Reports

How will the Cybersecurity Sector Rise in a Digitized World?

by Sandeep Kumar

Keep up to date with the latest research

Every now and then we keep hearing about instances of cyber threats and attacks wiping out millions of dollars from various organizations. The cases have risen as several companies went completely digital, especially post-pandemic. 2021 saw a record rise in cybercrime with ransomware attacks rising by 151%. As businesses realize the importance of digital security, they are taking steps to keep their digital stack secured, making cyber resilience a top business priority. As per a survey by WEF, nearly two-thirds of businesses find it difficult to deal with cybersecurity incidents due to a lack of skills. Hence, they need to rely on partnerships with security firms to secure their business from such threats. Cybersecurity is a massive market with over $150 Bn in annual spending. It has led to a positive outlook toward cybersecurity startups. As a result, VCs are betting their money on security startups. 2021 is considered a record-breaking year for the sector as cybersecurity startups raised over $29 Bn in venture capital, outpacing the previous two years combined.

Source: 2022 Cybersecurity Almanac | Momentum Cyber

VC activity and trends

VC investments in cybersecurity have grown gradually over the years. In 2021, VC firms had a really big appetite for cybersecurity as the deal volume crossed $29 Bn, seeing a YoY growth of over 136%. With this, the size of the funding rounds has also increased for security startups, as 82 financing rounds grabbed a deal of more than $100 Mn.

As the startups in the sector are attracting VC money, there has been significant growth in the number of unicorns. About 30 cybersecurity startups achieved the unicorn status last year, with a few of them achieving the mark in just a few years of their inception. For instance, Orca Security, which was founded in 2019, raised $550 Mn in October at a valuation of $1.8 Bn. Wiz, a cloud security provider which was founded in 2020, is now valued at $6 Bn!

According to Momentum Cyber, cloud security has been the favourite segment to receive financing with a total of $4.3 Bn, followed by identity and access management receiving $3.4 Bn in funding, and endpoint security with $2.8 Bn. Geographically, the majority of the cybersecurity startups that received funding, securing over $17.4 Bn, belong to the U.S. followed by Israel (as per Crunchbase data).

Source: 2022 Cybersecurity Almanac | Momentum Cyber

Cybersecurity investment trend forecast

Based on the current momentum and growing threat landscape, the cybersecurity sector could see an even bigger year in 2022. This year, cybersecurity startups could see a market opportunity in the following areas, thereby drawing investors’ interest.

 Cryptocurrency

The crypto market is booming across the world. However, the area is also prone to growing amounts of cyberattacks. Most recently, Axie Infinity was a victim of one of the biggest crypto heists worth over $600 Mn. There are multiple cases like these, hence crypto security platforms (like Fireblocks) are expected to see investors’ focus. According to the Managing Director at Insight Partners, areas within crypto security, such as coin monitoring will see a critical focus. It is expected that large payment companies and even traditional market exchanges will carefully look at the space around security.

 Compliance and Auditing

2022 is likely to see a move towards “shifting left of compliance”, which intends to find errors early in software delivery for compliance and third-party audits. This also includes smart contract security audits. Some startups already working in this space include CertiK, Certora, and OpenZeppelin.

 Web3 and Metaverse

A large number of startups are exploring the web3 and metaverse space. This means startups involved in securing user identity and ownership could attract VC money. Identity management and authentication have already been popular in 2021, however, startups looking beyond and into the future of the internet could win big.

How to spot promising early-stage cybersecurity startups?

The number of cybersecurity unicorns and new startups in the sector is multiplying. As many startups are attracting VCs and raising funds at higher valuations, it is important to spot promising startups early-on to get higher returns.

YL Ventures, an America-Israeli VC firm specializing in early-stage cybersecurity investments, suggests some benchmarks that you can look out for. Some of the early-stage startups backed by YL Ventures include Orca Security, Enso Security, Grip Security, Piiano, Valence, and Eureka.

 Initial Revenue:

Series A companies with $500k in ARR attract strong investors. Best startups in the sector manage to reach the $500k benchmark in less than 18 months of operation. From this level, top-performing startups can reach $1 Mn in 18–24 months, which largely depends on the company’s ability to get relevant customers.

 Average Contract Value:

Contrary to founders’ concern, Average Contract Value (ACV) is rather a misleading point of comparison as cybersecurity goods and services, along with their business models, sales motions, and customer profiles, are far too divergent when compared across the industry. However, despite the divergence, it is expected that growth-oriented companies can improve their ACV over time as the company develops additional features and improves their ability to secure large enterprise customers.

 Initial Paying Customers:

On average, successful US-based cybersecurity startups will have closed their first payment within 12 months of their seed round. A company should aim to secure at least one paying customer one full year from initial funding. As per YL Ventures, at around the 18-month mark, a startup should aim for at least 10 paying customers. However, security startups in traditional and heavily regulated sectors may have a smaller number of contracts. They should instead focus on the size of the contract.

 Hiring:

On average, successful startups will have a go-to-market (GTM) executive within the first year of securing seed funding. Apart from this, successful startups tend to have about 25 full-time employees by the 18-month mark, and the number doubles at around two years.

Cybersecurity’s demand on rise

The number of cyber threats is growing in current times, and they are not expected to decline in the near future. It is expected that over the next five years, global cybercrime costs will be rising by 15% per annum, and is estimated to reach $10.5 Tn by 2025. As businesses have made a shift towards a digitized economy, they need to protect themselves from such malicious attacks. Security companies are building themselves continuously with the necessity to deal with the present and possible threats. Contrary to the horizontal approach which focuses on enterprise applications, cybersecurity has now been focusing on the vertical approach so that specific pain points of each industry can be addressed.

The global spending on cybersecurity products and services is estimated to reach $1.75 Tn between 2021 and 2025. This number suggests the huge TAM potential that the industry holds in ensuring cyber safety. As the security concern comes to the forefront in business discussions, the cybersecurity bubble is going to rise and is not expected to burst any time soon.

– – – – – 

This article has been co-authored by Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

SPACs as Alternative Investment: A Critical Review

by Sandeep Kumar

 

The present SPAC ecosystem

Why are companies getting involved in the SPAC craze?

         Data Souse: SPACInsider

Downsides of going Public via SPAC

         Data Souse: SPACInsider

What Impact Do SPACs have on Private Equity?

Future Outlook

Will the SPAC boom stay?

 

 

Flourishing ESOPs in Indian Startups: How can employees make the best of this opportunity

by Sandeep Kumar

Growing Potential of Employee Stock Options in Indian Startup Landscape

This year has proved to be a great year for Indian startups and their employees. With growing valuations and better performance, a large number of companies are opting for ESOPs which has now formed an integral part of the startup compensation system. As a result, many employees were able to earn a fortune overnight.

Employee Stock Ownership Plan (ESOP) is an employee benefit plan that offers employees an option to gain an ownership interest in the company in the form of company shares that are offered to the employees at a pre-determined discounted price. ESOPs convert employees to owners by giving them an opportunity to participate in the future growth of the company by owning a part of it, but also are a great tool to motivate and retain talent.

According to KPMG’s ESOP Survey Report (2021), about 68% of the total respondents have either already implemented an ESOP plan or a similar employee benefits program or are contemplating having one. Of these companies, 72% are private companies. In India, the majority of companies offering the ESOP option to their employees belong to the software and startup sectors. As tech companies have started to realise the growth potential and benefits of the ESOP market, other industries such as Financial Services, Consumer Goods, Automobile sector, etc. have also started adopting ESOP programs for their employees.

Source: KPMG India’s ESOP Survey Report (2021)

Indian Startups on ESOP rush

Investing early on in ESOP options of start-ups can offer great returns to the employees. As of November estimates, ten leading start-ups that have been now either listed or preparing to list soon, have generated over $5 Bn returns for their employees through ESOPs.

Indian startup employees have created a fortune through their ESOP plans as the company’s valuation surged. Freshworks, an Indian SaaS startup, turned 500 of its employees into millionaires overnight as it got listed in NASDAQ this year. Almost 76% of the company’s employees own Freshwork’s shares. Looking at the fashion e-commerce brand Nykaa’s successful IPO launch, the top six employees of the company are estimated to have unlocked way more than the expected $115 Mn of value through their shareholdings and vested options. Even food delivery app, Zomato which had an ESOP pool of $745 Mn at the time of its IPO has now more than doubled in value to $1.5 Bn.

