The Neon Show
00:19:05 · Siddhartha Ahluwalia, Bhaskar Ghosh
[00:19:05] S0: and [00:19:06] S1: Inverse person business, clinical trials business, know, all these examples I gave. [00:19:12] S0: Not enough founder [00:19:13] S1: market That is a hard one. You have to bring in domain experts there. That's why I'm pointing out that that operating principles around building businesses like this is quite different. It's new. Because we don't want to be also pure private equity. We want to insert tech into it. We want to keep on building. That's why I'm saying that is where I think a lot of the known unknowns are. Building software, doing AI, buying businesses is not. People are doing this already last one year. How do you actually operate them at scale? What culture do you need? Is a known unknown? After that, you start thinking, what is the outcome? Are you going to get to SaaS multiples if you go IPO? Is it going to be closer to VC, closer to PE? That is also unknown. So that's what you and I were discussing. [00:20:00] S0: So let's dissect, first of all, why do SaaS companies get high multiple? What's... Why is...
00:20:00 · Siddhartha Ahluwalia, Bhaskar Ghosh
[00:20:00] S0: So let's dissect, first of all, why do SaaS companies get high multiple? What's... Why is... [00:20:06] S1: That's a deeper question that you're putting me on the spot. I think SaaS has also gone through a reboot. Ultimately, to me, the reason a lot of forward facing high multiples have been given, there are a few drivers below it. One is that usage based pricing will keep on growing without too much input. You don't have to throw bodies at it. That installed base will keep growing. That there's a lot of software in the act of doing that business. That's number one. Number two is in SaaS, if you look at just pure departmental SaaS or vertical SaaS, there are two or three winners. And the ones who will get network effects will actually end up winning big. Right? If you go into this department, sales or what marketing. That once you start winning, most people buying sales software will actually buy from you. To me, those are key like... Those are key parts. You have to come back and think about whether that's going be possible in AI enabled services businesses. In terms of how how will you buy the next five companies and scale them? Is there a network effect there? I would posit that's gonna be a tough one. That that that once you have grown to $100,000,000 in revenue by buying three companies, growing to $400,000,000 by buying 10 more companies, that's not a network based act. That you will probably have to do some special stuff to do those things in parallel. That's kind of the limit of my thinking, I can't go further than that.
00:21:33 · Siddhartha Ahluwalia, Bhaskar Ghosh
[00:21:33] S0: Then I have two schools of thought here. One is you're saying SaaS principles don't apply here of scaling, that's the reason. [00:21:42] S1: But [00:21:44] S0: the other thing is once the AI infra is ready and let's say I go ahead and buy a BPO at 1x revenue multiple, let's say $20,000,000 of BPO revenue, I raise VC money as a founder, I buy them at $20,000,000 or lesser, then at least I have the $20,000,000 revenue with and I build, I get the new infra, the AI infra for reducing headcounts and the BPO, getting more efficiency. [00:22:12] S1: AI enabled software which has infra, which has applications, everything. But [00:22:16] S0: the second thing which we are also not counting is, how the increase of this BPO capacity to get more revenue. [00:22:24] S1: That is the top line part. Yes. [00:22:27] S0: So do I have to buy a new business to increase the top line business or can this existing setup with eat, like get out, get more business outside?
00:22:27 · Siddhartha Ahluwalia, Bhaskar Ghosh
[00:22:27] S0: So do I have to buy a new business to increase the top line business or can this existing setup with eat, like get out, get more business outside? [00:22:37] S1: That's a great question. So the question we have to ask is the following. How does top of the funnel sales marketing work there? Are you... Have you brought in some amazing domain experts who are known in the domain? Sure. So that new customers will come automatically, that there's a network effect which is domain specific? Could be. Yeah. You could also use Gen AI specific tools in sales and marketing which is a smaller flywheel question. I think it also has to do with the specificity of that domain. Like we have looked at travel a lot. We've looked at corporate travel, we've looked at consumer travel, highly fragmented space. Huge space and one of the top five domains you can think of, right? By running a good business in the corporate travel case with 200,000,000 ARR, are you able to have all the new customers join you? Unclear. Unclear about how people make corporate travel decisions. That's why I'm saying it's also domain specific act around fragmentation, around how customers, you know, buy these services. And if there's a network effect there. That's why I'm saying it's a bit of an unknown unknown. [00:23:46] S0: So then, but it's true for software also because in software also the case also, you are also replacing something. As harder are the greenfields, I don't know how much greenfield is left.
00:23:46 · Siddhartha Ahluwalia, Bhaskar Ghosh
[00:23:46] S0: So then, but it's true for software also because in software also the case also, you are also replacing something. As harder are the greenfields, I don't know how much greenfield is left. [00:23:57] S1: I think replacing software and replacing services, the fundamental acts are probably a little bit different. [00:24:04] S0: Sir, can you tell more about it or how they are?
00:24:04 · Siddhartha Ahluwalia, Bhaskar Ghosh
[00:24:04] S0: Sir, can you tell more about it or how they are? [00:24:07] S1: It's about saying... So think of a customer of the services BPO industry. It's about the nature of the business you're running. Suppose you're in the category called PEO, which is I think Professional and Employees org or something like that. You can think of that as all things HR and payroll and benefits for small to medium businesses. Yeah. Think about a company which is small to medium which is growing. Yeah. Which decides to go with a new HR and payroll provider. And how do you make the decision when you are at 10 to 20 employees versus 100 employees versus 500 employees. Because when you bring in a services business like that, it so happens most of the services being supplied by that supplier is through human beings. So the customer is not only dealing with software, where you suddenly say, oh, I had this UI. Where the the the decision of buying the service is just like changing my UI and migrating a database. So the the the the... I think those are the fundamental reasons where when the handover is just about software, it's much more streamlined, structured. There are consultants who will migrate your HR system from this to this. But the act of going from one services outsourcing to another is much more human driven. That is one reason I think network effects are harder to adopt. Again, we'll come back in two years and I'm sure I'm going to be proven wrong, but that's where my head's at today. Okay.