastic outcome for the founders because when they started up seven years ago, they were thinking if I can sell this business for 5 million, I'm good. Now they're obviously at a valuation of a little less than a hundred million. So, it's fantastic for the team, everybody. So that is the third option. But let's say somebody took a couple of million dollars, a diluted 30%, 35%, and I've now slowly gotten to a million. The first two options are not possible anymore, right? You can’t sell your business because you’ll be selling for less than what you raised, in most cases. The second option is not possible because, for the investors, it is absolutely fair for them to ask, where is my money? How are you going to give me a return? And they can’t give a fair return. And these are the companies that generally get acqui-hired or go for a small exit and nobody makes money. Employees don't make money; founders don't make money. Founders lose interest. It becomes a game of attrition. So, when I look at most start-ups and divide that into these three possibilities, people taking capital too much, too early, basically are by default removing the first two choices of themselves and their team becoming successful and only shooting for the dark. And in a B2B SaaS, B2B context, where cash flow is possible, where profits are possible, I think that most founders should keep these options open until they cross at least a million or 2 million in revenue. And then they can lock on that. Keeping the choices open and super important in the early stage so that they have these choices. And then after that, if they continue to be capital efficient, they will still have these choices. But the moment you raise something like 100 million, then you are saying, basically I will go IPO. So, you're saying I will go IPO or you're trying to shoot for a billion-dollar-plus exit. There are only a few companies in the world, which can buy you over a billion dollars. It’s not impossible, but basically, you're saying I will go for an IPO. So do you want to lock your choice that way too early, versus when you actually have more insight into what kind of business you can be, that's the optionality bit that we want to empower founders with? Most founders don't know that these options exist. We are trying to say, it is not bootstrapped versus VC. Do you want to be a founder forever? Do you want to have an exit at some time frame and get some money back or do you want to hyper-scale? And you probably don't have the data today to make a good, informed decision on which of these choices you should throw away. So, until you have that insight, don’t throw away your choices. That is what we are trying to educate founders on.
00:41:10
Harish: As you said, I think educating is the right word to be used here. I know for a fact that many founders don't know this or don't understand this. And a lot of times they perceive that they have been pushed into a corner while they're probably not. They still have enough choices, but they feel that they are now in a corner and there's only one option for them. So, what can be done to increase awareness, get people to understand these things better? You are doing a great job. People who come to you get this, but how does this get better for the whole ecosystem?
00:41:47
Prasanna: That's our goal, right? So, what we're trying to do is talk about value SaaS, and that's something that we keep repeating ad nauseum, don't do vanity SaaS. And so, if you're doing value SaaS, then you are capital-efficient, you have unit economics, you are then keeping those choices open. And by keeping those choices open, you are able to have that optionality and what we are trying to tell people is, look, you became a founder because you wanted to make choices. In most cases, founders become founders because they're in a situation where you're not letting them make choices. And now they're like, okay, I want to make choices. I want to be the driver. Let me drive. So, if you are getting into that situation and then locking yourself into a path, it doesn't make sense. So that's why we've coined this value SaaS term and saying no vanity SaaS and we're trying to push that as a message. And the good part is, there are some founders who have now crossed 10 million, 15 million dollars, not from Upekkha but are identifying themselves as a value SaaS founder. This philosophy makes sense. So that is what we are trying to do to educate people because our marketing budget is nearly zero, versus, the folks who are selling vanity, their marketing budget, a very large one. So, we can't compete with that directly. So, we are using a classic, guerrilla marketing tactic because obviously nobody in the world is going to say that I want to build a vanity SaaS business. So, we're trying to get them to the good side of the force by appealing to their sense of value and fairness.
00:43:32
Harish: Is there a cultural context also involved here? Do you see people from a certain kind of background resonate with this better? Maybe geography, India or abroad. Is there any lens to that or is it wrong to think on those lines?