Following the trail, many Indian tech startups are now expanding their ESOP pool to retain the interests of their workers.

Recently, Meesho announced MeeSOP, an ESOP-for-all programme, that would allow all its permanent employees to have a stake in the company’s shareholding, irrespective of their position or tenure in the company. With this, the company aims to break the traditional hierarchy to make every employee an owner. This will allow all its employees to realise their personal and financial goals along with organisational goals, as employees will be able to cash in on the company’s frequent ESOP liquidation drives. Meesho is a high-growth startup, whose valuation is only expected to grow in the future. Hence, the company’s workers will be able to enjoy high gains in the future, given they exercise their vested options.

According to some sources, it is estimated that 80% of employees of the hotel aggregator platform, OYO have been granted the company’s ESOPs. As of September 2021, OYO has an ESOP pool of about 470 million shares of which 11,739 options are exercised. With its IPO coming up and an estimated post-IPO valuation of $10 Bn, it will create a total wealth of $688 Mn for its employee shareholders. Another IPO-bound company, Snapdeal has also expanded its ESOP pool by 151%, offering a total of 5,000,000 ESOP options.

While these are only some of the examples, many more startups are adopting the method to retain top talent — including PhonePe, Licious, Udaan, ShareChat, OfBusiness, Urban Company, to name a few. It is estimated that from January 2020 — July 2021, Indian startups have added $700 Mn worth of stocks. During H1 of 2021, nine companies expanded the pool to more than $170 Mn and the number is expected to have been doubled in the H2 of 2021. Looking at the fortune created by employees of companies like Freshworks and Nykaa, other startup employees also hold a chance to become Crorepatis. However, some hurdles set back workers from exercising their options.

Source: Entrackr

Problems faced by ESOP holders in exercising their ESOPs

As fascinating as they sound, exercising ESOPs is not a straightforward task. Not many employees are even aware or care about how to exercise or when to exercise ESOPs. Read more about the correct time to exercise ESOPs and tax obligations in other articles published on the same channel. As per our estimates, between 70% — 80% of vested ESOPs in unicorn and soonicorn companies go unexercised every year due to the problems faced by employees. This leads to billions of dollars of lost value for them.

Lack of understanding, delay in approvals, and lack of transparent communication from their companies are some of the reasons which hold back employees from exercising their options. Apart from this, heavy tax obligations are a major problem. While exercising ESOPs can provide massive gains to the employees, a major proportion is lost in paying the taxes. As a result, many ESOP holders across companies do not exercise their options as they do not want to pay the capital gains tax. Financing an ESOP can be a costly affair, even for the financially affluent workers.

ESOP Taxation in India

Let us understand what will be the tax implications on ESOPs for an Indian employee.

One may be liable to pay ESOPs tax on two occasions as an employee.

  • First, when the shares are allotted as a result of exercising vested options (taxed as salary income)
  • Second, when the shares are sold as a result of exercising the vested options (taxed as salary income) (taxed as capital gains).

Now let’s look at how ESOP taxation will work:

The first level of taxation (when the option is exercised):

ESOPs would be taxed as a requirement, with the value given as:

The perquisite value of an ESOP will be included in X’s salary and will be taxable in the year in which the shares are allotted. On such an amount, the employer is required to deduct TDS.

The second level of taxation (when ESOPs are sold):

When Mr. X sells the stock, he will be subject to capital gain tax, which will be calculated as follows:

Because X has held the shares for less than a year (counting from the date of allotment), the gains will be categorized as short-term capital gains and will be taxed at the standard slab rates applicable to X.

How Can ESOP Holders Grab the Opportunity?

Due to lack of clarity and huge costs involved, we have seen more than 2,000 shareholders in the past 12 months who are paper rich and cash poor and have made several wrong decisions when it comes to their private shares’ ownership. We aim to make employees aware of these opportunities and help them grab the vested opportunities. As a result, Torre Capital helps ESOP holders with funds required to exercise the stock options and pay tax obligations, with no recurring monthly interest payments, unlike a traditional loan. It is advisable to exercise stock options early so that one can reduce their tax burden and also exercise price in certain cases.

In case of a company’s liquidation event, if the firm has a successful exit (such as an IPO), you repay the principal along with a certain percentage of upside (ranging between 30% to 70%, depending upon the stage of the growth startup) back to your investors. On the flip side, we bear all risks related to performance issues with the investee company, delays in IPO/other liquidation events, or closure/bankruptcy scenarios. Your other personal assets are never at risk because it is non-recourse finance.

So, if you are an employee looking forward to exercising your ESOP options, Torre Capital can provide you with the best and the most convenient exercise and financing journey. Reach out to us at [email protected] in case you wish to know more and seek further assistance.

. . .

This article has been co-authored by Tamanna Kapur and Sayan Mitra, who is in the Research and Insights team of Torre Capital.

For exclusive information about additional research and insights by our Analysts, kindly subscribe to Torre Capital’s Blog.

If you are an investor or shareholder and want more advice about the Pre-IPO secondary markets, please feel free to reach out at [email protected] for investment advice, or register for an account at Torre Capital.

Keep up to date with the latest research

How will the Cybersecurity Sector Rise in a Digitized World?

by Sandeep Kumar

Keep up to date with the latest research

Every now and then we keep hearing about instances of cyber threats and attacks wiping out millions of dollars from various organizations. The cases have risen as several companies went completely digital, especially post-pandemic. 2021 saw a record rise in cybercrime with ransomware attacks rising by 151%. As businesses realize the importance of digital security, they are taking steps to keep their digital stack secured, making cyber resilience a top business priority. As per a survey by WEF, nearly two-thirds of businesses find it difficult to deal with cybersecurity incidents due to a lack of skills. Hence, they need to rely on partnerships with security firms to secure their business from such threats. Cybersecurity is a massive market with over $150 Bn in annual spending. It has led to a positive outlook toward cybersecurity startups. As a result, VCs are betting their money on security startups. 2021 is considered a record-breaking year for the sector as cybersecurity startups raised over $29 Bn in venture capital, outpacing the previous two years combined.

Source: 2022 Cybersecurity Almanac | Momentum Cyber

VC activity and trends

VC investments in cybersecurity have grown gradually over the years. In 2021, VC firms had a really big appetite for cybersecurity as the deal volume crossed $29 Bn, seeing a YoY growth of over 136%. With this, the size of the funding rounds has also increased for security startups, as 82 financing rounds grabbed a deal of more than $100 Mn.

As the startups in the sector are attracting VC money, there has been significant growth in the number of unicorns. About 30 cybersecurity startups achieved the unicorn status last year, with a few of them achieving the mark in just a few years of their inception. For instance, Orca Security, which was founded in 2019, raised $550 Mn in October at a valuation of $1.8 Bn. Wiz, a cloud security provider which was founded in 2020, is now valued at $6 Bn!

According to Momentum Cyber, cloud security has been the favourite segment to receive financing with a total of $4.3 Bn, followed by identity and access management receiving $3.4 Bn in funding, and endpoint security with $2.8 Bn. Geographically, the majority of the cybersecurity startups that received funding, securing over $17.4 Bn, belong to the U.S. followed by Israel (as per Crunchbase data).

Source: 2022 Cybersecurity Almanac | Momentum Cyber

Cybersecurity investment trend forecast

Based on the current momentum and growing threat landscape, the cybersecurity sector could see an even bigger year in 2022. This year, cybersecurity startups could see a market opportunity in the following areas, thereby drawing investors’ interest.

 Cryptocurrency

The crypto market is booming across the world. However, the area is also prone to growing amounts of cyberattacks. Most recently, Axie Infinity was a victim of one of the biggest crypto heists worth over $600 Mn. There are multiple cases like these, hence crypto security platforms (like Fireblocks) are expected to see investors’ focus. According to the Managing Director at Insight Partners, areas within crypto security, such as coin monitoring will see a critical focus. It is expected that large payment companies and even traditional market exchanges will carefully look at the space around security.

 Compliance and Auditing

2022 is likely to see a move towards “shifting left of compliance”, which intends to find errors early in software delivery for compliance and third-party audits. This also includes smart contract security audits. Some startups already working in this space include CertiK, Certora, and OpenZeppelin.

