The Neon Show
00:12:42 · Bhaskar Ghosh
[00:12:42] S1: mean Yes, a doctor's front office, dentist's front office. Where in offline, you are sending reminders to patients, you are sending an email to patients. That's all happening automagically. You're interacting with them through text, you can interact with them through WhatsApp, any channel. And you are getting right answers, you're being able to reschedule stuff, you're being able to ask PII related questions maybe as long as you have the right security and stuff. All of that. Now, of the people in the mid office sitting in a doctor's or a medical office who are having to get data after a visit and deal with insurance, deal with follow ups. All of that, if you think of it as a co pilot setting, can be done automagically now, to a large extent. Which is why we are seeing so many companies getting started in each of these areas in a very, very high demand driven way because Applied AI founders, when they go into a domain, are finding many of these workflows are ready to be mechanized, maybe even disrupted. So that is kind of the software aspect of service. I think you and I have spent some time today talking about and where we have constructively disagreed on some things is, where... What happens next in these services industries? If you bring this Silicon Valley and Bangalore view of SaaS, you bring in, you write good software, you start a seed company, you start selling software to say these dentist offices, as an example, or these invoice processing offices for supply chains, second answer. What happens next? Do you build this out of the software business? One of the key thesis that we are all thinking about is we're going a little bit out of the box when it comes to software. It's reasonable to start reconsidering whether a pure software business will scale here. It is reasonable to start asking, if you sell pure software into these industries, how much of the economic pie will you get? It so happens if you look at most of these industries, they don't spend most of their money on software. So the question to ask is, are we envisioning that these services companies themselves will be mostly software and AI? That... So that's where things get murky. That's where things get exciting. It is reasonable to assume at some point in time in the five, seven, ten years that might happen.
00:15:04 · Bhaskar Ghosh
Question is, how does this industry start innovating and kind of transforming itself? One of the bets a lot of us are making, a lot of them from Silicon Valley, some funds from New York are making, is you're saying, I will now take over these legacy services businesses and I'll own the business, I'll run it also. It so happens I'll also bring in my software to run it in an AI first way, software first way. This is the whole concept of roll ups that is being played out in the context of AI services thesis. And I am personally looking at it in a big way. We have done some investments whether it's in, let's assume, I think, in the area of cloud data migration or in the area of MSP IT services, in the area of legal, in the area of clinical trials. You can... You... We have gone and started thinking about maybe the company which has been building software till now should be owning the services companies. And a lot of the large funds are making progress there, if you think about it. Then we come to the point where the Silicon Valley founders, these technical founders now start buying these companies. Something you and I talked about is what next? What happens now? Well, the simple narrative is you buy enough revenue base, enough scale Yeah. And then you insert AI into it in a judicious way, making certain assumptions around digital transformation of the business itself, that there is enough software that you can replace. And then you basically expand margins. Yeah. Or you expand top line also, I mean, because you can do things better. Let's assume you want to buy one, two, three of these companies. I think the part where our discussion got really interesting is, what is the nature of this business you're getting into? It so happens if you sit down and think about it, This is not a pure software business anymore. You have written great software. You have this great tech team. You've sold a bit of software, let's say, into design partners. Then you went and bought two of these design partners. Assume that. And you bring in like $100,000,000 of revenue, but you also inherit 700 people. Random number. I think the new thing for us Silicon Valley folks for VCs, know, who are also builders like us. At 8VC, we both build companies, we incubate, but we also invest massively. Is I think the nature of the firm, the company which will do this will fundamentally change.
00:17:30 · Bhaskar Ghosh, Siddhartha Ahluwalia
Because you know this... You need this deep operating chops to go run these companies now. Do you keep the old founder of that company? Does she or he stay on with incentives? Are they excited to increase margins? Would... Do they want their company, their services government to become tech first? These are the deeper questions that I don't think Silicon Valley venture has grappled with, or Silicon Valley founders have grappled with. Private equity has grappled with it. There's always been this concept of operating partners. But what we are trying to do is something new that private equity has not done before. Which is private equity generally is more about the cost structure. After you buy companies, you take a very strong look at that data and analytics, you cut costs, so on and so forth. It's not like you build new products. What we are trying to do here is, we are trying to fundamentally change the way in that business operates. You can think of that new Tech enabled business as almost like a new product you're building, which is not all software. [00:18:36] S0: So what is a product now, if not software? [00:18:38] S1: Well, in that case, the product still remains that you are doing an MSP IT play, you're doing a dental services play, you're doing... But with a lot of AI thrown in. So it is still about dental services. But the nature of how you are delivering those services is changing, which is AI first. But I feel Silicon Valley leaders, technical leaders going and running, [00:19:05] S0: and
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?