00:43:47
Prasanna: So, my sense is that because we are saying B2B, value is already a large determinant of most people's calculus. So, we're not going after B2C where the value is generally very different, right? So, in a B2B context, most people who are doing B2B by choice, understand that you're selling value to a customer and they're paying you for that value. So, it's not a stretch. In some cases, they don't realise that they are vanity. And that's because they are on this trajectory because they think that that's the right thing to do. But when they hear this, then it's not something that you can say no to. The misunderstanding that people have is if you want to do value SaaS you have to bootstrap. That's not the point. Capital is a tool. You have to use it judiciously, right? I'm not saying build a skyscraper without using tools. I'm thinking that if you're building a skyscraper, you understand what tools. If you end up selling the whole skyscraper to buy those tools, then you would have built a skyscraper, but man, it doesn't belong to you anymore. Once they realise that part and the maths is like this – when you look at public companies in SaaS, in B2B, the companies which have done really well after IPO, many of them had larger founder equity. Canonical example, of course, is Microsoft, where the founders basically never took a venture round. They only did a venture round to get a VC who had experience taking a tech company to the public market. And so, the founders kept most of the equity. So those companies have done extraordinarily well. Companies with diluted too much have not done as well. And this is fairly well-studied. So, once we share that there's a company, for example, called Veeva where the founder took $7 million in equity, spent only 4 million out of that, got to 50 million in revenue, did an IPO, is now at a billion dollars in revenue in ARR on just 4 million raised. And by the way, this is not 40 years ago. They started in 2007-08. And they're in pharma CRM, which is as boring and as niche and industrial, as you can possibly imagine. Then whatever sector you're in, what is the problem? Why can't you be capital efficient? They were in a valley. And they burnt only 4 million to get to 50 million. So, once we share some of these examples, then they realise that then you go and look at some of the much more marketed companies you realise that the founders have 3% or 4% equity at IPO. And then you're like you built the skyscraper, but you paid so much for the tools and the material that you don't own, anything in the skyscraper. You don't even own one floor. Maybe you got a parking spot right. Now for that's for the founding founders. But the employees in many cases, get it even worse. There are some $200 million exits, but the employee has got nothing. Because they had raised $150 million and the 200 million employees didn't get anything out of that. To me, that is a bigger shame.
00:47:34
Harish: Sorry to interrupt here, Prasanna. What about the people who are joining these start-ups? As you said, it is extremely important for them also to know how founders are thinking. Do you see this as a criterion for people when they join a start-up?
00:47:54
Prasanna: No. People are thinking higher valuation is good. They don't realise that higher capital raising means that more money has to be returned before they will see a single dollar. And there's this trend of liquidity from venture capital via ESOP buyback and in companies that are not yet profitable and have not yet proven their business model. I have no clue what people are thinking here, right? It's just like giving a higher salary. And people are thinking that the equity is worth something. So, this makes no sense to me, from a fundamental perspective. So, I'm very confused about some of these things. Over cycles from 99 to now, multiple cycles of going up and down, whenever things go so high up that I don't understand how fundamentals will match, then I've learned to trust myself saying the fundamentals are fundamentals. If there are no fundamentals, the skyscraper is going to come crashing down one day or the other. And we've seen that in the Indian case, with Snapdeal, Paytm, with many others where the fundamentals and the employees are suffering. Founders made out, but the employees are suffering. So, I think, luckily in B2B, it doesn't happen as often. Your customers will not let you go ahead of fundamentals too often. It still happens in B2B, people raise too much, don't get enough revenue and exit. Happens, but not as often as on the other side of the business.
00:49:34
Harish: Yeah. I think being in that non-glamorous space is almost like a self-selection criterion to be thinking with your feet grounded.
00:49:43
Prasanna: Absolutely. So, I've seen multiple cycles where investors get excited about B2B. Then they invest into B2B, raise up the valuations. Then they realise that this is not a business where you can just grow your revenue by 10X every year. It is very hard. Your revenue is going to grow only by 2.5X, 3X year-on-year. But it's 80% gross margins. You can't say I will sacrifice gross margins to grow faster. Doesn't happen. Even if you sacrifice your gross margins, the growth will remain the same. So, once they understand that, then after some time a new shiny toy comes, e-commerce or quick commerce or Web3 or NFT or whatever, and they're willing to go there. And then some sanity returns to the B2B side of things. And I've seen like three, four cycles of this happening. And I'm good because we are filtering and we are taking people who are good to build a business for 5-15 years because that's how long it takes to build. You can't do it in 2-3 years. It’s a myth. So, we're good with that. And what I tell founders is look in 1991, there were 200 companies in India, doing a hundred million of IT services exports in 2002, there were 8,000 companies doing $12 billion of IT services exports. That's what's going to happen in SaaS, stick around, play the fundamentals, play the long game. You're going to be one of those folks who get to higher revenue. Now for you, for your business, what you're selling for the market that you're selling into that higher revenue, maybe 2 million, 5 million, 10 million, 50 million, 100 million or 200 million. You don't know upfront. Whichever type of business you want to build, let's try to build it in that direction. Be deliberate about it. Can you always try to build a 100-million-dollar business? Not possible. Can you try to build a million-dollar business in any B2B space? Yes. So, I like what Girish said, ‘Freshworks dreams in increments. So, you dreamt about the first $1000 revenue, then $10,000 revenue, then $100,000 revenue, then a million, $10 million, then a hundred million’. And now they're thinking a billion dollars and $10 billion. So that dreaming increment works very well in B2B. And we help people build the foundation in such a way that they don't realise it, but we help them build the foundation in a way that these choices are aligned where instead of locking yourself into a market where you could only build 3-5 million, maybe you can expand it to adjacent or the same market you can get to 50-100 million. So that's how we help founders shape the fundamentals. So, they're still dreaming in increments. And as they get to each milestone, hopefully, things open up and that's where the optionality plays so that you are having options to move or expand or increase your TAM in certain ways. And historically, that's how it's been for most B2B companies. Veeva is a good example. When they went IPO, there were already 50 million public and public market analysts who said that its total market size is only 150 million, so don't buy Veeva stocks. This was eight years ago. They were already at 50 and unless you are saying they can't go more than 150 because the entire market is 150. Today they are a billion dollars in revenue. So how wrong were those analysts that one company could get to a billion? So, most companies anyway are building in increments and dreaming in increments. We say that if you have to do it in a capital-efficient way, that's how you have to do it. Otherwise, we see somebody saying, I'll get to 10 billion in revenue or a billion dollars in revenue, and then their first round is valued at 50-100 million. They’ve raised a lot of capital. Is it working? Are you able to get to a genuinely good quality of 100K of revenue or half a million dollars of revenue? That is just getting lost.