 Web3 and Metaverse

A large number of startups are exploring the web3 and metaverse space. This means startups involved in securing user identity and ownership could attract VC money. Identity management and authentication have already been popular in 2021, however, startups looking beyond and into the future of the internet could win big.

How to spot promising early-stage cybersecurity startups?

The number of cybersecurity unicorns and new startups in the sector is multiplying. As many startups are attracting VCs and raising funds at higher valuations, it is important to spot promising startups early-on to get higher returns.

YL Ventures, an America-Israeli VC firm specializing in early-stage cybersecurity investments, suggests some benchmarks that you can look out for. Some of the early-stage startups backed by YL Ventures include Orca Security, Enso Security, Grip Security, Piiano, Valence, and Eureka.

 Initial Revenue:

Series A companies with $500k in ARR attract strong investors. Best startups in the sector manage to reach the $500k benchmark in less than 18 months of operation. From this level, top-performing startups can reach $1 Mn in 18–24 months, which largely depends on the company’s ability to get relevant customers.

 Average Contract Value:

Contrary to founders’ concern, Average Contract Value (ACV) is rather a misleading point of comparison as cybersecurity goods and services, along with their business models, sales motions, and customer profiles, are far too divergent when compared across the industry. However, despite the divergence, it is expected that growth-oriented companies can improve their ACV over time as the company develops additional features and improves their ability to secure large enterprise customers.

 Initial Paying Customers:

On average, successful US-based cybersecurity startups will have closed their first payment within 12 months of their seed round. A company should aim to secure at least one paying customer one full year from initial funding. As per YL Ventures, at around the 18-month mark, a startup should aim for at least 10 paying customers. However, security startups in traditional and heavily regulated sectors may have a smaller number of contracts. They should instead focus on the size of the contract.

 Hiring:

On average, successful startups will have a go-to-market (GTM) executive within the first year of securing seed funding. Apart from this, successful startups tend to have about 25 full-time employees by the 18-month mark, and the number doubles at around two years.

Cybersecurity’s demand on rise

The number of cyber threats is growing in current times, and they are not expected to decline in the near future. It is expected that over the next five years, global cybercrime costs will be rising by 15% per annum, and is estimated to reach $10.5 Tn by 2025. As businesses have made a shift towards a digitized economy, they need to protect themselves from such malicious attacks. Security companies are building themselves continuously with the necessity to deal with the present and possible threats. Contrary to the horizontal approach which focuses on enterprise applications, cybersecurity has now been focusing on the vertical approach so that specific pain points of each industry can be addressed.

The global spending on cybersecurity products and services is estimated to reach $1.75 Tn between 2021 and 2025. This number suggests the huge TAM potential that the industry holds in ensuring cyber safety. As the security concern comes to the forefront in business discussions, the cybersecurity bubble is going to rise and is not expected to burst any time soon.

– – – – – 

This article has been co-authored by Tamanna Kapur, who is in the Research and Insights team of Torre Capital.

Road to Sustainable Investment: How Are Private Market Investors Responding to ESG Needs?

by Sandeep Kumar

What is Driving Private Market Investors into ESG Investments?

The demand for ESG-certified investments looks to be unstoppable. According to Bloomberg Intelligence research, global ESG assets under management (AUM) will surpass US$53 Tn by 2025 and will soon represent 44% of the global AUM. More than a third of all AUM in the world would have an ESG imprint in the coming future at this rate.

Two parallel developments are driving the increased usage of ESG management systems. First, rising social pressure, a shift in expectations from private enterprise, and continuous legislative reforms have raised the desire for businesses to adopt proactive environmental and societal responsibilities. Second, there is a growing realization among financial and business experts that ESG concerns may have a significant influence on corporate value, and that risk management can help organizations and their shareholders protect economic value.

ESG risk factor methods have sparked the interest of investors of all shades, and progress has been made in applying them. Some of the largest fund managers have adopted ESG on their own, realizing the advantages of incorporating risks into their investment processes. Others are reacting to the rising number of LPs asking ESG-related questions as part of their investigative work and may exert pressure on GPs to include sustainability initiatives into their investing procedures on the margin or even as a mandate to invest.

Long-Term Profit is Closely Linked to Sustainable Investment

The goal of a corporate should be to generate profits without a doubt, but it cannot be the only goal for long. Consider a company that prioritizes money over everything else with little regard for safety or environmental repercussions. What happens to a firm if a defective product is issued or an accident occurs because the business is focused on maximizing the stock price without concerns for the planet and the environment? Not only would the stock price plummet and previously avoided expenditures become due, but litigation, penalties, recalls, cleaning costs, and reputational harm would almost certainly follow, all of which might lead to bankruptcy or liquidation. In the past ten years, cyber security attacks have been a CEO’s nightmare. The next couple of decades may add ESG related concerns to that list.

According to the US SIF Foundation’s research on US Sustainable and Impact Investing Trends, US asset management companies and institutional asset owners have started employing sustainable investing techniques and analyzing the ESG problem in managing their portfolios. The sustainable industry has expanded at a CAGR of 14% over the last 25 years. Since 2012, the most significant surge has occurred.

Greenwashing Concerns

When GPs recognize that ESG is affecting LP commitment choices, they may use buzzwords in their due diligence papers to show they have accepted ESG principles, however all that talk may not be translating into implementation. As per the study of InfluenceMap, the world’s largest asset managers are failing to meet the Paris Agreement’s climate targets. More than half of climate-themed funds failed the test, while slightly over 70% of funds claiming to have ESG compliance failed. In comparison to the US and Asia, Europe is the only region that tracks ESG across the asset management business, and the framework it creates is likely to become a global standard.

Greenwashing is a practice that has drawn attention to the need for honesty in advertising in this industry. Not only are many LPs getting better at exposing asset managers’ ESG claims, but regulators are forcing asset managers to represent themselves and their plans correctly and honestly. TotalEnergies SE, Halliburton Co., Chevron Corp., and ExxonMobil Corp. were all included in climate-themed funds that were exposed to the fossil-fuel business. According to InfluenceMap, three funds dubbed “Paris aligned” and managed by UBS and Amundi SA scored -40% to -26%.

At COP26, it was widely acknowledged that considerably more money is needed for climate adaptation — that is, programs that would mitigate the expected effects of climate change throughout the world. The text of the Pact itself reflected this. The cost of implementing the necessary modifications to achieve “net zero” by 2050 is predicted to be between $100 trillion and $150 trillion. According to GFANZ, private money could provide 70% of the $32 trillion in investment required by 2030 to establish a net-zero economy by 2050. Despite their importance in completing the Paris Agreement, climate tech venture capital and ESG funds are still in their infancy. The increase of private investment removes the load on underperforming governments in terms of capital flow. More cooperation between public and private finances is essential to achieve a speedy transition.

Sector-Wise Effect of ESG

Naturally, various sorts of businesses are subjected to different ESG demands, and some of the imperatives are more intense than others. According to IHS Markit’s survey, 40% of respondents believe the energy, mining, and utilities sector would be most affected by ESG concerns in the next two years, followed by industrials and chemicals (17%) and transportation (17%).

          Source: IHS Markit

The selection of these businesses is likely influenced by the global climate change agenda, with increased environmental legislation and policy focused on companies that emit considerable amounts of carbon. “These are energy-intensive companies,” a partner at a UK private equity company explains. “Mining, for example, makes extensive use of natural resources and conventional energy.” “Companies will have to replace their cars with more fuel-efficient ones,” a UK-based asset management executive says on transportation.

COVID-19 Crisis has Aggravated Investor Focus on ESG

The ESG phenomenon is fuelled by a variety of factors, many of which have been exacerbated by the outbreak. Climate change is a major subject, with COVID-19 emphasizing the interconnectedness of the planets and the fragile link between people and nature.

J.P. Morgan polled investors from 50 global institutions, representing a total of $12.9 Tn in AUM on how they expected Covid would impact the future of ESG investing.

As a result of the COVID-19 crisis, action and knowledge of long-term sustainability concerns are expected to rise in the long run, this should be a beneficial driver for ESG. The majority (55 %) of investors polled by J.P. Morgan believe it will be a positive catalyst in the next three years. Only roughly a quarter of investors (27%) feel it will have a negative impact, while 18% believe it would have no effect.

          Source: J.P. Morgan, Tracking the ESG implications of the COVID-19 Crisis.

COVID has uncovered the costs and unfairness of inequality as social transformation accelerates. A wide spectrum of stakeholders is calling for organizations to be better operated and more responsible, especially in light of taxpayer-funded business support during the outbreak.

Are ESG Factors Shifting Investors’ Focus?

Overall, it appears that regulatory and LP forces are bringing the private markets to the brink of mainstream ESG acceptance. Some GPs are beginning to accept that the risk variables identified as part of the ESG framework are worthy components of the investing process, and reporting and monitoring systems are coming together. LPs are shifting their emphasis from public market operations to private market adoption. However, concerns about greenwashing are growing. The root of the issue is how ESG ratings, such as those provided by MSCI and Sustainalytics, are calculated. Most ratings have little to do with true corporate responsibility, contrary to what many investors believe. Instead, they assess how vulnerable a company’s economic value is to ESG Factors.

There is no doubt about the fact that due to the concerns regarding climate change and the need for sustainability, application of ESG in private markets has started to gain momentum. If you are an investor looking forward to access similar opportunities, Torre Capital offers access to top startups across the globe. Our platform provides seamless financing and investment journey. Feel free to reach out to us for understanding the investment process better.

. . .

This article has been co-authored Vivek Kumar who is in the Research and Insights team of Torre Capital.

Upcoming Indian Unicorns: Logistics Startups Driving Towards Growth

by Sandeep Kumar

In India, over 72 startups have gained unicorn status as of November 2021. The count of these billion-dollar companies is expected to reach a total of 76, by the end of the year 2021. Unicorns in the country are currently valued at $168 Bn approximately. The pace with which these companies are gaining valuations is truly remarkable. India’s pace of unicorn growth has surpassed that of China. The Indian economy is capitalizing on a host of international and national factors that are expected to create many more such companies.

We aim to identify and bring out such companies at an early stage so that the secondary’s investors can churn out greater returns. In this edition of Indian Soonicorns, we bring out some companies in the logistics space that have complete potential to reach the billion-dollar mark in the future.

A Hope for Growth in a Highly Fragmented Logistics Market

The size of the Indian logistics industry is estimated to be about $215 Bn, growing at a CAGR of 10.5%. Even though the market is highly fragmented with a large number of organized players, companies are working to make a mark in the industry through the adoption of technology such as Artificial Intelligence, Internet of Things, automation, cloud computing, blockchain, etc. In 2020, the Indian logistics tech market secured over $460 Mn investments, despite the pandemic. Delhivery is one of the successful logistics startups that is looking forward to go public through an IPO this year.

Let us have a look at potential soonicorns that are likely to give high returns to their investors in the longer run.

1. FarEye

Rationale: FarEye, an Indian SaaS start-up that helps firms globally optimize their supply chain and logistics operations and process over 100 Mn transactions each month. The start-up works with over 150 e-commerce and delivery companies globally, including popular names such as Walmart, UPS, DHL, Domino’s, and Amway. The company clocked 280% growth for the FY21 compared to the previous year and 78% of the revenue comes from the market outside India. FarEye has raised a new financing round, it’s third since the pandemic broke last year. The new capital will be used to expand its software platform capabilities, drive expansion in Europe and North America, and explore inorganic growth opportunities.

2. Locus.sh

Rationale: Locus is an intelligent decision-making and automation platform for logistics. It uses deep ML and proprietary algorithms to offer supply-chain solutions. The start-up operates in North America, South Asia, Europe, and the Indian subcontinent, says it has helped its customers save over $150 Mn in logistics costs. The platform is popular among GMGC, retail, and e-commerce firms as well as distribution partners. The company is aiming for a revenue potential of $3–5 Bn between 2023 to 2025 and will be focusing to improve its geographic reach and build its R&D team to expand its product line.

3. Xpressbees

Rationale: They are the fastest-growing express logistics service provider in India catering to end-to-end supply chain solutions. Their logistic solutions across B2B, BTC, Cross-border, and the third party comes with an edge of speed, accuracy, and scalability. It has grown 4X in the last three financial years, from FY18 to FY21. Xpressbees presently has over 100 hubs across India, a storage capacity of 10 lakh sqft, and 52 cargo airports. Fully automated, technology-driven workflows and material movement procedures are used in 75% of Xpressbees’ operations. The team is now working on AI/ML technologies to develop the next generation of smart and intelligent systems.

4. ElasticRun

Rationale: The Pune-based ElasticRun develops an online system that improves the reception of orders from customers and the dispatch of delivery drivers. According to The Economic Times, its current revenue rate is around $350 Mn and is expected to cross $1 Bn over the next 6 months. The company’s focus on using deep technology to address the need for commerce marketplaces has helped them scale rapidly, delivery much broader distribution for consumer product brands, while also creating a level playing field for Kirana stores, given them parity with competing e-commerce players in terms of reach and product selection.

5. Porter

Rationale: Porter offers an end-to-end logistics platform that helps businesses with last mile and first mile deliveries. It helps its customers save on logistics costs and provides support services such as on-demand transportation, real-time visibility, supply chain management. It is said to be one of the only logistics models that is 100% asset-light. The intra-city logistics company that saw a 5x valuation growth in its last funding round, is looking forward to expand its operation to enter the top 35 cities of India by 2023.

6. LEAP India

Rationale: LEAP India provides integrated, end-to-end customized pooling solutions to its customers. The company’s consolidated revenue in FY20 was marked at about $23 Mn and has been estimated to be grown at a CAGR of 47% during FY17 — FY20. According to India Ratings and Research, the company has a fairly stable investment outlook with a rating of ‘IND BBB+’. With only a few players in the palletisation sector, LEAP India is already a leader in the country, having a market share of over 70%.

Logistics Gaining Investors Interest to Seek Higher Valuation

The initial months of the pandemic did slow down the sector, however, it has started to gain momentum. The large but fragmented logistics sector is emerging as a trustable opportunity for investors. The digital transformation that has come up recently is reviving the $200 Bn logistics industry in India, and more so as these startups are keen on using technology to bring down the logistics costs in the country. With greater government support on infrastructure and an expected rise in the B2C and B2B trade in the coming years, logistics companies are set to grow. The third-party logistics segment alone is expected to experience growth by $10.74 Bn during 2021–2024. With investors’ money, the logistics space will become more robust in the near future. We try to spot some startups in this space that are soon expected to join the likes of Delhivery, Rivigo, and Blackbuck.

If you are an investor interested in getting access to these and similar opportunities, please reach out to us for understanding the investment process better. If you are a shareholder or an ESOP holder of any such company and are looking for liquidity solutions, feel free to connect with us as well. Our platform will provide you with seamless financing and investment journey. Follow us for more such updates.

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This article has been co-authored Tamanna Kapur and Vivek Kumar who is in the Research and Insights team of Torre Capital.

Upcoming Indian Unicorns: Healthcare Startups that are Showing Potential to Achieve Greater Valuation

by Sandeep Kumar

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India has been emerging as the startup hub all across the world. From a time when India produced one unicorn per year during the period 2011–2014, the country has produced 34 unicorns in 2021 alone! The count is highest ever for the country and shows no sign of stopping. The growing trend of unicorns is indicative of growing interest and faith of global VCs and investors in the Indian startups. The most recent startup to gain the unicorn status is the insurtech company, Acko, which witnessed its valuation increasing from $400 Mn to $1.1 Bn in its recent funding round.

Early identification of such unicorns can increase the investors’ returns manifold. Through this article we fetch out the potential soonicorns in the healthcare sector that are expected to soon enter the unicorn club and provide great returns as their valuations would soar high in the future.

Growth of Healthcare Sector Post Pandemic

The Covid-19 pandemic has caused a havoc across the world. In times like these people have realised the importance of health. As a result of the pandemic, the healthcare sector in India has witnessed a boost, especially in its digital transformation. Indian healthcare startups have attracted more funding than ever, over the last year. Compared to total of $316 Mn raised by the sector in the year 2020, this year healthcare startups have raised $1.3 Bn over 69 deals as of 6 August 2021. It is estimated that the HealthTech market in India will reach $5 Bn by 2023, growing at a CAGR of 39%. Digital shift, use of better technology, and favourable government policies are facilitating the growth of the market.