00:54:17
Harish: Yeah. So, we have come to the end of our allotted time, and I think this deserves a follow-up session. We'll be able to do that anyway. But a couple of questions to round up this thing. So, we spoke a lot about the initial stage. I don't want to bucket it into seed, angel or anything like that. But if you want to generally put, say different stages of the life cycle of a company, from the first MVP to say IPO/acquisition. Let’s take this as a lifecycle. What are the important challenges that founders overlook most commonly at different stages of this lifecycle?
00:55:09
Prasanna: Yeah. So, in the Microsoft accelerator, my mentor Ravi Narayan and I, had this nice framework for thinking about it as what risks have you mitigated? What do you still have? And so, the number one risk of any business is the market, right? So, until you prove that a market exists for what you're building there is always a big risk, right? And before that there is tech/product, whatever you're building, does it work? But in most cases, it's not the challenge. Other than the deep tech, in B2B it’s not a problem if you work. The second is a market. Is there a large enough market for what you're building? Is there a market where you can build this product and sell it with good unit economic viability? So, the market risk is the second one. So, most founders are going through a journey where they're first ameliorating the tech/product risk and then ameliorating the market risk. Then there is an execution risk. So, are you able to assemble the right team? Are you able to get the right people? Are you able to point them in the same direction? Are you able to get them to do the work? Are you able to deliver quality repeatedly? All of those things are an execution risk. And execution risk never goes away, but you can reduce it over time. And finally, it’s the financial risk and again it never goes away, even if you're extremely profitable. You're always generating cash flows. You're spending money. It's always going to be there. So, when you think about a start-up as a journey of mitigating these risks, one after the other, the mistake that lots of founders made, they mitigate the tech/product risk but don't actually pay attention to the market risk. They’ve spent too much money on tech and products, then don't have enough money to mitigate the market risk and fail. That's why we usually tell founders to focus on the market risk because in most cases you can build almost anything. Focus on the market risk and once you mitigate it and your product works, then you can figure out how to invest more in the tech and product. This of course does not apply to somebody making cancer drugs or somebody doing deep tech. But in most B2B cases, market risk is why companies fail. And once they cross that market risk threshold, if the founders are not sufficiently skilled, they fail because they don't do the execution properly, they don't take it seriously. They don't know how to hire an org, they keep everything with them, they don't know how to delegate or they over-delegate, or they don't know how to hire the senior team, they don't know how to hire a leadership team. They don't know who works with other leaders. They have bottlenecks in their own capabilities. They're not able to scale up. And that leads to a lot of execution risks. Finance risk, the good part of the world that we are living in, there are different types of finance available, an infinite amount of capital is available if these three things are sorted. So, that's how I see the stages. And so, when I'm evaluating, I'm not looking at it as a pre-product etc. I'm looking at how much of the market risk they have mitigated. Will they be able to build a product? This is more valuable to me than they have built a product but have no clue about the market. That is much worse.
00:59:18
Harish: Yeah. I think that's a great way of looking at it. It clears a lot of things for me personally, as well. So, one of the last questions. What books, people, podcasts have shaped your thinking and what do you recommend to the founders in your cohort and others?
00:59:43
Prasanna: Sure. So, one of the books that I recommend a lot is The Goal by Goldratt. It's a fantastic book. I think anybody running a start-up should read all his books. Especially the third book, where I think he talks about software. It’s a must-read. I think that that's a good start. If you're building a tech business, you can read Selling The Wheel. This is a fantastic read. It's mind-blowing. I wish I'd read it like 20 years ago. The author actually wrote it in 1999. I think it's just mind-blowing. So, these are like a couple of books that I think really have shaped how I think about start-ups and building start-ups. I'm not a big podcast listener. I read a lot. So, if you want book recommendations, I have a large pile of books here. I think for any founder if they read these two books, they will understand a lot better the actual dynamics of how things work in a business than they would otherwise.