Earlier this year, Pharmeasy became a unicorn, bagging a valuation close to$1.5 Bn. Now the online pharmacy is planning to go public soon, eyeing a valuation of about $7 Bn through its IPO. We analyse more such healthcare startups that have the potential to achieve unicorn status in the future, and can earn high valuations in the long run.

1. Pristyn Care

Rationale: Pristyn differentiates itself from hospital chains by offering end-to-end services including diagnostic assistance, health insurance claim processing, hospital paperwork, cab pick-up and drop-off for surgery, prescription delivery at home, and a free post-surgery consultation. After the pandemic and subsequent lockdowns wreaked havoc on the healthcare industry, Pristyn turned to telemedicine and online consultations to restore its surgery division. The startup is in talks to raise $90-$110 million from investors such as Sequoia Capital US and others, valuing the company at $1.2-$1.4 Bn. They wanted to make an ecosystem that can organise the world of daycare procedures by utilising technology and a set of basic yet powerful processes and activities.

2. Cure.fit

Rationale: Cure.fit is a health and fitness company offering digital and offline experiences across fitness, nutrition, and mental well-being. The start-up which has made 6 acquisitions so far, has spun off its health food vertical — Eat.fit, as an independent entity to cater to growing consumer demand from the cloud kitchen delivery sector. Cure.fit is targeting to have 10 lakhs subscribers on its platform by Dec 2021. Partnership with Tata Digital will significantly accelerate CureFit’s growth as a fitness & wellness leader and will open up access to a large set of new consumers.

3. HealthifyMe

Rationale: HealthifyMe was developed and launched by a team of doctors, nutritionists, and fitness trainers in 2012. HealthifyMe uses a combination of software, wearable devices, and fitness trainer to help people reach their fitness goals. It claims to be used by over 25 Mn users and has 1,500 coaches across India and Southeast Asia. They are slated to cross $50 Mn in their annualized run rate revenue by this coming January and are on track to touch the $400 Mn revenue run rate by the end of 2025. The COVID-19 pandemic has helped people realise the importance of staying fit and maintaining a healthy lifestyle.

4. La Renon

Rationale: Ahmedabad-based La Renon is a global healthcare company. It is founded and managed by a group of professionals of varied domains of the healthcare industry itself who have got vast experience with unmatched expertise. The new-age pharma company has been attracting private equity interest. La Renon become one of the top 40 pharmaceutical companies in India. It has been ranked 34th in the market with a promising growth rate with a CAGR of 70%. The company is planning to expand the business into other chronic segments and in the manufacturing of critical Active Pharmaceutical Ingredients. Despite the presence of global peers, the opportunity in the segment is huge.

5. Practo

Rationale: Practo has evolved from a SaaS website to one that charts a patient’s whole path, from scheduling an appointment to locating a lab, having a second opinion, prescription reminders, and finally bringing medicine to the patient’s door. It is now available in 20 countries. Every year, 18 Cr patients use the app, which has over one lakh doctors on board and 70 K clinics and hospitals as partners. Practo plans to introduce surgery support to diversify its revenue and create new moats. Though telemedicine usage has been small thus far, India has seen some recent development due to the pandemic, Practo being a lead in the field.

6. Stelis Biopharma

Rationale: Stelis Biopharma is a fully integrated biopharmaceutical contract development and manufacturing company. Given the health crisis around the world due to the pandemic, the company is experiencing strong customer traction and is working to ramp up its CDMO business and enhance its process development and other capabilities. Stelis Biopharma is looking forward to produce upto 800 million doses of vaccines annually, including Covid-19 vaccines. With some really important contract, like the one for Sputnik V, Stelis Biopharma has entered into its growth stage.

7. MFine

Rationale: MFine provides an AI-powered healthtech platform for on-demand, virtual consultations with doctor. It also offers services such as booking routine lab tests, medicine delivery, and comprehensive wealth packages. The company has served over 3 million users since its inception, and monthly transactions crossing over 300,000. Apart from individual users, MFine also partners with over 500 corporates. Despite significant growth in revenue in the recent years, the company’s expenses have increased which shall be used to enhance its technology and services. With its plan to introduce insurance service, MFine is working to all health related needs under one platform.

Growing Market and High Future Returns

Since the pandemic and series of lockdown, a large number of people have been dependent on some of these healthcare platforms. Its growing market very well explains the growing valuations of such healthcare startups. An early identification, can help investors to reap great returns as these companies reach the later stage of its operations.

The growth of the unicorns in India has just started, and it is heartening to see such growth as it creates an environment for others to innovate and perform better. We will continue to bring forward such potential startups to your notice. If you are a shareholder or an ESOP holder of any such company, looking for liquidity solutions, feel free to connect with Torre Capital. Our platform will provide you with seamless financing and investment journey. Follow us for more such updates.

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This article has been co-authored Tamanna Kapur and Vivek Kumar who is in the Research and Insights team of Torre Capital.

Investing in alternative assets and why you should care about them?

by Sandeep Kumar

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What is the meaning of a secondary market?

The private secondary market is the one in which stakeholders of private, venture-backed companies (employees, ex-employees and early investors) wish to transfer their shares to an investor in exchange for liquidity. The investor on the other side exchanges cash in return of shares of that private company. The sales proceeds go to the selling shareholder, not to the company.

A primary issue of shares is the source of equity for a given company. Primary issue happens when a company issues a new class of shares and grants those to employees (in the form of stock options) or sells them to investors in an event of fund raise. The employees and investors who own primary shares may choose to sell them in the secondary market, through Torre Capital’s marketplace.

How can you diversify your portfolio and expect higher returns by investing in the secondaries market?

  • Given the expense of going public (which can be significant in terms of time and resources) and the public markets’ short-termism (which can cause public companies to focus on quarterly earnings and not on long term growth).
  • Tech-Based companies have fewer reasons to go public than they did a decade ago, because of which the venture-backed technology companies are increasingly reaching $1B and even $10B valuations before they go public, which leaves less potential for public market investors. In the year 1999, US technology companies went public typically after 4 years but today, the average technology company IPO comes after a minimum of 10 years.
  • As the companies are taking longer to go public, their early investors and employees have to wait substantially longer for liquidity than they would have in the past.

There are many reasons why early shareholders of now valuable private companies might want to tap into liquidity through Torre Capital. For example, an early stage venture capital investor might want to return capital to limited partners ahead of the launching of a new fund. An early employee of a now late-stage company might want to sell shares to finance transactions like buying a house.

Torre Capital acts as an intermediary between the shareholders who need liquidity, and the investors who want investment exposure to proven technology companies before they ultimately go public or get acquired. If the company goes public, investors receive shares post the lock-in period (which restricts private company shareholders from selling their publicly traded shares, ranging between 6 months to a year). If the company is bought for cash, the investors are compensated for the same as well.

More than $50 Billion in value is estimated to be locked up in private, pre-IPO companies, and the secondary market is unlocking that value for investors who were previously unable to participate due to high minimums and restricted entry.

Who influences the pricing of the secondary market?

The investors who participate in the fund raise have an influence on primary market prices; secondary transactions are usually priced in relation to the most recent funding. The price is generally influenced by factors of supply and demand. If a private company has a high demand, its shares might trade at a premium in the secondary markets (in other words, the shares would be priced higher than the share price from the most recent funding). If the sellers of a particular security are more than its buyers, the shares might trade at a discount (lower than the share price from the most recent funding).

Apart from the influences of demand and supply, following are the other factors that can affect the price per share of private market securities:

a. Share Class: Two of the primary types of shares are preferred stock and common stock.

  • Preferred stock is a type of equity security that has certain rights over common stockholders. These rights may include, but are not limited to, liquidation preferences dividends, anti-dilution clauses, and managerial voting power.
  • Common stock is a type of equity security that is most frequently issued to founders, management, and employees. In the event of liquidation, preferred shares are generally given priority over common shares.

b. Discount for Lack of Marketability: A valuation discount exists between stock that is liquid and traded publicly, and stock that is illiquid and not publicly traded. Because Torre Capital’s offerings are relatively illiquid, it’s common for them to be priced at a discount to the most recent round of funding.

Why invest with Torre?

Torre Capital is a VC funded Singapore based Financial Technology company and a Registered Fund Manager in Singapore. We are creating a fully digital Wealthtech to connect family offices and HNI investors with global opportunities, including alternative assets like Private Equity, Venture Capital, Real Estate Funds, and Hedge Funds. Our investment vehicles offer exposure to high quality global growth startups, private debt opportunities, and other thematic funds in the pre-IPO space. They are available to registered investors around the globe.

Our current customer set includes 500+ family offices and High net worth investors (CXOs, first and second-generation entrepreneurs). With the team composed of ex-Mckinsey consultants, Asset management veterans, and Digital experts.

Exclusive features offered by Torre:

  • Pre-vetted/ Curated funds
  • Low-minimums
  • Low and transparent cost
  • End-to-end digital

Who are the shareholders?

Shareholders include all angel investors, employees of the company, founders, or anyone who currently has equity in an eligible private company in the form of common shares, preference shares, stock options or restricted stock units. The following services are provided by Torre Capital to private company shareholders:

  • Opportunity to sell shares in the Torre Marketplace
  • Avail equity funding for your private company ESOPs

How does the Shareholder’s journey work?

a. For selling shareholders:

  • Register on the platform by providing a few basic details about your equity stake.
  • Explore the Torre Capital marketplace to submit your request. Our private market specialist connects with you to perform due diligence checks.
  • We offer the shares to our investor community and gather investment commitments. We also work with the company directly for a completely secure transaction.
  • Transfer documents executed and you receive the sale proceeds. Torre Capital charges a nominal transaction fee.

b. For shareholders who seek to avail equity funding:

  • Register your interest and submit your financing request. Find out how much funding you can avail.
  • Our credit experts get in touch with you to perform due diligence checks, understand your tax liability and underwrite the funding.
  • Depending on your company’s terms and agreement, the forward equity contract is signed and you receive your funds.
  • Share a portion of profits with us post liquidation event. In case of no liquidation event, you don’t have to pay us back.

Advantages of selling at Torre’s Marketplace:

  • Immediate Partial Liquidity.
  • Maximum benefit to shareholder: You only pay us in case of a liquidity event.
  • Get to keep your upside: If your company never meets a liquidation event, you still have received funding for part of your shareholding.
  • Minimized Risk: Upfront part funding and safety of investment till liquidation. 
  • Multiple asset class: If you own multiple classes of preferred stock, common stock, ESOPs, RSUs, you can sell them easily on the Torre Capital marketplace.

Who are the investors?

Currently only accredited investors as defined here are able to make investments through our platform (Investments are not open to US Citizens). With Torre’s platform, the opportunities are endless. You can choose to allocate capital across four different asset classes – equity, ESOPs, structured products, and funds.

How does the investor journey work?

  • Register your interest on our platform. We leverage our network to provide company specific offerings to all employees.
  • Reserve your interest. All IPAs issued post approval.
  • Shareholders agree to terms, sign a Forward share ownership contract.
  • Funds transferred to shareholders’ account. Company leadership informed of agreement with Torre Capital. Receive frequent updates.
  • Upon liquidation, receive principal and profits redemption requests raised to shareholders.

Advantages of investing at Torre’s Marketplace:

  • Exclusive access to high-growth startups: 20% – 30% discounted equity ownership in series D and above global pre-IPO unicorn/soonicorn shares leading to lower investments than secondaries.
  • No upfront cost: Zero transaction cost versus 10% charged by secondaries.
  • Attractive Returns: 3x – 5x better returns than direct secondary transactions.
  • Vigilant and protective measures: 3x collateral protection for initial investment till 80% downfall in stock value.
  • Faster cash-inflows: 3x – 4x faster return of capital than top VCs.

Torre’s Pre-IPO Fund

If you believe in the power of the Torre Capital platform for sourcing strong deal flow and you believe in the pre-IPO asset class, but you are not comfortable or otherwise do not want to select single names for investment, you should consider a managed fund investment. The Fund Series investment committee will select all investments, which are a curated subset of what comes across the Torre Capital platform.

If you would like your investment to give you diversified exposure to the pre-IPO asset class, but can’t commit to multiple $100,000 investments, a managed fund is a good option. You will get investment exposure to multiple pre-IPO companies that are carefully selected by the fund series investment committee.

Popular SaaS metrics to consider while investing in a Tech Venture

by Sandeep Kumar

SaaS metrics can answer important questions about your venture: Do I have the right business model? Is this the time to accelerate growth or to hit the brakes? Do I need to add new customers or focus on the existing ones? Should I add that new pricing level the products guy has been pestering me about? Is there really a limit to how much my venture can grow? Can it be changed?

With all the jargon and metrics whizzing around, it can be hard to keep track of what really matters. Today we break down what is that needs to be measured to unlock explosive growth! This article focusses on:

  • What are the most crucial metrics to measure at each stage of the startup?
  • Why are SaaS businesses different and how are the challenges they face different from other software startups?
  • And finally, is your SaaS business model viable?

Here goes…

So, what makes building a SaaS business so tough?

In one word.

Subscriptions.

Think about it. The revenues from a customer do not come instantly, like how it does when you sell a product. The revenues come over a period of time. If your subscriber is happy with your product and sees no reason to change it, they will stick with it for longer. And the longer they stick, the more money you pull out of them (on second thoughts, that sounds so pervert!). The longer a customer stays with you, the more you profit.

If on the other hand the customer signs up but ends up finding a better product or cheaper pricing or whatever, the customer will hit that CANCEL button and leave (churn). If this happens before you recover the money you spent in acquiring them, then, my friend you just made a loss. (Ouch!)

So, let’s get it straight. SaaS is not just about selling some piece of software to a customer. It has more to it. There is not just one but two sales you have to make. That’s right, two!

  • Getting your customer. Well, because, you need someone to buy your subscriptions.
  • Retaining that customer. So that you can increase the revenues generated from that customer. The longer the customer stays, the more revenues you get.

There is one last and final aspect to the two sales above. That is monetizing your customer.

Let’s look more into each one by one.

Getting those Customers (Acquisition)

Now, what do you think happens to your P&L while you are acquiring your customers? (Hint: Nothing good)

If ‘you bleed cash’ seems too hard a way to put it, then let’s just settle on, ‘you suffer significant losses’ Your server costs, employee wages, office rents, and all other costs don’t go on a pause magically.

And to add to your sorrows you also have to spend a bomb to woo your customers to your product.

A newbie SaaS business spends 92% of its revenues to acquire customers.

All this takes cash. Loads of it.

But wait, it gets worse.

The faster you try to grow, the more you bleed. (Ouch again!)

This naturally will extend to a cash flow problem as your customers will pay you only at the end of the year or month.

If you spend 1000 bucks to acquire a customer and bill them for $50 pm, you’ll need 20 months to break even on just one customer. Even worse, the customer may leave just after one year. Before you could recover your $1000.

But it’s not all blood and tears. The humble J curve is here to help you.

The horror story I just told you, well that applies only to the trough you see above in the J curve (the hockey stick head).

Once you hit breakeven on the individual customers, you’re off to the races!

So how do I know if I have hit the breakeven? Well, we have two metrics that help you do just that.

The first one is the Customer Acquisition Cost or the CAC, the horrors of which we discussed above. The CAC has been dubbed as the killer of startups. This is the amount you spend to get each customer. This of course varies from business to business.

Some businesses find a way to hack their way through the miseries of CAC. They build an audience first and then offer a solution to them. This way you get access to a ready-made audience that most probably will throw their money at you. You won’t have to spend (or spend not much) anything to get your customers.

The accompanying metric to CAC is the Long-Term Value or the LTV of a customer. Loosely, this is the total revenue you expect to get from each customer.

Using these two, you can find out if your business model works or not.  There are two rules of thumb to keep in mind:

  • Make sure your LTV > 3x CAC. Even higher LTV is better. Some startups have LTV at 4, 5, 6 even 7x to their CAC. While such a high ratio may seem good, just make sure that you are spending enough on marketing. Chances are you could do with putting in more money.
  • Make sure the months to recover CAC is less than a year. Basically, you should hit break-even within one year of acquiring your customer. Good startups have has this figure at just 10, 8, even 5 months.