01:01:29
Harish: And any people to follow on social media?
01:01:35
Prasanna: So, my co-founder Rajan is much better at Twitter than I am. I think in a B2B context, there are lots of folks to follow. A couple of folks who run an interesting site called forgetthefunnel.com, Claire and Gia. They have put out some really good stuff, very grounded, very driven by fundamentals. They don't focus more on the product side of things, but like on the market side of things, on how to choose what problem to solve. And once you've done that, how do you market that? How will you sell that well? Very clear, no fluff there. Jason Lemkin has sold a business, does really good content. In an Indian context, Paras Chopra is a good follower of social media. A lot of the Indian SaaS founders are not very active on social media, so not much to follow there.
01:02:57
Harish: Yeah. I think there's space for somebody to storify all the great work that they are doing. Maybe you should put a spotlight on these people. I've come to know of so many people through following people like you. Especially because like you said, the B2B space is not there in the news all the time. Somebody needs to put the spotlight on them. So, I think you guys have got great content on your site as well.
01:03:34
Prasanna: So, we have our own ebook as well, The Value SaaS Guide, which we recommend to all SaaS founders.
01:03:41
Harish: Okay. You've been too humble not to recommend that, but I will do that. So, the final section, Prasanna. I am going to ask you three things and I want your hot take on what is its future relevance? So first, what do you think is the future relevance of traditional start-up centres, like Bangalore, Gurgaon, Hyderabad, Pune, Mumbai? Are they going to be relevant post-2020?
01:04:17
Prasanna: I think for folks trying to figure out who to work with and how to work with people, there's going to be a transition period when people who don’t know how to work remotely where these centres will work really well. But more and more, we'll see companies where founders have never met each other in person and they're working together, it's working great, they're making revenue and both sitting in some random places with no cost of living and building million-dollar businesses. So, I think they are relevant for investors because investors like to be close to the start-ups that they're funding. But for the founder, I think it no longer matters as much. But building that early network used to be easier because you were in the same company, same place, you met people and stuff like that. I think that is going to evolve in a different way. I don't know how, but I think for that, it's still worthwhile coming to meetups and doing stuff. But I think the function of work as a networking space is going to change, not go away, but change how it was done. And there is going to be more emphasis on networking for networking’s sake than people do. Go to events, conferences, just for networking, not for the gyaan that the conference gives. I think that is going to increase, but that will not be in Bangalore or these kinds of places. It could be anywhere.
01:05:47
Harish: Okay. What do you think is the future relevance of incubation centres and these entrepreneurship courses that are being run in traditional institutes?
01:06:01
Prasanna: So, the only two that I heard that have worked well, one is Babson College in the US. Another is my mentor; she teaches a course at The University of Virginia. So those I've heard are good for shaping actual entrepreneurs. A lot of the other people who are teaching entrepreneurship at these entrepreneurial centres have never done a start-up in their lives. If a start-up hits them in the face, they will not know what a start-up is. There it is more of, build a business model, do this, do that versus the real work of building a start-up, which is figuring something out of nothing. I think those centres where it's not being taught by entrepreneurial folks, it's not being taught by people who have done start-ups before. And maybe, unfortunately, they're in a place where there are not too many start-ups, they might be providing inspiration and they might be providing a context. But I don't think that they're teaching useful skills, which is the 99% of unfortunately entrepreneurial education today.
01:07:07
Harish: And the final one. What do you think is the future relevance of the Olympics?
01:07:15
Prasanna: I am not a sporty person.
01:07:18
Harish: But you have to give me a hot take on this.
01:07:22
Prasanna: I've never watched the Olympics. I literally have no clue. So, if it stays, people are happy, fine. If it goes…
01:07:36
Harish: Completely indifferent about it. So, maybe there will be more people like you. They will be completely indifferent about the Olympics. As we know, I think over the last six or seven editions, it's been a loss-making venture for cities. So, it has not really been economically viable. And cities have been backing out of bidding for games. So, going by your lens of evaluating ventures, it’s not doing well.
01:08:10
Prasanna: Yeah.
01:08:10
Harish: So, on that note, I think this is a fantastic conversation. We covered a lot of areas. We spoke about your BS detection, vanity metrics, value SaaS, what should founders be thinking? I think there were a couple of truth bombs thrown very nonchalantly, which we are going to try and capture and put in the promo of the conversation. But thanks a lot. This was fantastic.
01:08:36
Prasanna: Thanks Harish. Thanks for having me. It was a pleasure to be here.
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