This second rule can also be inverted and used to get a rough idea of how much you should price your product. Remember that $1000 spending to get your customer to pay you $50 pm? Well maybe you should bump your subscription cost to $83 (= 1000/12) or reduce your CAC.

Once you have these two rules nailed down, you can really step on the gas and expand like crazy. The LTV > CAC shows that your business model is viable and the CAC within 12 months shows that you can do hit profitability without going bankrupt. You have these two working in your favor, most VCs will be ready to fund you. (Nice!) Otherwise, maybe you need to change your business model somehow.

Based on Unity’s disclosure in its S-1 about the number of >$100,000 customers, adjusted with a bit of extrapolation for a single quarter we arrive at the numbers for the beginning of 2018. We are no able to judge that Unity added approximately 116 new and increasing >$100,000 customers in 2018 and approximately 111 new and increasing <=$100,000 customers back in 2019.$1.6 Mn per customer might seem huge, however, these are a large token of customers who are willing to spend more than $100,000 per year.

You can also combine them with segmentation (another qualitative metric of sorts) to see what segments of your customer base seem to be most promising. Alternatively, you can also use LTV: CAC to gauge what ad streams offer you the best returns and then heavy down on the ones that offer the most customers for the cheapest.

Making those Customer stick with you (Retaining)

So, you have a proven business model that has LTV > 3x CAC and time to LTV < 12 months. You’ve also secured funding now and have also expanded the team. Now you just scale the business and very soon you’ll make a bank!

You begin with 100 customers. At the end of the month, you find that 3 of them are no longer with you (not dead, they canceled subscription). 3 fewer participants on the platform. Big difference. You simply shrug it off and keep expanding rapidly.

A year passes and now you are acquiring customers by thousands. One fine month you acquire 10000 customers. At the end of the month, you notice 300 of this cohort (the group of customers acquired this month) have left.

Maybe losing 3 customers a month was okay, but 300 is big!

My friend, you’ve just run into customer churn

The churn is the % of customers you lose from a cohort each month. And this isn’t just another number in the spreadsheet. These are the number of people that tried your product but did not want to continue with it. You can only guess the reasons. Maybe they found a better product or maybe they found something cheaper. Either way, this sheds light on if your product is lacking.

The appropriate churn for a medium-stage startup is less than 5%. Great companies like Salesforce have kept it to less than 3%. This means that out of the 100 customers that signed up, 97 stayed on. Now as the scale of your business goes up, the goal must be to keep the churn numbers lower. As low as possible.

Now for all those who run a B2B SaaS. Let’s say you lose 5 customers out of the 100 you have. No big deal maybe. But what if these were your 10 biggest clients, responsible for a substantial churn of your MRR (Monthly Recurring Revenue)? Well, now you’re trouble. (again)

This kind of churn is called revenue churn. Again, there isn’t a clear way to get out of this, maybe you need to reiterate on your product or maybe you need to get a better sales team. There is however one trick to hack your way out of it.

Advance Subscriptions!

You just ask your customers to pay upfront and provide them access to your platform or app or whatever that you have. There are two benefits of doing this:

  • You get good cash flow, even before the sale is officially recognized. This increases your capital efficiency.
  • The customer is also less likely to churn as they have already parted with their money, they must as well use your product.

You may keep a track of this using the ‘Months up Front’ metric. The more months upfront you have, the lesser are the chances of cash flow issues and customer churn.

One has to be careful in asking for upfront payments though. A lot of the customers will not be happy paying for the product before they use it. (did I ask you to get a better sales team…?)

There is another superpower that only a few startups have. And that is the negative churn. Negative churn is when you increase your revenue from existing customers such that it offsets any revenue you lost from the churned customers. There are two ways to get to this coveted stage:

  • Up-sell your existing customers. Maybe sell premium versions or cross-sell other subscriptions.
  • Add a variable to your product. Maybe keep a variable number of accounts allowed/leads tracked/seats used. As the customer expands usage, the more you get paid.

Now as your startup expands to new customer segments or other markets, you may wonder if there was a way to know beforehand if the churn would trouble you or not. To counter that, we suggest startups use a Customer Engagement Score and Net Promoter Score.

Customer Engagement Score is a startup-specific metric that tracks how likely is a customer to continue using the product based on the features of the product they use and the frequency with which they use it. You basically assign points to each feature of your product (or to each product, if you have multiple products). Allocate more points for features/products you think would be more engaging.

You can verify your points allocation by using your historical churn data to see if the features/products you used actually predicted that churn.

You can also use this to find out which are the best features/products so that you can double down on improving that feature or up/cross-selling those products.

To put things into perspective Unity grew by 33% without taking into account any new customers and its actual growth was 42% because it added new customers. A growing base of customers that spends more every year is the reason behind the stellar growth numbers of Unity. Organic growth is much easier when you have a niche product.

The other metric worth tracking is the Net Promoter Score. This is a startup agnostic score, making it useful to compare across startups. You can learn more about NPS here.

The range lies between -100 to 100. Anything above zero is considered ‘good’, 50 above is ‘excellent’, and 70 above is ‘world-class. Any score above 71 is rarely attained.

For Unity, the score is between 41-50 among various platforms, which makes it number one amongst its competitors. Even the best of the companies like Amazon (54) and Apple (47) haven’t attained a score beyond 70.

There are a lot of additional factors to consider as well. The market has changed slightly, with many VCs now prioritizing profitability over crazily high growth. Companies that have both are ideal, but they are quite rare. Financial indicators are an excellent method to measure the health of a firm if it has more than a million ARR, but we also take a lot of qualitative aspects like the addressable market size, its demography, management and the team, and other factors into account.  The majority of traditional SaaS businesses aren’t like that. In order to push the expansion forward, the business must cautiously look at the health of its metrics mentioned above and invest money in sales, marketing, and its team.

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This article has been co-authored by Khubaib Abdullah, who is in the Research and Insights team of Torre Capital.

UiPath: On the Path to a Blockbuster IPO?

by Sandeep Kumar

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UiPath is a pioneer of the Robotic Process Automation industry. The company filed its first S-1/A this week, setting an initial price range for its shares. Shares are going to be listed in the price range of $52 — $54 bringing the valuation to $26.90 Bn — $27.90 Bn. It is all set to launch the IPO under the ticker ‘PATH’ on the New York Stock Exchange.

Incorporated in 2015 and headquartered in New York, UiPath develops computerized workflows to build, manage, measure, and engage with processes. Customers benefit from the platform’s innovative capabilities by eliminating work spent on time-consuming, repetitive, and tedious tasks.

The company’s products have become increasingly attractive for companies looking to boost productivity. This is especially true amid the global pandemic that has enforced technology and automation adoptions. The demand is much higher than initially expected. This has been driving the demand for IPO and the investors are bullish on the ‘PATH’ stock.

Company Snapshot 

  • Annualised Renewal Rate (ARR): $580 Mn
  • Annualised Renewal Rate growth Yoy: 65%
  • Total Customers: 7,968
  • Customers ≥ $100k
  • ARR: 1002
  • Dollar based net retention rate: 145%
  • Net Loss: $92 Mn

So how does UiPath make money?

Product Offering: The end-to-end platform provides a whole range of robotic process automation via a suite of interrelated software offerings. The flagship product offering, the UiPath Studio is an easy to use, drag-and-drop development platform designed for RPA developers engineering complex process automation. Other offerings include the UiPath Robot which emulates human behavior to execute the processes built-in Studio and the UiPath Orchestrator that tracks and logs Robot activity.

Market Model: UiPath has an efficient go-to-market model, which consists primarily of an enterprise field sales force supplemented by a high velocity inside sales team focused on small and mid-sized customers, as well as a global strategic sales team focused on the largest global customers.

Revenue Model: UiPath generates revenue from the sale of licenses for its proprietary software, its maintenance and support, and professional services. The license fees are based primarily on the number of users who access the software and the number of automation running on their platform. The license agreements have annual terms, and/or multi-year terms. Additionally, UiPath provides maintenance and support for its software as well as non-recurring professional services such as training and implementation services.

 

 

License (57% of revenue): UiPath’s primary business model is selling licenses through annual and multi-year subscription contracts. Being 57% of its business it shows a vibrant business model and the right product mix which is well received by the market.

Maintenance and Support (38% of revenue): The relatively large amount of maintenance and support revenue suggests that the customer base is being retained.

Services (<5% of revenue): A small part of its business is customer education and technical services likely around their UiPath academy.

UiPath’s Road to Dominance

UiPath is at the forefront of technology innovation and thought leadership in automation.

Companies such as UiPath have two ways to grow: either blasting through the market and acquiring more and more customers or be more docile and focus more on retention than expansion. UiPath chose the former. The company expanded internationally very early on, acquiring more and more customers from different nations. The growth was absolutely out of control.

Surprisingly, this does not mean that UiPath compromised on customer retention, the killer of all SaaS companies. UiPath managed to find the middle ground between blatant expansion and customer retention. The S-1 reveals an extremely high 96% “gross retention rate” and a dollar-based net retention rate of 145%. So, this says UiPath’s existing customers are spending more with the company and also sticking with it.

The Robotic Process Automation Landscape

According to an estimate by Bain & Company the size of the market for automation software will grow to approximately $65 Bn.

The market for automation is super-hot right now with the COVID pandemic making automation a dire necessity. UiPath is the clear market leader in this category. The S-1 puts their Total Addressable Market (TAM) at $60 Bn. Pre pandemic this figure stood at $30 Bn. Double the market size, in just under a year. That’s some serious growth.

It is clear that UiPath wishes to tap into the red-hot IPO market and rightly so. It needs to pad its balance sheet with as much cash as it can muster for the massive opportunity and the competitor risk it faces ranging from its peers such as Automation Anywhere to the giants like Microsoft. The principal purposes of this offering are to increase its capitalization and financial flexibility.

This is data from the Brookings Institution and the Organization for Economic Co-Development that depicts productivity statistics for the U.S. The smaller charts on the right are for Germany and Japan.

                                  Source: Brookings Institution and the Organization for Economic Co-Development 

The US showed productivity growth in ’95-’04, but that slacked off later. Similar is the case with Germany and Japan where the productivity levels have been falling continuously.

Humans are slowly reaching the very limit of what they can do alone to solve the most pressing challenges around the globe. Automation is what can free up labor and divert human intelligence and creativity into more engaging and worthwhile problems. The market is ready for automation and the post-pandemic world will witness never seen before levels of automation. 

Key Industry Risks

  • Barriers to Entry: Robotic process automation is very difficult to implement and therefore many organizations will not able to implement it thereby affecting the industry growth.
  • Sustainability: Any automation, no matter how advanced is not capable of perfectly emulating human behavior.
  • Affordability: The entire automation process is a costly proposition and affordability is an issue.

Key Company Risks

  • Growth Opportunity: The revenue growth rate of above 80% YoY may not be sustainable in the future due to the maturation of the business, increased competition, and changes to technology.
  • Limitations to Scalability: While the UiPath platform is intuitive and beginner-friendly, intra-organizational scalability poses an issue. Also, many features offered by UiPath are offered for free by other productivity platforms.
  • Pitfalls of Constant Innovation: Automation and Productivity Software is a fast-changing landscape. UiPath will need to disrupt itself to stay relevant.

Financial Highlights

Revenue: Total Revenue of $336 Mn in 2020 grew to $607 Mn in 2021, a YoY growth of more than 80%. Most of the increase was fuelled by the maintenance fees and other incomes. A 71% increase in license fees indicates a very fast-growing customer base.

UiPath has gone from making $169 Mn in the last quarter of FY 2019 to $580 Mn in the last quarter of FY 2021.

Gross-profit Margin: The gross profit margin stands at 90% and has increased from 72% in 2019 to 90% in 2021. This comes on the back of reduced travel costs due to the COVID pandemic and rapid international expansion which generated 66% and 61% of the revenue in 2019 and 2020 respectively.

Net-profit Margin: The Net Loss has also been improving over time, in spite of the break neck speed that UiPath seems to be growing at. This is explained by the Operating Expenses Line Item where all the three viz. licensing costs, maintenance costs, and other costs should have gone up, keeping in line with the revenue growth. On the contrary, all the three went down, while as the revenues shot up.

Cash Flow: Unlike a lot of other growth startups going public, UiPath has a positive free cash flow, saving cash on the operational front. This is rare for a rapidly growing company. Other growth stage companies to go public such as Snowflake and CrowdStrike had negative free cash flows. Quite a few haven’t made money, even months after listing.

This may pose a concern for investors who view UiPath to be a rapidly growing, disruptive startup. Generating cash may be interpreted as a sign of UiPath transitioning into its mature stage.

Alternatively, the plan may be, to slow down the growth, settle down, consolidate the customer base and the product offering, and then continue explosive growth. Daniel Dines, the founder of UiPath has been an unconventional CEO on many fronts, this may as well be a part of the bigger picture.

Other Interesting Tid-bits

Annualized Renewal Rate (ARR) is the key metric UiPath uses to gauge its business. It illustrates the ability to acquire new subscription customers and to maintaining the existing subscription customers. The ARR may fluctuate as a result of a number of factors, including customers’ satisfaction, pricing, competitive offerings, economic conditions, or overall changes in customers’ spending levels.

 

UiPath’s “ARR” rose by 65% over the last year, indicating a massive jump in the number of new consumers using UiPath. This again highlights UiPath’s ‘expanding, yet retaining’ value proposition.

  • Number of Customers: 6,300
  • Number of Enterprise Customers: 1,500. As of January 31, 2021, UiPath had 7,968 customers, including 80% of the Fortune 10 and 63% of the Fortune Global 500.
  • Number of Developers on the UiPath platform: 200,000
  • Number of People enrolled in UiPath Courses: 100,000

Is UiPath prepared to handle the competition?

The platform addresses the market for Intelligent Process Automation, which International Data Corporation, estimated would have a value of $17 billion by the end of 2020 and is expected to grow at a four-year compound annual growth rate of approximately 16% to $30 billion by the end of 2024. According to an estimate by Bain & Company the size of the market for automation software will grow to approximately $65 billion.

 

UiPath is a market leader in the Automation industry commanding a whopping 44% of the entire market.

Nearly every company’s a winner that gets to feature in the RPA Magic Quadrant from Gartner, and even just getting on the chart is a win for some companies. UiPath ranks very high, at the very top right of the matrix, strongly positioned as an industry leader as well as a visionary, with only Automation Anywhere coming close.

 

Source: Gartner’s RPA Magic Quadrant

The UiPath IPO will be a decisive moment for not just UiPath itself, but also Automation Anywhere. A tie-breaker between the two, the UiPath IPO will either force Automation Anywhere to respond with an IPO or simply perish.

Are the Valuations on the Right Path?

The NASDAQ 100 Technology Index is up by 62%, this year alone. This coupled with the high demand for the RPA products worldwide, and you get a red-hot market for the UiPath IPO. This is likely to benefit UiPath massively but is the valuation justified or the financials go for a toss?
UiPath was valued at $35 Bn following its last financing round in February. Based on a recently released statement by the management UiPath is likely to launch IPO with shares in the price range of $52-$54 bringing the valuation in the range of $26.90 — $27.90 Bn. This brings the EV/Revenue multiple to 45.88x.

 

 

How well do the Peers Fare?

Being the market leader with a 44% market share and its colossal size relative to the peers it is difficult comparing the company to its peers. However, we have compared it to its direct competitors Automation Anywhere (Private Company) and Blue Prism (London Stock Exchange: PRSM).

Taking the Taking EV/Revenue multiple into account and weighted average calculation of the comparable companies, we arrive at an NTM multiple of 12.33x which gives us an intrinsic valuation of $8.96 Billion.

Investment Recommendation

The UiPath IPO in any case is highly anticipated, being a market leader in the red-hot Robotic Process Automation market. The company has a strong reputation and a substantial client base. Despite that, it was a bit of shock that the IPO price range failed to reach the valuation company garnered in private funding. This might be caused by the general cooling of IPOs over the past few months.

Going public in a dynamic market like RPA is tricky. However, UiPath has demonstrated strong performance and growth potential and this should be an extremely successful IPO only cementing its leadership position. We forecast a strong performance and growth for the share and recommend a long-term positive outlook. 

– – – – – 

This article has been co-authored by Khubaib Abdullah and Ayush Dugar, who are in the Research and Insights team of Torre Capital.

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